Gd:GaN layers grown with different Gd concentrations by molecular beam epitaxy (MBE) are studied using photoconductivity and photo-thermoelectric power spectroscopy. Our study reveals that the incorporation of Gd produces a large concentration of acceptor-like defects in the GaN lattice. The defect band is found to be located ~450meV above the valence band. Moreover, the concentration of defects is found to increase with the Gd concentration. The effect of annealing on the structural and the magnetic properties of GaN implanted with Gd is also investigated. A clear correlation between the saturation magnetization and the defect density is observed in implanted samples. The colossal magnetic moment per Gd ion and the ferromagnetism observed in this material is explained in terms of the formation of giant defect cluster around each Gd ion.