On 12 February 2020 Revenue NSW issued Revenue Ruling DUT 046 on the deceased estates concession in section 63 of the Duties Act 1997 (NSW) (DA). The guidance provided is helpful and contains a few traps and gems.
No duty is payable on the vesting of estate assets in the deceased's legal personal representative (LPR) on a grant of probate or letters of administration (section 65(12) of the DA). The deceased estates concession focuses on the transfer of dutiable property from the LPR to a beneficiary.
Section 63(1)(a) of the DA levies $50 duty on a transfer of dutiable property by the LPR to a beneficiary where the transfer constitutes:
- a transfer made under and in conformity with the trusts contained in the deceased's will or on intestacy;
- a transfer of property the subject of a trust for sale contained in the deceased's will; or
- an appropriation of the deceased's property in or towards the satisfaction of a beneficiary's entitlement under the trusts contained in the deceased's will or on intestacy.
Transfer made under and in conformity with the will or on intestacy
This limb of the deceased estates concession is read strictly. A transfer must be made under and in conformity with the trusts of the will. It is insufficient that the transfer is consistent with those trusts (Sanders v Chief Commissioner of State Revenue  NSWADTAP 22 (Sanders)).
A transfer pursuant to a family provision order falls within this limb as it takes effect as a codicil to a will (or a will in the case of intestacy) (section 72 of the Succession Act 2006 (NSW) (SA)). A vesting order under the SA also falls within this limb as it has the same effect as a transfer by the LPR to a beneficiary (Vukic: Estate of Grbin v Grbin  NSWSC 212).
Where a beneficiary makes a transmission application with the LPR's consent and in conformity with the will, this is treated as a transfer by the LPR to the beneficiary to which the $50 duty concession can apply (section 63(2A) of the DA).
Deeds of family arrangement (DOFA)
Sometimes beneficiaries enter into a DOFA to vary gifts they receive under a will or on intestacy. If:
- beneficiaries do so in order to settle a claim on the estate;
- the administration of the estate is incomplete at the time of the DOFA; and
- the only consideration a beneficiary provides under the arrangement is a waiver of their estate claim,
then the variation of gifts should not trigger capital gains tax (CGT) as the CGT death rollover should apply (section 128-20(1)(d) of the Income Tax Assessment Act 1997 (ITAA 97)).
The requirement that the only consideration a beneficiary provides is a waiver of their estate claim raises difficulties where beneficiaries wish to take assets of different value. In such a situation an appropriation of estate assets by the LPR may be more tax effective (discussed below). Whilst a DOFA may avoid CGT, duty on the transfer to the substituted beneficiary remains an issue.
Where a LPR transfers dutiable property to a beneficiary under an agreement that varies the trusts in a will or arising on intestacy, the dutiable value of the transferred dutiable property is reduced proportionately by reference to the dutiable property to which the beneficiary was originally entitled (section 63(2) of the DA).
The section 63(2) concession focuses on a beneficiary's original entitlement to the dutiable property, rather than examining the estate's whole value (Alexander v Chief Commissioner of State Revenue  NSWCATAD 180).
Example 2 of DUT 046 highlights this, where, A and B are entitled to a residuary estate in equal shares, comprising land ($2 million), cash ($1 million) and shares ($3 million). Under a DOFA, A and B agree that A takes the land and cash ($3 million) and B takes the shares ($3 million). Although evenly divided, A must pay ad valorem duty on half the land value ($1 million) since A was only entitled to half of the property under the will. (Curiously the abolition of duty on shares from 1 July 2016 (by making them no longer dutiable property under section 34(1) of the DA) unintentionally narrows the duty concession in section 63(2)).
Revenue NSW's reading of section 63(2) is restrictive and results in more duty payable. In Example 1 of DUT 046, A and B are entitled under the will to the residuary estate in equal shares, comprising a Gosford property ($2 million) and a Newcastle property ($3 million). A and B enter into a DOFA whereby A takes Gosford and B takes Newcastle.
Since B receives $500,000 of dutiable property more than he is entitled to, one may have thought that section 63(2) only applied duty on excess – i.e. $17,932 duty. However, Revenue NSW reads the duty concession as follows:
- A is entitled to $1 million of Gosford under the will. Section 63(2) reduces the dutiable value of Gosford by A's entitlement, meaning A pays $40,432 duty on the remaining $1 million dutiable value of Gosford.
- B is entitled to $1.5 million of Newcastle under the will. Section 63(2) reduces the dutiable value of Newcastle by B's entitlement. B must pay $67,802 duty on $1.5 million.
The DOFA results in $108,234 duty.
