With speculation surrounding the federal election 2019 of a potential re-introduction of a "death or inheritance tax" in Australia, a recent settled matter Carroll & O'Dea were involved in demonstrates the difficulty in applying inheritance tax in family provision claims.
The deceased passed away in October 2015, leaving a will dated 27 April 1989 for his estate to pass to his first wife, one of his daughters, his brothers and sister in unequal shares. A later draft will by the deceased dated 16 June 2009 was ultimately accepted as the last 'will' leaving the entirety of his estate to his "children."
The deceased had nine children; six of whom were from his first marriage and aged between 29 and 17 at the time proceedings commenced on 28 October 2016. The deceased also had three children ('de-facto children') from a de-facto ('the de-facto') relationship who were between two and five years of age at the same time.
Family Provision Proceedings
Carroll & O'Dea commenced proceedings in the Supreme Court of NSW on behalf of the de-facto children as eligible persons seeking a provision out of the estate for their maintenance, education and advancement under section 59 of the Succession Act 2006 (NSW). Associated proceedings were also commenced on behalf of the de-facto seeking the same provision for the maintenance, education and advancement of the de-facto children and the other six children from the first marriage.
Assets of the deceased estate and tax consequences
The deceased estate had assets in both Australia and the United Kingdom (UK). Under the Inheritance Tax 1984 (UK), tax may be payable on an estate of someone who has died, depending on the value of the estate.
The deceased resided in both Australia and the UK. The issue concerned whether the deceased died in domicile in the UK and, if he was deemed to be domiciled in the UK, whether the deceased was required to pay tax on his estate located outside the jurisdiction of the UK. The estate obtained independent legal advice specialising in taxation and also from UK accountants, exhausting significant funds in determining the issue.
The advice received by the estate was that the deceased would be considered domiciled in the UK, and therefore subject to pay inheritance tax under section 267(1) of the Inheritance Tax Act (1984) which deems someone is domiciled if either:-
- He was domiciled in the United Kingdom within the three years immediately preceding the relevant time.
- He is a formerly domiciled resident for the tax year in which the relevant time falls ("the relevant tax year"); or
- He was resident in the United Kingdom:-
- For at least fifteen of the twenty tax years immediately preceding the relevant tax year; and
- For at least one of the four tax years ending with the relevant tax year.
The value of the estate, as submitted for calculation of the UK inheritance tax, was £1,100,000.00. The amount that was deemed by HM Revenue and Customs to satisfy the deceased inheritance tax obligations was over £300,000.00. This amount represents 40% of the value of the estate above £325,000.00. The estate was also liable to pay interest compounding daily from April 2016. The total amount of inheritance tax to be paid out of the estate was around £335,000.00 or roughly $626,000.00 as at 5 March 2019 with interest still compounding.
The matter raises questions of how inheritance tax would be determined under similar laws in Australia, especially in circumstances where the extent of the deceased's assets are unknown and as such difficult to calculate, has foreign assets and whether the deceased is deemed as domicile in Australia.
Potential consequences of the death tax if introduced in Australia
This matter provides a warning should the death tax be introduced to Australia of the potential delay and increased cost associated with a family provision claim. Such a tax will increase the liabilities payable out of the estate, reducing the assets that can be distributed. This should be considered before deciding whether to commence a family provisions claim.
Ultimately, the matter took some three and a half years for the deceased's assets to be received, settling soon after the matter was to be heard in the Supreme Court with assets still to be sold and distributed.
The delay associated with determining the amount of inheritance tax payable, resulting in increased costs, brings into question whether family provision claims could be dealt with in a just, quick and cheap manner should such a tax be introduced in Australia.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.