Sharp as tax: Rules strict on gifting and rest-home subsidies

In October 2011, gift duty was abolished which meant that any amount of money could be given (or forgiven) to people/trusts for whom one has ''natural love and affection'' without paying gift duty.

This was particularly important to the many New Zealanders with discretionary trusts who had been previously diligently forgiving outstanding debt between themselves and their trusts to the maximum untaxed amount of $27,000 per annum.

At that time, many tax advisers, accountants and lawyers sought to remind their clients that there were lots of factors to be considered before accelerating a gifting programme, For example, business risk, potential creditors, solvency, relationship property disputes, the aims of the trust and who the beneficiaries are, are all matters that could lead to serious consequences for the unwary.

At the same time, clarification was sought from the Ministry of Social Development on how the removal of gift duty would impact clients' entitlement (if any) to residential care subsidies to pay for rest-home fees.

Despite what many ordinary Kiwis had hoped to achieve by moving their assets into trusts, the message from the ministry was clear - the rules about residential care entitlements did not change with the removal of gift duty; residential care subsidies are for people who need them and cannot afford to pay for their own care.

As well as this affirmation, the ministry, perhaps surprisingly, advised that the acceptable limit for gifting funds into a trust for reasonable asset protection purposes is $27,000 per year per application, not per person.

Irrespective of whether this position was originally intended or via a previous oversight, this meant that the actual limit was $13,500 each per annum for a couple, and that many couples had inadvertently been making ''excessive'' gifts (of $27,000 each or $54,000 combined) to their trusts for many years.

Thus, where couples had thought they had effectively gifted part of their estate to a trust so as to be eligible for residential care subsidies, they were sadly mistakenA recent case has now affirmed without doubt what Crowe Horwath and others have been advocating for almost two years in respect of this issue.

The late Mrs B of Whangarei and her husband set up a family trust in 1987 and made gifts of $27,000 each per year between 1987 and 2004. In 2009, Mrs B moved into a rest-home and her application for a rest-home subsidy was declined due to her assets considerably exceeding the limit for eligibility. All gifts made by Mr and Mrs B collectively in excess of $27,000 per year were counted back as personal assets.

It was asserted that this was a test case and a significant number of otherwise successful applicants would now be ineligible for the residential care subsidy. With greatest sympathy for the family in this case, and the others to follow, we can only agree that this is the outcome under the current stated rules. If you are impacted by this scenario, we recommend you talk to your adviser. If you feel aggrieved by this scenario, we recommend that you talk to your MP.

- Scott Mason is the NZ managing principal of tax advisory for Crowe Horwath.

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