The abolition of gift duty in October 2011 generated much public interest given the number of family trusts that have been established in New Zealand. The abolition essentially means that, from October 1 last year, it is possible to make gifts of unlimited value.
In the context of family trusts, this means that assets (most commonly the family house) are able to be transferred to a trust in full by way of gift for no value.
While that makes things tidier on the balance sheet and avoids the need for an annual gifting programme as required previously, it also means creditors will have less substantial assets available to satisfy their claims if default situations arise, since considerable personal value can now be transferred away outright by gift.
However, as with many things, nothing is as simple as it first appears. Under the Property Law Act and the Insolvency Act creditors are able to challenge gifts in certain circumstances.
Section 60 of the Property Law Act 1952 (which has now been replaced by section 346 of the Property Law Act 2007) provides that a transfer of property with "intent to defraud creditors" is able to be challenged by that creditor. This topic was recently considered by the Court of Appeal in the case of Taylor v Official Assignee.
The Taylors (T) had established their family trust in 2000 after Mr T became involved in a new IT business venture.
The evidence was that the Taylors had approached their lawyer to set up the trust following advice from their accountant that it would be a sensible move given the new business. They established a trust and transferred their family house into that trust at market value - and then started an annual gifting programme of $27,000 each per annum to forgive the purchase price debt owed by the trust.
That type of structure was common practice for the establishment of a family trust except in this case, at the time the trust was established, Mrs T owed Inland Revenue Department $4800 in tax arrears.
By the time the house was transferred to the trust the IRD debt had been reduced to $3000 and then paid off entirely by December 15, 2000. Problems arose later when Mrs T's health deteriorated and she incurred new tax arrears in 2002 which eventually resulted in her being declared bankrupt in 2006 owing approximately $123,000 to IRD.
The Official Assignee sought to have all the trust transactions (including the original transactions in 2000) cancelled on the basis they were undertaken with intent to defraud IRD. The judge in the High Court accepted this and essentially decided that the Taylors were lying when they said they established the trust in order to protect assets in light of the new business venture - instead he decided the motivation was Mrs T's desire to defraud IRD.
The Court of Appeal, however, rejected that interpretation and instead accepted that the Taylors were being truthful when they said the trust was established for asset protection purposes - as indicated by the fact that Mrs T's tax arrears in 2000 were less than 3% of their assets, the arrears were paid off in full that year and the form of the trust transaction was a standard and common form.
In certain circumstances, evidence of fraud at a later time can permit an inference of fraud at an earlier time (which would expose trust transactions to being challenged). However, in this case the Court of Appeal was sympathetic to the significant health problems subsequently suffered by Mrs T which contributed to the post-2002 tax arrears. The court decided the trust was established for legitimate purposes and the later tax arrears did not void the standard trust transactions.
Though each situation will depend on its own facts, the Taylor decision will be of comfort to many people who have established family trusts for legitimate purposes and who subsequently encounter financial difficulties.
- David Smillie is a partner in the firm Gallaway Cook Allan.
