'Archaic' gift duty on its way out

Photo / Paul Estcourt

An age-old cat-and-mouse game between trusts and the Inland Revenue Department looks set to end with the abolition of gift duty on October 1.

Legislation due before Parliament in June is widely expected to mean the end of gift duty - which is seen as an archaic tax that raised little revenue for the Government but cost about $70 million a year in compliance costs.

As it stands, any person who gives away more than $27,000 in a year is liable to pay gift duty. But far from raising revenue of any consequence, the tax has only given rise to the formation of complex trust arrangements.

A common avoidance tactic is for people to sell their assets into a trust, then the trust to owe them a loan or a debt for the value of the asset, which is gifted over time at $27,000 a year.

Tammy McLeod, a trust specialist at Davenports Harbour Lawyers, says the new regime will mean people who put their assets into a trust will - barring insolvency - have far more certainty that they will not be touched.

"It will be much more black and white as to what is in trust and what is not," she said.

"Basically it means that people will be able to put their assets into trusts in one go, without having to go through a convoluted gifting programme.

"Immediately they will have no assets listed in their name, whereas before they still had the debt that the trust owed them in relation to the asset," she said.

At present, claims can be made against an estate based on the value still owed to it by a trust.

"If there is no gift duty, there is nothing in your estate and they can't make that claim against the trust."

In the case of insolvency, claimants have two years to claw back assets put in trust.

McLeod says the new regime will be good for "testamentary freedom" - the ability for people to leave their assets how they wish.

A by-product of the abolition of gift duty means people will not go through the annual gifting process. McLeod says that may be risky as some trusts will not be scrutinised each year. There will be far more emphasis on trust administration.

There will also be implications for the law as it relates to relationships.

The Property (Relationships) Act of 1976 provides that de facto couples have the same property rights as married couples.

This act has an opt-out regime and many people enter agreements under the act so the act will not apply to their assets.

An alternative is to transfer assets to a trust prior to entering into a relationship. This means the property is trust property and cannot be dealt with under the act.


"There will be no argument regarding a debt back as the debt back will no longer exist," McLeod said.