The Government passed legislation to abolish gift duty effective from 1 October 2011. What does this mean for our clients and, in particular, clients who have Family Trusts or may be considering setting up a Family Trust?
Do you Gift?
The decision to forgive in full outstanding debts or make gifts is going to depend on the personal circumstances of the individual. In making this decision the main areas that a person may need to consider are;
- Residential Care Subsidy Entitlement;
- Creditor Protection Issues;
- Preservation of Rights; and
- Relationship Property Matters.
In considering whether to gift in full (or not), a person will need to weigh up or balance their requirements in the above areas.
Residential Care Subsidy
The requirements to be eligible for Residential Care Subsidy are set out in the Social Securities Act 1964, together with accompanying regulations. The Act has means testing provisions for both assets and income. Where a person (or the person’s spouse or partner) applies for means assessment and that person has "directly or indirectly deprived himself or herself of any income or property" the person may be assessed as if the deprivation has not occurred. Assessment of deprivation includes:
- Gifts in excess of $6,000.00 per year in the five-year period prior to the application for Residential Care Subsidy; and
- Any gifts that exceed $27,000.00 in any twelve-month period prior to the five-year period.
There is no time limit for the application of the $27,000.00 test and there is no expectation that the eligibility rules will be changed following the abolition of gift duty. In fact, there is an expectation that even greater scrutiny will be placed upon an application and it is important to understand that when considering an application (and if deprivation has occurred), the Government can take into account gifts made by an applicant and their spouse or partner.
If a person intends to make an application for Residential Care Subsidy and they have a Trust or are considering setting up a Trust, careful consideration needs to be given to any gifts.
Now that gift duty has been abolished proof of solvency at the time a gift is made will be crucial. Previously, when it had been only possible to make small gifts each year a person’s solvency has never really been an issue. Now that larger gifts can be made, a person must assess and be satisfied of their solvency at the time of the gift. There is a risk that the gift may be able to be clawed back if as a result of the gift, the donor is unable to pay their debts as they fall due or if their personal liabilities exceed personally owned assets.
Under the Insolvency Act the Official Assignee can claw back gifts made in the two years prior to bankruptcy. Gifts made between two and five years prior to bankruptcy could also be set aside if the bankrupt was insolvent at the time of the gift.
Preservation of Rights
Where a person has a debt back and was working through an existing gifting programme, the debt back could provide security. This debt back can mean that the person can protect a right to live in Trust property or can make sure that capital can be repaid to the individual if required.
There have been no changes to the Relationship Property legislation as a result of the abolition of gift duty. Therefore, the situation is still the same as it was prior to the abolition of gift duty where, if relationship property is disposed of to a Trust either through a gift of property, or as a result of forgiveness of relationship debt, it is possible for the disposition or gift to be overturned under the Relationship Property Act. Any significant gifts of relationship property should be recorded in a Contracting Out Agreement.
When considering whether to gift or not where there is a Trust it will be useful to consider why the Trust was originally set up. If the main reason was to protect assets and property for the person’s family, then missing out on a Residential Care Subsidy because of a large gift may not be of concern.
The Way Forward
We recommend to our clients they consider taking advantage of the change in legislation, which will enable them to make one final gift of any debts owed to them. However, as highlighted in this article there are a number of matters which will require careful consideration before a final decision is made as to whether a final gift is appropriate.
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