A more duty effective way is to transfer the residuary estate to A and B in accordance with the will, each obtaining a 50% share in each property. $50 duty applies to these transfers. Subsequently, A and B partition the properties, leaving A with Gosford and B with Newcastle. Under the partition concession in section 30 of the DA, A is not required to pay duty on their receipt of Gosford since its dutiable value ($2 million) is less than the value of A's interest in both properties (i.e. $2.5 million). B must pay duty on Newcastle since B received $500,000 more than the value of B's interest in both properties. Therefore duty of $17,932 is payable, being equivalent to what would be payable if Revenue NSW refrained from taking its restrictive position.
Whether a partition is a better approach requires an assessment of other tax consequences, particularly capital gains tax (CGT) which is assessed at the beneficiaries' marginal income tax rate.
Where the asset transferred to a beneficiary under DOFA is a company share or a unit in a unit trust, prima facie no NSW duty applies provided the share does not confer a land use entitlement. Whether the transfer triggers landholder duty must be considered. The deceased estates exemption from landholder duty in section 163A(d) of the DA is narrower than the deceased estates concession in section 63, requiring that a beneficiary acquire their interest in the landholder solely as the result of a deceased estate distribution. A transfer under a DOFA does not meet this 'solely' requirement: Tay.
Transfer of property the subject of a trust for sale contained in the will
A trust for sale is a direction in a will to sell estate assets and distribute the proceeds to beneficiaries. Where the LPR and beneficiaries agree not to sell dutiable estate assets but rather have the LPR distribute the assets to the beneficiaries according to their will entitlements, $50 duty should apply to the distributions.
This differs to where a beneficiary contracts to buy an estate asset from the LPR, where ad valorem duty applies.
Revenue NSW accepts that nominal duty under section 63(1)(a) of the DA applies where a will grants a beneficiary with an option to purchase a deceased estate asset (paragraphs 28 to 29 of DUT 046). Provided no written agreement for sale or transfer is entered into between the beneficiary and executor:
- nominal duty applies to the transfer of dutiable property to the beneficiary resulting from the beneficiary exercising the option; and
- no duty applies to the beneficiary's exercise of the option.
Revenue NSW accepts this because a testamentary option does not create a sales contract between the testator and the donee (O'Neill v O'Connell (1945-1946) 72 CLR 101). Rather, the rights of the executor and beneficiary arise from the provisions of the will and equitable doctrines.
Revenue NSW's position on testamentary options creates estate planning opportunities for testators with lumpy assets. A purchasing beneficiary under a testamentary option provides cash to the deceased estate, which can be divided amongst other beneficiaries rather than having all beneficiaries inheriting one lumpy estate asset. The appropriateness of this approach depends on whether CGT concessions can minimise tax on the sale of the estate asset.
Appropriation in or towards satisfaction of beneficiaries' entitlement
Nominal $50 duty applies to an appropriation of a deceased estate asset in or towards the satisfaction of a beneficiary's will entitlement (section 63(1)(a)(iii) of the DA). An appropriation can be made under section 46 of the Trustee Act 1925 (NSW) (TA), the rules of intestacy or an express power in the will. In Tay the Court held that where a will contains a trust for sale the trustee may, with the beneficiary's consent, appropriate an asset to satisfy the beneficiary's entitlement and such an appropriation fell within this duty concession.
To make an appropriation under section 46 of the TA, the LPR must ensure that:
- the appropriation does not prejudice any specific gift;
- the appropriation is made with the recipient beneficiary's written consent; and
- the LPR has regard to the rights of any unborn, missing or any other person apart from the recipient beneficiary.
The duty concession only applies where the appropriation does not result in a beneficiary receiving more than their entitlement under the will. Revenue NSW considers any appropriation in excess is subject to ad valorem duty: section 63(2) of the DA (see example 6 of DUT 046).
An appropriation which provides the recipient beneficiary with no more than their entitlement triggers no CGT as the CGT death rollover applies: section 128-20(1)(c) of the ITAA 97. Therefore, where a LPR is amenable to a 'deal' between residuary beneficiaries, it is more tax effective for the LPR to appropriate estate assets between residuary beneficiaries, than to implement a DOFA or partition.
In Example 2 of DUT 046 (discussed above), the LPR could have appropriated the land and cash to A and shares to B. The deceased estates concession applies to the transfer of the land to A. Assuming that the shares are not in a landholder and do not confer a land use entitlement, then no duty arises on the share transfer.
Since an appropriation practically achieves the same result as a DOFA but the duty consequences are different, it begs the question as to whether section 63(2) of the DA should be amended to provide the same duty result as would occur under an appropriation, or whether Revenue NSW should adopt a broader reading of the subsection. The difference means that ill advised LPRs and beneficiaries may pay more duty.
- Revenue NSW reads the deceased estates concession narrowly
- Beneficiaries seeking to vary will gifts should consider the resulting CGT consequences
- An appropriation of assets may be more tax effective than a deed of a family arrangement in varying will gifts
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.