Articles by Matthew Gilligan

• Draft legislation is before Parliament to repeal gift duty from 1 October 2011.  Once this rule is finalised we will spend more time advising you as to what the appropriate course of action is.  At this point it would seem highly likely that this will be enacted as is so one can expect gift duty to be no more from 1 October 2011.

• A number of significant changes are programmed to take effect in relation to GST from 1 April 2011.  Some of the key ones are:

• Land transactions entered into after 1 April 2011 are zero rated for GST purposes if the transaction is between two GST registered parties.  In the past the vendor would collect GST from the purchaser and remit that to the IRD and in turn the purchaser would claim the GST back.  From 1 April 2011 such transactions will be subject to a GST rate of 0% meaning no GST is charged and collected and no GST is claimed by the purchaser.  This is a rule change designed to prevent so-called "phoenix" arrangements whereby land was sold out of one GST registered entity to another, at which time the purchaser made a GST claim and the IRD were left out of pocket because the vendor entity was insolvent and could not pay the GST back.

• New apportionment rules replace the current adjustment rules.  Under current GST rules you claim GST on 100% of the purchase price of an asset if the principal purpose in acquiring the asset is to apply it towards a taxable activity.  You then make adjustments if the asset is subsequently applied towards exempt purposes.  The apportionment rules replace this approach by requiring you to determine up front what portion of the assets use is intended to be for taxable purposes and then claiming GST on that basis.  For example, say 75% of the use of an asset is expected to be in relation to the taxable activity, you will claim 75% of the GST.  You then make adjustments over time if the actual use of the asset differs from the original estimate.

• In relation to land transactions many of you may already be making GST adjustments as a result of a property being bought for dealing or development purposes being rented.  Despite the enactment of these new rules on 1 April 2011 you will still continue to apply your existing rules for land acquired prior to this date.

• The position in relation to nominee transactions has been clarified.  There has historically been debate around whether nomination arrangements triggered a second supply for GST purposes.  The new provisions by and large confirm that there is a single supply from the vendor to the nominee and provided all other criteria met, the nominee is entitled to make the GST claim.

• The definition of commercial property has been broadened to explicitly include home stays, farm stays, bed and breakfast accommodation and certain serviced apartments.  Broadly speaking there is almost a presumption that property is commercial unless you fit within the definition of dwelling, which is essentially a dwelling used by its occupants as their principal place of residence.

• In relation to Family Assistance the definition of income in order to determine one’s eligibility is being broadened to include trustee and company income.  This applies to Trust's where the applicants are settlors and companies owned by these Trusts.  Various other items of otherwise exempt taxable income are also now included in the assessment.  This was a change signalled when the budget was read in May.  It represents an attempt to address the Government’s concerns about the integrity of the social assistance regime. 

Naturally the above is merely a broad brush summary of the changes.  If you have concerns particularly in relation to GST and eligibility for Family Assistance then please contact us.

GIFT DUTY TO BE ABOLISHED
On Monday Revenue Minister Peter Dunn confirmed that the government intends to abolish gift duty.  Earlier this year the Minister had signalled that a review was being undertaken as to whether or not the gift duty regime should be repealed or amended.  Subsequently that review has occurred with the Inland Revenue producing a report assessing the impact of a repeal of gift duty across other governmental and legislative areas.  One of the prime concerns that was raised when the review was announced earlier in the year was whether or not repealing gift duty would have an adverse affect on creditor protection and rules in relation to qualification for social assistance. Contact Us at GRA.

The Review

The outcome of this review is that the various governmental bodies have concluded that there is little or no risk to their areas of operation if gift duty were to be repealed.  The Inland Revenue have confirmed that approximately $1m of revenue is collected annually in terms of gift duty.  Interestingly they note that much of that revenue collection seems to be a result of timing mistakes where donors accidentally gift more than the $27,000 allowable in the 12 month timeframe.

From our perspective the areas that we were most interested in was whether a repeal of the gift duty regime would lead to any suggestions for new legislation in respect of creditor protection or access to social assistance such as residential care subsidies, family assistance, student allowances etc.  In short the review has concluded that existing legislation is adequate and no changes are proposed as a result. 

