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The perfect gift after 125 years

An Inland Revenue report on the abolition of gift duty is set to cost professionals such as accountants and lawyers around $70 million in lost compliance fees. It is estimated that the government will save around $430,000 in administration fees but forego the $1 million a year in duty they were receiving from the scheme.

The public is the big winner out of the scrapping of the gift duty, as they will save $70 million in compliance fees and the savings by not paying gift duty.

However, very few people have actually paid gift duty over the years which is evident by the fact the government have only received a return of $1 million a year after taking into costs of administrating the scheme. This is done by only gifting $27,000 as any dollar gifted over this amount, under the old rules, would be liable for gift duty.

Gift duty was first introduced in 1885 with the aim of raising additional revenue for the government. Under the rules, any taxpayer who gave away more than $27,000 (in assets or actual cash) in a year was liable to pay gift duty. The rate at which the tax was payable was worked out progressively ranging from 5% to 25% depending on the quantum of the gift.

For example, if John gifted his house worth $500,000 to his family trust, he would be liable to pay gift duty amounting to $112,850. This is calculated by taking $5,850, the amount of gift duty payable on $72,000 and adding it to the remaining $428,000 which is taxed at 25%.

Many people over the years who transferred a house to a trust and had been happily gifting $27,000 a year, from 1 October 2011, will no longer need the yearly visit to the accountant to sort out the best methods to structure how they gift without incurring a tax liability.

The abolition of gift duty is seen by many as an “open door” through which people can now move assets into trusts immediately without needing to put in place a gifting programme over many years. Furthermore, now that taxpayers do not have to pay gift duty tax, the change makes it much easier and quicker to safeguard assets away from potential claims of their partners.

However, a full and proper examination of any potential consequences is needed before moving assets.

Some potential consequences include the loss of absolute control of the assets; the need to ensure that trusts are under the control of all trustees and administered correctly to avoid being challenged as a sham; the potential for former partners and creditors to challenge a gift where it has disadvantaged their claims against the donor; and any tax consequences of the disposition, such as depreciation, being recovered.

As of 1 October 2011, gift duty will cease to exist. Any gifts made on or after this date will not be subject to gift duty. However, gift duty will still apply to assets gifted prior to 1 October 2011.

A number of people have been intentionally holding off gifting until the 1 October 2011 which makes perfect sense as some large tax savings will result due to no tax needing to be paid.

The introduction of gift duty saw the evolution and formation of various complex trust arrangements whereby people would gift only $27,000 in value each year to avoid paying the tax. A common avoidance tactic was for taxpayers to sell their assets into a trust with a reciprocal loan back to them amounting to the value of the asset. The loan would then be forgiven out of ‘natural love and affection’ (at the rate of $27,000 each year) until it was fully paid back.

Traditionally, Inland Revenue had the ability to challenge the gift and reverse any tax advantages obtained and it was therefore important that any restructuring was well thought out with professional advice sought.

One Response

Mary on February 28, 2012 at 6:00 am

With the abolishment of gift duty/tax, doesn’t this leave it wide open for these scammers, who coerce/extort monetary gifts (and being left part or whole estates) to get away with what is definitely morally wrong, even perhaps legally wrong? ie a “caregiver” who can talk an elderly gentleman into “gifting” $70,000 in one sum, because she feeds him a story of woe and hardship. This change seems to me to leave the door wide open for these type of people to repeat their actions time and time again with our vulnerable elderly. How can they be stopped?

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