Gift duty is abolished from 1 October 2011 – with particular implications for anyone who has established a trust and is owed money by the trust, or who is considering gifting assets to a trust.
Claims against trusts by creditors and the Official Assignee are already commonplace. Frenzied gifting of debts following the abolition of gift duty is likely to attract close scrutiny from those parties.
This Brief Counsel covers what the repeal of gift duty may mean for you and potential issues in relation to gifting all or a significant part of a debt after 1 October 2011.
Gift duty repeal – what does it mean for you?
The decision whether to gift all or a significant part of a debt should not be taken lightly. Large gifts made to trusts will attract particular attention from creditors (including ex-partners) and the Official Assignee, all of whom may try to claw back such gifts.
Consideration of the consequences of a significant one-off gift will be particularly relevant if:
- you have personal liabilities
- you are a settlor but not a beneficiary of a trust that is benefitting from your gift
- you are about to enter into a business or transaction and are leaving yourself with an unreasonably low asset backing
- you have, or may in the future have, creditors whose claims cannot be satisfied from your personal assets or insurance, and/or
- you may otherwise have expected to qualify for government assistance (such as a rest home subsidy).
Potential for claims from creditors
If you have borrowed from a third party and on-lent to a trust, it is likely that your personal liability is somewhat balanced by the amount of the debt owing to you by the trust.
Gifting $27,000 to the trust annually has a slow and steady effect on your financial position. But gifting the entire amount of the debt owed to you may leave you technically insolvent, to the extent that assets owned by you are significantly less than your liabilities.
Does this matter?
Yes. If as a result of a gift, you are unable to pay your debts as they fall due, you could face a claim by a creditor to claw back the gift. Under the Property Law Act, the court has the power to claw back gifts made by a debtor who was insolvent at the time of the disposition, or became so by the disposition, with the intent to prejudice a creditor. The court can also exercise this power if the donor was engaged in or about to engage in some kind of venture or transaction and left themselves with an “unreasonably small” asset base – this is equivalent to a corporate capital maintenance test.
Similarly, under the Insolvency Act, the Official Assignee can claw back gifts made by a bankrupt:
- within two years before the date of the adjudication of bankruptcy, and
- between two and five years before the date of adjudication of bankruptcy, if the bankrupt was unable to pay his or her debts on making the gift.
The law in this area is not new, but one can expect the provisions to be invoked more readily and assertively in the new gifting environment.
Minimising your risk
To minimise risk and protect the assets of a trust from the claw back provisions, donors need to:
- consider what their financial position will be after the gift has been made. For some, it may be prudent to record their solvency at the time of the gift. Future business plans and contingent liabilities will all need to be factored in, and
- document the reasons and basis for making the gift.
Relationship property claims
It is anticipated that after the abolition of gift duty more relationship property claims may be made under the Family Proceedings Act 1980 and Property (Relationships) Act 1976 to gain recourse to assets gifted to a trust.
If relationship property is transferred to a trust, the resulting debt owing back from the trust is itself relationship property. However, the trust property is no longer the property of either party to the relationship and cannot be relationship property. This could be problematic if significant one-off gifts are made.
In the event of any future separation, a partner could be detrimentally affected by having gifted their relationship property to the trust. It is therefore important that you understand clearly the implications of gifting your relationship property and that you retain joint and equal powers in relation to the trust.
There will also be tax implications for the debtor trust arising from a forgiveness of debt, unless the only beneficiaries of the debtor trust are those for whom the donor has “natural love and affection”, or charities. Gifts of assets held on revenue account, or on which depreciation has previously been claimed, also have the potential to give rise to a tax liability to the donor. Independent legal advice should be sought.