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RESIDENTIAL CARE SUBSIDY AND ABOLITION OF GIFT DUTY

There was some surprise that no new legislation was proposed as a result of the abolition of gift duty. Some saw the removal of gift duty as an opportunity for taxpayers to defeat creditors and gain access to benefits, by depriving themselves from ownership of assets through transferring them to a trust.

On face value, residential care subsidies seemed to be one area where the removal of gift duty could have a significant impact. However, the existing rules more than adequately cover this situation and prevent an undue advantage being obtained.

At present, gifts made within five years of applying for a residential care subsidy in excess of $6,000 per application per annum, will be clawed back. ‘Application’ includes a spouse. Thus, a husband and wife can gift no more than $6,000 in total per annum if they wish to avoid claw back. If a couple together gift $54,000 per year, their excess gift over five years would amount to $240,000.

Beyond the five year period, it is possible to gift up to $27,000 per application per year, but anything in excess of $27,000 could also be clawed back.

There is an ability to pay someone for providing a high level of care prior to going into a rest-home. However, any such amount will be included in the total gifting
allowance (of $6,000 per annum for five years) and, therefore, may affect the claw back calculation.

The rules also claw back any deprivation of property and income. Deprivation is where there is a deliberate act or omission that results in deprivation of property or income. Deprivation of income includes waiving a right to income, not demanding payment, or investing in non or low income producing assets.

Where assets are transferred to a trust, but in reality the applicant and/or the spouse has a power of appointment or control over the trust assets, claw back may also arise if an asset has been transferred to a trust and not been fully gifted at the rates allowed.

How it affects you

Before engaging in a gifting programme, transferring assets to a trust or other person, you will need to consider the wider implications of such, including matters like loss of control, application of the above rules, family succession objectives, income needs, etc. It is always wise to seek advice before undertaking any gifting.

ARE YOU RENTING YOUR HOUSE OUT FOR THE RWC?

With the Rugby World Cup (RWC) fast approaching and the proliferation of homes being offered as accommodation, it is timely to review the income tax treatment of short-term rental activities for a taxpayer.

From an income tax perspective, matters are relatively straight-forward, in that all income derived from the short-term rental accommodation activity should be included in the person’s income tax return for the corresponding income year.

Where things become more complicated however, is in relation to deductibility of expenses.

As a general premise, a person is allowed a deduction for an amount of expenditure or loss to the extent to which the expenditure or loss is incurred in deriving their assessable income. However, a person is denied a deduction to the extent to which the expenditure is private in nature.

With respect to a property which is being rented out on a short-term basis for the RWC, there will be an element of deductible expenditure and a much larger element of private expenditure (if you are renting out your own home or a holiday home).

Thus, if you are renting your home for a four week period over the RWC, then you will be entitled to a deduction of 4/52 of the annual expenditure incurred in relation to the property, for example, insurance, rates, interest costs on a mortgage, etc.

Other costs that can be directly attributable to the four week stay will also be deductible. This may include electricity, rubbish removal, advertising of the property, cleaning, etc.

The difference between the income received and the expenditure incurred will be taxable income. For a wage and salary earner, this will mean that they will be required to file an income tax return for the 2012 income tax year. The person will also have a terminal tax liability in relation to the net income derived, which would be due on 7 February 2013, or 7 April 2013 if the taxpayer uses a tax agent and has an extension of time.

How it affects you

The Inland Revenue Department has advised that they are reviewing advertisements for accommodation and are contacting those persons directly to remind them of their income tax obligations in relation to renting their property. If you are unsure of what your tax obligations are, we suggest that you contact your usual advisor.

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