Most Read Contributor in New Zealand, September 2016
Gift duty is abolished from 1 October 2011 – with
particular implications for anyone who has established a trust and
is owed money by the trust, or who is considering gifting assets to
Claims against trusts by creditors and the Official Assignee are
already commonplace. Frenzied gifting of debts following the
abolition of gift duty is likely to attract close scrutiny from
This Brief Counsel covers what the repeal of gift duty may mean
for you and potential issues in relation to gifting all or a
significant part of a debt after 1 October 2011.
Gift duty repeal – what does it mean for you?
The decision whether to gift all or a significant part of a debt
should not be taken lightly. Large gifts made to trusts will
attract particular attention from creditors (including ex-partners)
and the Official Assignee, all of whom may try to claw back such
Consideration of the consequences of a significant one-off gift
will be particularly relevant if:
you have personal liabilities
you are a settlor but not a beneficiary of a trust that is
benefitting from your gift
you are about to enter into a business or transaction and are
leaving yourself with an unreasonably low asset backing
you have, or may in the future have, creditors whose claims
cannot be satisfied from your personal assets or insurance,
you may otherwise have expected to qualify for government
assistance (such as a rest home subsidy).
Potential for claims from creditors
If you have borrowed from a third party and on-lent to a trust,
it is likely that your personal liability is somewhat balanced by
the amount of the debt owing to you by the trust.
Gifting $27,000 to the trust annually has a slow and steady
effect on your financial position. But gifting the entire amount of
the debt owed to you may leave you technically insolvent, to the
extent that assets owned by you are significantly less than your
Does this matter?
Yes. If as a result of a gift, you are unable to pay your debts
as they fall due, you could face a claim by a creditor to
claw back the gift. Under the Property Law Act, the court has the
power to claw back gifts made by a debtor who was insolvent at the
time of the disposition, or became so by the disposition, with the
intent to prejudice a creditor. The court can also exercise this
power if the donor was engaged in or about to engage in some kind
of venture or transaction and left themselves with an
"unreasonably small" asset base – this is
equivalent to a corporate capital maintenance test.
Similarly, under the Insolvency Act, the Official Assignee can
claw back gifts made by a bankrupt:
within two years before the date of the adjudication of
between two and five years before the date of adjudication of
bankruptcy, if the bankrupt was unable to pay his or her debts on
making the gift.
The law in this area is not new, but one can expect the
provisions to be invoked more readily and assertively in the new
Minimising your risk
To minimise risk and protect the assets of a trust from the claw
back provisions, donors need to:
consider what their financial position will be after the gift
has been made. For some, it may be prudent to record their solvency
at the time of the gift. Future business plans and contingent
liabilities will all need to be factored in, and
document the reasons and basis for making the gift.
Relationship property claims
It is anticipated that after the abolition of gift duty more
relationship property claims may be made under the Family
Proceedings Act 1980 and Property (Relationships) Act 1976 to gain
recourse to assets gifted to a trust.
If relationship property is transferred to a trust, the
resulting debt owing back from the trust is itself relationship
property. However, the trust property is no longer the property of
either party to the relationship and cannot be relationship
property. This could be problematic if significant one-off gifts
In the event of any future separation, a partner could be
detrimentally affected by having gifted their relationship property
to the trust. It is therefore important that you understand clearly
the implications of gifting your relationship property and that you
retain joint and equal powers in relation to the trust.
There will also be tax implications for the debtor trust arising
from a forgiveness of debt, unless the only beneficiaries of the
debtor trust are those for whom the donor has "natural love
and affection", or charities. Gifts of assets held on revenue
account, or on which depreciation has previously been claimed, also
have the potential to give rise to a tax liability to the donor.
Independent legal advice should be sought.
For further information, please contact the lawyers featured
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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