Gift duty repeal will affect divorce

Peter Dunne announced that the Government intends to repeal gift duty. Photo / Sarah Ivey

If you, your spouse or de facto partner has a family trust, then the announcement by Peter Dunne that the Government intends to repeal gift duty could have major implications for you.

One of these implications is the potential for property to be much more easily transferred out of the pool of property available for division upon separation.

In New Zealand it is estimated that there are up to 500,000 family trusts, so any legislative reform is going to have widespread ramifications. Parallel with trusts' popularity is the soaring number of divorces.

The great philosopher and poet Kylie Minogue once said that she did not believe in the idea of one perfect match. For many of us, Ms Minogue is absolutely right. In any event, we don't all separate but we do all die, and the Property (Relationships) Act applies also in regard to claims that arise following one partner's death.

At present, property owned by a trust is not relationship property and not available automatically for division on a marital split. It is not owned by the spouses who transferred the property to the trust.

Ignorance about trusts is high. Many New Zealanders think transferring property to a trust is like putting it in a cupboard. They assume they can get it out of the cupboard and it is still theirs. Despite their wide powers under the trust deed, when it comes to separation and death of a partner a different set of rules apply.

This is why the Public Trust and lawyers advise asset-owning parties to consider using trusts to avoid the Property (Relationships) Act. The existence of gift duty has meant that people have not been able to immediately transfer their property into a trust. Why would you, when heavy tax penalties resulted under the gift duties regime?

Instead, the owner(s) would gradually gift property across at $27,000 per person per year. This has meant that in many relationship property cases there was at least the debt back from the trust to the individuals, which could be classified as relationship property if the property transferred to the trust was relationship property in the first place.

If the Government repeals gift duty, then gifts to trusts will be absolute and immediate and there will no longer be an option to claw back any part of the gift not yet paid under the gifting programme.

The Property (Relationships) Act has weak provisions in regard to trusts. There are provisions with which one can prove that there was a deliberate diversion of property to a trust to avoid the act, but it is difficult to prove the necessary intention.

There is also a provision which deals with compensation orders if relationship property has been transferred to a trust during the relationship. This, however, only provides for orders against separate property or relationship property owned by the partner who benefited and orders against income from the trust (only as a last resort).

The provision does not allow for orders in regard to assets owned by the trust. If the trust does not produce an income, or only limited income, such as if the only asset is the family home, there may be no other source from which compensation can be awarded.

The use of trusts to avoid equal division of relationship property is well known and promoted as a feature of trusts. During a relationship, if property is only in one partner's name they can transfer it to a trust without even telling the other partner.

Contrast this with a situation where a couple wish to contract out of the Property (Relationships) Act and provide for a different sharing regime in the event of separation. To do that, you both require independent lawyers and the lawyers must be fully informed of assets, values and what the effect of the agreement is. To be valid, any agreement must be certified that a lawyer has fully informed the signing partner of the implications and effects of the agreement. The inconsistency between using trusts to sidestep and contract out of the act is obvious.

We do not advocate the retention of gift duty, which is an outdated and expensive tax. A tax should not remain for an extraneous purpose of ensuring a fair division under the Property (Relationships) Act.

We do, however, advocate that individuals are aware of the significant impact of the repeal of gift duty in regard to their property if they or their partner has a trust. The impact of this amendment could adversely affect you, in that property which would have otherwise have been categorised as relationship property _ and therefore divided equally between you _ will no longer be divided between you at all.

We do not think Dunne or his advisers have grappled with the true situation in regard to trusts and the act. They need to amend the legislation to prevent the undermining of the principles of the legislation in terms of equal division of relationship property.

At the least, both partners should be required to obtain independent legal advice as a prerequisite to the valid transfer of relationship property to a trust.

Deborah Hollings, QC, and Suzanne Robertson are barristers.