Articles: July - Dec 2010
October 2010 - REPEAL OF GIFT DUTY - what will it mean?
September 2010 - Beware: New Real Estate Contracts
August 2010 - Amendments to Residential Tenancies Act 1986 Gives Tenants More Incentive to Pay Their Rent
July 2010 - Influencing Disposal of Trust Assets
October 2010 - REPEAL OF GIFT DUTY - what will it mean?
by Brett Gould
Director
Peter Dunn the Minister of Revenue has announced the repeal of Gift Duty from October 2011. The recommendation has been made on the basis of efficiency, simplicity, administration costs and the significant reduction of compliance costs.
Gift duty which has applied in NZ since 1865 remained after the Estate duty was removed in 1992, supposedly to protect against income tax avoidance and social assistance targeting. Since then it has been regarded as providing some protection to creditors. It applies to all gifts of over $27,000 made by a person annually. Major reasons for the recommendation include:
- It would reduce current Government income by $1.621 m a year ($2.348m in 2003/4)but would provide direct administrative cost savings of $430,000 annually. Further it is estimated there will be a $70 million (225,000 gift statements filed per year and not electronically) saving in private sector spending on compliance.
- The original purpose of gift duty was to protect the estate duty base (by discouraging gifting of assets prior to death) and to raise revenue
- Only 0.4% of gift duty statements filed every year create any liability to pay gift duty
The repeal was suggested as long ago as 2001 and since then there have been a large number of applications for exemptions and requests to review the thresholds. The reality is that the majority avoid gift duty by implementing gifting schemes below the thresholds. Overall the view is that gift duty is no longer performing a significant and useful function.
The IRD Issue Paper records the various perceived issues and the various government departments views on the same which are summarised below:
| CONCERNS | GOVERNMENT RESPONSE |
|---|---|
| Reduction of government income | Negligible against cost of collection and private sector compliance costs |
| Income tax returns | Alignment of trustee and personal tax rate from 1 October 2010 removes any tax advantage. But note a high earning individual could still transfer income producing assets to a trust or to low earning income family members so that the income could then accrue to beneficiaries/family members at their lower tax rates. However this occurs now with gift duty. |
| Reduction of creditor protection because defaulting debtors are able to transfer assets out of their name and currently then take a debt back which is then progressively gifted off - and the ungifted portion of the debt is available to satisfy creditors - the Official Assignee can make demand of the same on behalf of the bankrupt. | IRD records showed that only 0.003% of parties filing gift statements have gone into bankruptcy. So relatively gift duty is of little benefit in recovering debt from creditors particularly when considered in the context of $70 m spent by private sector in gift duty compliance. Further other specific creditor protector statutory provisions remain in place. |
| Without gift duty there will not be the compliance requirements and as a result there will not be the paper record of gifting. | The whole asset would be transferred as a single gift and no deed or gift statement would be required. There would be other records eg. Bank statements and title transfers evidencing same. |
| Social Assistance concerns relating to likes of asset tested and income tested benefits, Legal Aid, Student Allowances, Child Support and State Housing | Covered by some existing provisions and can be covered with updated application forms providing for such information. |
| Residential Care Subsidy - current ability to claw back any gifting over the prior 5 years. | Provisions relating to intentional deprivation of assets at any time remain and would be used more often. |
| Defeating Claims - in Relationship Property Disputes and Family Protection Act 1955 | Felt existing provisions exist to protect, prevent or remedy the disposal of property where intended to defeat the interests of another party. |
| Trust Law Concerns - removal will lead to more gifting and more trusts established - further concern over use of trusts and lack of regulation. | Law Commission is currently undertaking a review of trust law in NZ which may include new forms of regulation such as a central register and filing of annual compulsory returns |
An important point to make is that the announcement is just that and it will not be implemented before October 2011. Until such time gift duty is payable and gifting programs should be maintained in the meantime to ensure that one does not inadvertently in the interim breach the thresholds. Currently annual gifting provides an opportunity to reflect on the trust and its operations which is of some value when our courts are challenging a number of the long established understandings of how trusts operate.
SEPTEMBER 2010 - Beware: New Real Estate Contracts
by Kathryn Williams
Associate
Buying a house is the biggest investment most New Zealanders will make during their lifetime. For over twenty years, those buying or selling property in New Zealand have used a standard agreement produced jointly by Auckland District Law Society and the Real Estate Institute of New Zealand. This Agreement, currently in its eighth edition, has been updated and revised, and a new edition has recently been produced for use in residential property transactions within New Zealand.
The biggest change to the Agreement concerns claims for compensation by a purchaser where, prior to settlement, there has been damage to the property, or other problems arise which reduce the value and/or benefit of the property to the purchaser.
This change came about as a consequence of a case called Property Ventures v Regalwood Holdings. The case involved the sale of a commercial building whereby the vendor warranted that the building would have a warrant of fitness on settlement. The vendor was unable to obtain a warrant of fitness and therefore could not produce one on settlement, but nonetheless insisted that the purchaser settle in full. The purchaser did not wish to settle in full, but instead wanted to reduce the purchase price to reflect the amount that would need to be spent on the building to obtain a building warrant of fitness. The vendor (amongst other things) cancelled the sale and obtained judgment for the purchaser's deposit to be forfeited.
