LIFE AFTER GIFT DUTY
by Warren Pankhurst (Tax Director, KPMG Tauranga
As most of us know, gift duty was abolished in New Zealand on 1 October 2011 and there were a number of articles at that time heralding the generally positive effect that this would have on taxpayers surrounding a reduction in compliance costs.
With a new financial year on the horizon, it is still wise to consider your personal circumstances and whether the current ownership of your significant investments is where they should be from a commercial and personal perspective.
The questions you should be asking yourself are:
Who holds your wealth and is it appropriate that the wealth is held by that individual or entity?
From a practical perspective, consideration should be given to the separation of your business assets from personal assets such as your principal home, holiday home and passive investments.
When in a relationship through marriage, civil or de-facto, assets could be considered to be, or could become, relationship property. The question is whether it is your intention that the property is relationship property. Another key consideration is when you include children in the mix, and protecting your legacy to them. Many of us have been in situations where the “blood is thicker than water” syndrome kicks in and we feel there is no need to be proactive as our family will never have conflict, or it happens to others but not to us. Ask the “others” and ascertain whether they had a similar sentiment before the proverbial hit their fan.
One of the options commonly chosen from both a commercial and a personal perspective to arrange affairs is to separate private assets from business assets through the use of a family trust. You will need to consult with your solicitor to discuss the set-up of the trust “type” for your circumstances. One of the many issues you may well need to address is whether a trust will be effective particularly as regards to whether any property is relationship property. There will be numerous other questions such as which assets should be in the trust, who are the beneficiaries, whether beneficiaries can be added and good administration of the trust.
From a commercial perspective the transfer of an asset creates value and gives rise to debt. The good news is that this debt can generally be forgiven with no gift duty or income tax consequences. There are, however, still some pitfalls that you need to be careful about with respect to GST.
If any assets that are transferred to the trust have a GST component, it is a good idea to register the trust for GST as if it is not GST registered there is likely to be a GST liability on transfer/disposal from the trust.
It may be possible, depending on the circumstances, for an asset transfer to be zero-rated for GST if certain procedures are followed.
GIFTING AND RESIDENTIAL CARE SUBSIDIES
by Gary Valentine (Senior Solicitor, Holland Beckett, Tauranga)
It is almost two and a half years since gift duty was abolished in. The old limit of $27,000 per annum gifting no longer applies and gifts of more than this amount since 1 October 2011 have been able to be made without incurring liability for gift duty taxes.
This article will deal with the current criteria for making an application for a rest home subsidy. The second article will deal with the implications of abolishing Gift Duty in relation to rest home subsidies and what can be clawed back by the Ministry of Social Development (“MSD”) in assessing a person’s assets and income with regards to eligibility for government assistance.
Residential Care Subsidies
If you require long term residential care and you are aged 65 years or over, you will be eligible for the residential care subsidy provided that your assets and income are within certain limits. The MSD will carry out a “financial means assessment” to determine whether you are in a position to pay for your own care. It is expected that you will use your own means first to pay for your care.
As at 1 July 2013, to qualify for the residential care subsidy:
A single person in care must have less than $215,132 (or both partners in care), including the value of their home and a car; or
A person in care who has a partner in the community must have combined total assets that value up to less than:
a) $215,132 in cash assets; or
b) $117,811 in cash plus a home* and a car.
(*The exempt home only applies to a home owned by the applicant and not by a family trust.)
In addition, there are other assets that are exempt, such as:
a) Household furniture and personal belongings (e.g. clothing and jewellery);
b) Prepaid funeral expenses of up to $10,000 each (provided they are held in a recognised funeral plan); and
c) The home and car if the above circumstances apply.
Individuals must also contribute their income (including trust income in some cases) towards the cost of that care.
Criteria In The Future
Previously the thresholds were increased by $10,000 per year, however the MSD has changed its policy effective from 1 July 2012. The threshold will now increase by the Consumer Price Index (“CPI”) on 1 July each year. Because the CPI will vary from year to year, it is extremely difficult to forecast what the threshold will be in the future.
What Gifts are Allowed?
The regulations and current MSD policy provides that the following gifts will be allowed:
1. Up to $6,000 in total per year in the five years prior to going into residential care; and
2. Up to $27,000 in total per year outside of that five year period.
Gifts above those limits may be classed as deprivation of assets. They will be added back into the calculation when assessing an individual's means to pay for their own care.
There is a common misunderstanding that the allowable gift for residential care subsidy considerations is $27,000 per person. However the assessment is actually made on a per application basis. When only one person in a couple goes into care, the gifting of both is taken into consideration by the MSD. Therefore the MSD will consider the extra $27,000 as an assessable asset. However if both are in care then the MSD's current practice is to allow $27,000 per person.
Historically, or at least prior to Gift Duty being abolished, there was a common understanding that MSD would only look back five years of gifting immediately prior to an application being made for a subsidy. This was ploicy only. In law the Department has always been able to take into account gifting as far back as it wants. The Department's policy may change in the future. However for the moment MSD may look back well before five years prior to an application for a subsidy.
Safest Approach Going Forward
The best advice now is that any current gifting programme needs to be reassessed in light of a couple's circumstances and goals. For those people who are concerned about entitlement to long term residential care subsidies, they may be better advised to continue to gift their assets (for example to a Trust) at $27,000 per year (or $13,500 each for a couple). This could be reduced to $3,000 each if they think they will be in need of care in the next five years.
If you have any specific queries about the above article please contact us.