As a result of the above legislation is to be introduced later this month which will see gift duty abolished from 1 October 2011. 

The Outcome

Overall we see this as positive development for taxpayers.  Abolishing gift duty will reduce compliance costs in that those of you that have outstanding gifting programmes will be able to bring those to an end post 1 October 2011 and thereafter not have to worry about the annual gifting process.  We also think it is encouraging that rules in relation to eligibility for residential care subsidies for example are not proposed to be altered so that there is at least some degree of certainty as to how those will apply.

What Should You Do Now?

The obvious question that arises out of this is – what do you do if you have annual gifting due between now and 1 October 2011.  Although it depends on the circumstances, in general we recommend that gifting continues as usual. 

Certainly we note that any transfers of assets to Trust prior to 1 October 2011 will still have to take place at market value with the usual sale and purchase agreement and deeds of acknowledgement of debt in place.  Gift duty still applies up until that date so still needs to be dealt with.  In terms of forgiving any outstanding debt our inclination is to encourage our clients to continue to execute gifts between now and then on the basis legislative provisions in terms of the creditor clawback apply such that gifting inside certain time frames is automatically reversed.  Thus the sooner a gift is executed the sooner it falls outside the timeframe.  We also note that until the legislation is drafted and passed into law there is always the prospect of it being amended or altered although we do see this as likely.

Summary

In summary, when transferring assets to a Trust at present it is business as usual at this point as gift duty will apply if the assets are not transferred at market value so there still needs to be valuations, sale and purchase agreements and deeds of acknowledgement of debt in place.  If you are currently gifting and have a gift due in between now and 1 October 2011 we encourage you to complete that gift, particularly if it is in the immediate future.  Post 1 October 2011 we will be contacting clients with existing outstanding gifting programmes and putting in place documentation to bring those gifting programmes to an end. 

Please contact us at Gilligan Rowe with any queries in relation to the above by clicking HERE

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz
or call +64 9 522 7955

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In case you missed it over the weekend, the NZ Herald article on a woman being awarded a share of her husband's 'inherited property' that pre-existed the relationship rewrote some relationship property rules.

What Happened?

The supreme court held that a woman whom helped maintain an inherited farm property (that pre-existed the marriage) was entitled to 40% of the growth on the property that occurred during the relationship.

Why?

Because she contributed to the maintenance of the house by performing domestic chores and by earning income.

Why is this a change ?

It was generally accepted before this case that inherited property that pre-existed a marriage is separate relationship property and not subject to 50/50 split on divorce.

Comment;

• Personally I think the case is fair, - she did contribute to the relationship so why should it not be shared property, given she contributed to the properties upkeep? The plaintiff's counsel noted the farm would have likely been forced to be sold, but for her income being used to support bank payments.

•  If you wish to avoid this happening, - put your property in a Trust and ask your spouse to sign a relationship property agreement. The latter ( relationship property agreement or S21 agreement) makes it very clear that the property is not intended to be joint relationship property. Such agreement is much easier than an expensive fight later on, and perhaps easier to put in place earlier than later.

•  The Trust is a great thing to do before the relationship commences, but is weakened as a defence to a claim if setup during the marriage and the property is transferred during the relationship. If you wish to do this during the marriage, the S21 agreement is essential to stop spouses 'tracing' their potential relationship property interest into the Trust.

Thank you,

 Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

As a structuring advisor to investors and business people, one very common mistake with many  business and property structures is a spouse being offered as a guarantor to the banks, landlords or creditors of a business.

Their personal guarantee is often not required to get a deal done, yet it is provided because the advisors around you do not stand up for you and say 'hey, don't let your spouse sign that - you don't need too'. The result is that if total business or investment failure occurs, both spouses are fully liable instead of just one.

Of course the creditor, banker or landlord requesting your spouses guarantee will insist it is necessary 100%, because it is in their interest.

But it is contrary to your interests.

