A Will, Real Property & CGT

Joan Todd (“Joan”), a widow, died on 2 April 2018, leaving a will dated 11 September 2006 (“the Will”) appointing her four children, Alexander, Wendy, Bronwyn and Yvonne as her executors (“the executors”). Probate of the Will was granted to the executors on 7 November 2018

The following real estate assets were gifted under case 8 of the Will

(1)          A property at Clarence Gardens (“the Clarence Gardens property”) to Wendy

(2)          A property at Hawthorn (“the Hawthorn property”) to Yvonne

(3)          A property at Goolwa Beach (“the Goolwa property”) to Bronwyn  and Alexander as tenants in common and

(4)          A property at Millswood (“the Millswood property”) to Alexander, Wendy, Bronwyn, and Yvonne, in such a manner so as to ensure that as at the finalisation of the administration of my estate all of my said children have received an equal value of bequests under the Will

The Will distributed the residuary estate  equally amongst Joan’s  grandchildren and clause 11(1) of the Will provide that all gifts shall be:

“… free from all duties whatsoever which (whether presently or presumptively or prospectively payable) shall be paid out of my estate in the same manner as my funeral and testamentary expenses and debts shall be payable so that there shall be no subsequent adjustment or apportionment thereof as between any of the beneficiaries.”

The proceedings

Yvonne as executor sought the transfer of the Hawthorn property under the Will; the executors sought advice or directions under s 69 of the Administration and ProbateAct 1919 (SA) in respect of the proper construction of clause 8 of the Will, particularly with respect to the following issues (“the application”):

Whether the accumulated capital gains tax liability attached to each of the properties gifted referred to in the Will should be apportioned to each of the parties in their capacity as beneficiariesunder clause 8, or alternatively under clause 11 of the Will; if so from what date, and whether the net amount of the income and expenses relating to each property should be adjusted pursuant to the Adjustment Clause or alternatively under clause 11 of the Will.  

Yvonne submitted that the values of the three properties should be determined by reference to the Valuer-General’s value at the date of Joan’s death. Providing for potential CGT liabilities under clause 11(1) is misguided and would result in the finalisation of the estate being delayed, potentially indefinitely.  As such potential capital gain or loss based on hypothetical future disposal of the property should have no bearing on the “value” of a bequest made under Joan’s will. 

Wendy and Bronwyn (as executors) argued that the approach of “value received” is commonly applied in the Family Court in substantially identical circumstances where property which is subject to CGT is distributed to one spouse under a property settlement.  Furthermore, they submitted that the same approach to valuing assets is commonly undertaken in commercial cases.

Yvonne, in her capacity as a beneficiary of Joan’s estate on the hearing of the application, submitted that the issue for consideration is the meaning of the phrase “an equal value of bequests under this my will” in clause 8 and how that equal value is to be calculated in the circumstances. 

Conclusion

The Court held that “Value” in clause 8 is to be interpreted as market value, being

“the price agreed between a willing but not anxious purchaser and vendor, both of whom are aware of the circumstances affecting the value of the land and current market conditions”

Joan’s children acquired the properties under the Will; for the purposes of the Income Tax Assessment Act 1997 (Cth) the properties are CGT assets. However, as the transfer is not a CGT event CGT was not payable at the time the beneficiaries acquired the properties.

As CGT liability in respect of a property shall only arise when (and if) that property is disposed of, and only then will the resultant tax payable (if any) be able to be determined.

The Court held that the value of the properties should not depend on the tax affairs of the person to whom they are bequeathed, similarly it is incorrect to say a property bequeathed to a person in the highest bracket of income tax payable for a given year would have a higher value had it been bequeathed to a person who had nil taxable income. Valuation of a property on this basis would present a nearly impossible task, as such a hypothesis would involve too many variables (including events occurring that cannot be discerned on the evidence).

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