Money: Valuation of assets essential

By Denham Martin

Taxwise


I am self-employed and my accountant has suggested I should consider settling a family trust to protect my house in the event that the business suffers a disaster.

was advised it would be necessary to have any assets to be held by the trust valued before I sold those assets to the trust.

have just received the latest Government valuation on my house and wonder whether this will be sufficient or whether I need to go to the expense of obtaining a valuation from a registered valuer.

R.S, Kohimarama It will be necessary for you to have each of the assets to be settled on the trust valued.

The reason for valuing assets lies in the fact that if assets are sold to the trust at less than market value, the Inland Revenue Department might treat the difference between the price at which the assets are sold to the trust and their market value as a gift.

This would attract a gift duty impost to the extent that it is above the allowable annual entitlement of $27,000 a person.

The valuation must be current, and for most assets this will mean not more than 12 months old.

However, it is the view of the Inland Revenue Department that property valuations should not be more than three months old.

Valuations of land until recently were undertaken by the valuation department of central government, then Valuation New Zealand, and these were acceptable to the Inland Revenue Department.

But since the amendment to the Rating Valuations Act 1998, councils are now obliged to maintain valuation roles. Thus, the latest valuation that you have received is likely to have been issued by your local council rather than central government.

There is no reason to expect that the Inland Revenue Department would not accept the council valuation.

The Inland Revenue Department will also accept valuations from a registered valuer or an associate member of the Real Estate Institute of New Zealand.

You should note that a valuation from a real estate agent who is merely a salesperson is not acceptable. For the purpose in question, the valuation must be given by the licence holder of the real estate agency.

Even where a valuation of an asset has been obtained, the Inland Revenue Department will sometimes challenge the value ascribed to the asset.

For that reason, lawyers include what is commonly known as a sliding value clause in the agreement documenting the sale of the assets to the trust.

The effect of the sliding value clause is to give the vendors of the asset (in this case, ou as the settlor of the trust) the right to increase the sale price of the asset should the Inland Revenue Department challenge the price as being too low.

By increasing the sale price, no gift arises.

Conversely, if the Inland Revenue Department considers the sale price too high, the sliding value clause may operate to reduce the sale price. In practice, this situation rarely, if ever, happens.

Similarly, there is no gift where the sale price is altered downwards as a result of the operation of the sliding value clause.

Although your query related specifically to the sale of your house to the trust, it should be noted that the comments could be applied to the sale to a trust of other types of assets.

For example, if shares in a company are sold to a trust and the shares are not quoted on a stock exchange, then a sliding value should be included in the contract for sale of the shares for the same reasons as discussed above.

This is particularly so given that the share values often would be based on the last set of financial statements and these may be many months out of date.

Obviously, for shares quoted on the stock exchange, the current trading price should be adopted.

Overall, you have been well advised to get a valuation of the assets you wish to settle on the trust.

Provided you act promptly, however, the council valuation that you received recently should be an adequate valuation for your house.

* Denham Martin is the principal of Denham Martin and Associates, lawyers specialising in advice on taxation and related matters.