My advice is NEVER give your spouses guarantee in business or property dealings if you can avoid it. I have developed over 80 million dollars in property, and guaranteed numerous business and banking obligations, purchased multiple investment properties, - and my wife has never signed a personal guarantee on the loans.

Why ? To shelter her from the obligations.

How did I avoid her being liable? By saying no to the banks and creditors when they asked. Did it hamstring her legal or matrimonial rights to recover the property if we divorced? No, - she still gets the assets because she jointly controls the Trusts and various entities borrowing. So this is not about stripping power off your spouse and potentially wealth, it is purely about minimising risk to your household.

Examples of this include:-

1. Borrowing money from the bank to purchase an investment property or even your home. If one spouse is a homemaker, has no income or their income is not required to meet debt servicing criteria of the bank, - then why allow the bank to take their guarantee? The only use of the guarantee will be to apply more pressure to your family if you have a problem, and both spouses go bankrupt instead of one ( which could be viewed as malicious in this light).
   
   One point to note here is that you may need to use a mortgage broker to manage the negotiation with the bank, - and the broker will have to work a bit harder to achieve this. If you deal with a bank direct, they will likely tell you 'no spouse guarantee is impossible in your circumstances'. It may be true if your borrowing position is not strong, but how do you know unless you have a lot of banking and commercial experience?
   
   The answer is use a broker who has the experience, and who is willing to try hard for you. I have found many brokers lazy, or unsophisticated - they are just not equipped for these sorts of discussions with bankers or do not value asset protection concepts. Remember they get paid on commission, and asking for tough things from the bank means more work and time for the broker, with no more money. For this reason it may be appropriate to pay your broker to deal with the complexities, if your affairs are complex. Otherwise they may put you in the 'too hard' basket. If you need a good broker, email me mg@gra.co.nz . We have contacts all over the country, and for the record we do not get commission from these relationships. We just want our clients better protected.

2. Dealing with landlords over commercial leases and guarantees: always try to divide leases out into separate 'tenancy companies' and make one spouse a director of this company, Your opening position should be no personal guarantee, and if 'no personal guarantee' is a deal breaker with the landlord, - then only the director/one spouse gives a guarantee. Try not to give an unlimited guarantee, - limit it to say 6 months rent, or a fixed sum as a cap.
   
   For example my rent is around $260,000 per annum for our premises, on a 3+3. If I guarantee it for an unlimited amount, that is a $780,000 personal obligation. Firstly, I limited the guarantee to 6 months rent ( $120,000) and secondly made sure that the shareholders (a Trust) and my spouse did not guarantee the loan. This turns a potentially disastrous obligation into a manageable commercial obligation.

3. Dealing with creditors over personal guarantees: creditors in business will generally ask for a personal guarantee. Refuse to give it if you can get away with it, and most of the time you can. Where you have to give one, just as with a landlord 'limit the guarantee'. Only this week I was arranging some advertising with Fairfax, and they asked me for two GRA directors personal guarantees over the obligations of our supply relationship with them for advertising. I was so annoyed, I told the salesman I did not wish to advertise with Fairfax if a personal guarantee was required. I told him clearly his company's view was that my company was unreliable in character, if they were not willing to deal with the company without the director's guarantee.
   
   He got the message - I really cared more about the guarantees than the advertising and they would not get our money unless they backed away from the guarantees. He rang later to advise the guarantees would not be necessary. To my knowledge, GRA directors have not guaranteed a single supplier obligation (apart from the limited guarantee to the landlord). So it can be done, but I do acknowledge that some suppliers just won't deal with you without providing a personal guarantee.

Summary

Keep your spouse out of the liability chain if you can. Personal guarantees and spouses should not mix.

If you are dealing with a landlord or creditor in business and have to provide a guarantee, try not to give a guarantee at all, or limit the guarantee to a fixed sum Eg: 6 months rent.

If your spouse has no income, you should be able to avoid their guarantee being given to the bank. Consider using a mortgage broker to achieve this. Generally the banks (if dealing direct) will be very hard to manage on this point, especially in this recessionary environment.

I hope you have found this information helpful.  If you require assistance with any financial matters, please fell free to request an interview.  We are here to help.

Have a good month!