The new edition of the Agreement for Sale and Purchase now makes it clear that a purchaser can insist that a reasonable portion of the purchase price be retained on settlement and paid to a third party, who must hold those funds until the issues have been resolved.
The other important change to the Agreement relates to Land Information Memorandum reports (also known as LIM reports). Under the new Agreement, purchasers now need to have reasonable grounds for not approving a LIM report, instead of being able to cancel the Agreement based on a minor issue.
There are other amendments which have been made in the new edition of the Agreement. The term "Solicitor" has been changed to "Lawyer"; if no interest rate on late settlement is stipulated, the default rate is the rate charged by the Inland Revenue Department on late income tax; and the Agreement now records that where a real estate agent is involved in the transaction, the "Approved Guide" about the sale of residential property has been given to both parties.
If you would like further information regarding buying or selling property, or about the new edition of the Agreement for Sale and Purchase, please feel free to contact one of the team at Logan Gold Walsh.
AUGUST 2010 - Amendments to Residential Tenancies Act 1986 Gives Tenants More Incentive to Pay Their Rent
by Tim Grooby
Staff Solicitor
Phil Heatley's Residential Tenancies Amendment Bill 2010 has recently been passed into law and came into effect on 1st October 2010. The amendments to the Residential Tenancies Act 1986 give landlords more power to deal with problem tenants.
Almost 90% of applications that are filed in the Tenancy Tribunal relate to rent arrears. The Residential Tenancies Amendment Bill 2010 provides that tenants who leave a rental property with rent still in arrears, without a reasonable excuse, now face a fine of up to $1,000.00 payable to their landlord. Prior to these amendments there were no disincentives for tenants who abandoned a rental property leaving rent in arrears. If they were ever found, all they had to do was pay back what they owed. Now, tenants who attempt to leave a property without paying what they owe in rent risk being caught and being ordered to pay the rent that is in arrears and a penalty of $1,000.00 to the landlord.
Landlords no longer have to deal with goods that are left behind by past tenants. Landlords have the right to destroy tenant's goods that are left at a rental property depending on their value. Prior to the amendment, landlords had been forced to store goods that had been left behind by a past tenant or otherwise seek tribunal permission to dispose of them. The new provisions allow landlords to dispose of the goods if their market value is less than the cost of storing the goods for 35 days, transporting and selling them.
The new bill also gives the Tenancy Tribunal power to deal with disputes up to $50,000 rather than the previous limit of $12,000.
However, landlords need to be aware that if they leave the country for more than three weeks they have to appoint a property manager. If a landlord does not appoint a land agent they maybe ordered to pay the aggrieved tenant up to $1,000.00. This amendment is designed to protect tenants where their landlord goes overseas for a long period of time and simply leaves a phone number or an email address to contact them on.
There was a proposal to limit the tenant's liability for property damage to four weeks rent. This arose from a fire in a Dunedin leased residence which resulted in the insurance company targeting the only tenant who could be found, but who was not responsible for the damage. This is obviously an unfortunate situation, however many of us would have heard horror stories of rental properties being seriously damaged as the result of vindictive tenants. If a tenant's liability was limited to four weeks rent for such damage, it would , to some degree remove any feeling of responsibility that these kind of tenants felt towards the rental properties they reside in, as they would know that there is a limit to what they would be liable to pay for any damage that they caused.
The amendments to the Residential Tenancies Act 1986 make several positive changes for landlords. Hopefully we will hear fewer stories of landlords finding their rental properties empty after tenants have packed up and left without paying their rent or that they are compensated for the same.
If you would like more advice about anything in this article please contact tim@lgwlawyers.co.nz.
July 2010 - Influencing Disposal of Trust Assets
by Bruce Logan
Principal
Where the settlor of a family trust has established property on trust to be applied for the benefit of certain beneficiaries, it is obviously desirable that the settlor’s intentions in respect of the trust property be given effect to. If there is a settlor living at the time of any proposed distribution the trustees could, of course, consult that settlor directly as to his or her wishes in respect of the distribution. However, often the settlor will no longer be living and the original trustees no longer in control of the Trust. In these circumstances, giving effect to what the settlor’s intentions might have been will depend on a certain amount of guesswork.
The problem can be greatly assisted if the settlor prepares a written Memorandum of Guidance (also known as a Memorandum of Wishes) setting out, in a non-binding way, his or her thoughts on particular beneficiaries and their expectations and likely needs. The greater the information provided, the better chance the trustees have of seeing that the settlor’s real wishes are honoured. Obviously, any such Memorandum of Guidance should be revised from time to time.
If the settlor, who is usually also one of the trustees, wants to ensure that certain assets will in time pass to certain beneficiaries, the trustees can, in advance, pass resolutions to that effect. Such resolutions can be expressed to be irrevocable and therefore set in concrete. However, because the future is unpredictable, trustees should be very cautious about passing irrevocable resolutions which they may later regret. An alternative is for any such trustees’ resolutions to be expressed to be revocable by the subsequent unanimous resolution of the trustees.
Settlors often struggle with the issue of the distribution of trust assets, particularly where the principal asset is a farm property and the settlor is keen for one of the beneficiaries to take over the farm, usually at the expense of an equal division between the family. This can be a troublesome aspect of succession planning, and is one that will be dealt with in a subsequent article.
