Rotorua Property Investors' Association

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Removal of gift duty still unclear

News the government is to abolish gift duty – confirmed by Revenue Minister Peter Dunne – may not mean the end of the current system for transferring property assets into trusts.

"People need to take a step back here," said NZ Trustees Services director Jonathon Cron, who believes there are "too many what-ifs to categorically say what is going to happen."

News of the planned abolition, as part of a wider review of the tax system,  prompted speculation the current system of transferring a property into a trust - a time consuming process where $27,000 of the value of the asset is ‘gifted' to the trust each year - will be replaced with a system allowing the property to be transferred in one go.

Not only would this see an end to the approximately $280 a year charge to set up debt forgiveness but the asset would be covered by trust status protections at once.

However, Cron says that the Property Law Act does not define what constitutes a gift, and that the IRD will be able to examine on a case-by-case basis why a trust has been created and whether any transfers qualify as a deprivation of assets.

He also believes that unless the government provides clarification it will be up to the courts to set a precedent.

The uncertainty surrounding the issue has also been highlighted by PricewaterhouseCoopers (PwC), which said in a statement that while the "practical implication" is that assets can be transferred without the need for a gifting programme, "you will need to monitor the progress of this repeal because the ability to gift assets may result in unintended consequences. Government agencies have already announced that they will be monitoring the impact of gift duty abolition and that Inland Revenue will undertake a post-implementation review to ensure no unintended consequences arise."

PwC partner Chris Leatham said it remains unclear how IRD will treat the transfer of property assets.

Leatham believes the government will provide further clarification on the issue ahead of the October 1, 2011 deadline for abolition and that allowing the courts to decide on the matter "would be very unsatisfactory."

James Johnston, partner at law firm Rainey Collins, also argues further clarification is required when it comes to property and trust issues.

"That particular issue has opened a bit of a Pandora's Box," he said.

He said the current government information leaves "a whole lot of unanswered questions" and that when it comes to the transfer of property "what are the fishhooks? What are the thing's we don't know about?"

Another issue Cron believes could be problematic is that the need for annual trust meetings and the accompanying reports would no longer exist, leading to a failure of best practice compliance.

"No reporting, no evidence," he said.

This in turn could prompt IRD scrutiny into why a trust was established in the first place.

Leatham also said that one of the key arguments in favour of abolition - the fact that compliance costs outweighed the revenue gathered - missed the point that gift duty was put into place primarily as an anti-tax avoidance measure, not  to gather revenue.

He says that at present there is uncertainty on the criteria the IRD will use to assess whether a property transfer counts as tax avoidance.

 "What we're not clear on is how they're going to do that," he said.

"At this stage it is a bit of a wait and see."

Leatham said PwC had raised the issue with government, calling for greater clarification and Cron said the Trustees Association intends to talk to Commerce Minister Simon Power on the issue "to put some form of regulation in place, a code of conduct, to set a standard."

"It's fair to say there's some water to go under the bridge yet," said Leatham.


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