Gift duty changes come with warning

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Tax experts are urging caution as changes to gift duty come into force from October 1.

Deloitte Dunedin tax partner Peter Truman said: "The abolition of gift duty will be seen by many as an 'open door' through which they can move assets into trusts immediately without needing a gifting programme over many years.

"We would recommend caution before proceeding, along with a full examination of the consequences."

Some of those consequences included 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.

Gift duty had been the "silent police" for many commercial and family transactions, Truman said.

He expected a big increase in gifting from October.

"Despite a number of submissions to the select committee, gift duty has been abolished without the introduction of other measures to provide protection for creditors and former partners in a relationship.

"Because it will be quicker to alienate property, and therefore greater scope to distance assets away from potential claims, we expect to see an increase in legal challenges to gifts made by parties that have been disadvantaged by the gift."

Where a gift was motivated by tax avoidance, Inland Revenue would have the ability to challenge the gift and reverse any tax advantages obtained, he said. The abolition of gift duty would open the opportunity to restructure family interests where there were valid commercial or estate planning reasons for doing so.

It was important that any restructuring be well thought out with there being no rush to complete the restructure during October, Truman said.

The Government only collected about $1 million a year in duty because people used gifting programmes to stay under the $27,000 every 12 months threshold.

However, it was estimated that it cost individuals about $70 million a year in compliance costs and costs the Government about $430,000 in administration costs, he said.

NEW RULES

* Gifts occurring on or after October 1 will not attract gift duty.
* Gift duty currently applies when a person makes gifts totalling more than $27,000 in a 12-month period.
* To avoid this, assets are sold to trusts with a loan back to the individual. The individual then enters a gifting programme to make gifts of $27,000 a year to reduce the loan.