To gift or not to gift: what are the consequences?

Published by Jared Cains on August 31, 2011

Parliament has abolished gift duty from 1 October 2011. 

That means that from 1 October you can make a gift of any size without incurring gift duty (tax). Previously gift duty was payable on any gift over $27,000 per annum.

For those of you who have a family trust, where the trust owes you a debt (normally where you have transferred assets to your trust and the trust owes you a debt back for the value of those assets) now is the time to be taking professional advice as to your options come 1 October. For many people it may seem obvious that the best thing to do is to immediately forgive or gift to the trust all of the outstanding debt that is owing.  However, depending on your personal circumstances, this may not be the best thing to do and may have some serious unanticipated consequences such as:

  1. If you are insolvent when making the gift or will be as a result of making the gift, or where you have an existing or potential liability or debt to another party, then if you default on that debt or liability the amount you have gifted to the trust can potentially be clawed back by the official assignee or on an application by a creditor to the court. It is important then that you are technically solvent at the time the gift is made and this should be properly documented.
  2. Making one large gift may mean that you do not qualify for a rest home subsidy (residential care subsidy) or any other form of government assistance that is subject to an asset test. This is because it is only the rules relating to gift duty that are being abolished not the rules relating to eligibility for government assistance. The debt owed to you by your trust is an asset and as such any gift in excess of $27,000 per year may be treated by WINZ as deprivation of an asset. In such a case the amount of the gift will be included as an asset for the purpose of assessing your eligibility. This can happen even though the gift may have been made some years prior to you making an application for assistance.
  3. Making a gift of the full amount owing to you by the trust means that you will no longer be able to call up that money if you ever need it in the future. While you may be able to rely on the trust providing assistance to you as a beneficiary, this requires the unanimous agreement of the trustees which you will not have total control over. While the debt remains outstanding you still retain some control over the trust, as you can call up the debt at any time. You need to be sure that your financial position is such that you are comfortable making this gift.

Your options come 1 October are:

  • Leave the existing debt in place
  • Continue with your gifting programme at $27,000 per annum (or some other amount)
  • Make one gift of the full amount of the debt

It is important that before deciding what option is best for you a comprehensive review of your financial affairs and personal circumstances is undertaken in conjunction with your lawyer and accountant.

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