A deed of family arrangement is a legal document that alters the distribution of assets or an estate, as agreed upon by all the beneficiaries and creates a legal record of the family arrangement.
When the distribution of an estate deviates from a Will or intestacy laws or when the estate’s legal personal representative seeks protection from potential future claims, a deed of family arrangement documents the agreed-upon distribution. It prevents further legal proceedings due to subsequent claims.
For a family arrangement deed to be valid, it must bear the signature of the deceased person’s estate’s legal personal representative, as well as the signatures and consent of all parties (beneficiaries aged 18 years or older) who were entitled under the original Will or, in cases where there is no Will, entitled under intestacy laws.
Duty on deceased estate transfers
Section 63(2) of the Duties Act 1997 provides reduced taxes on transfers from a deceased estate when there is an agreement among beneficiaries to modify the terms of a will. As the Will specifies, the beneficiary’s entitlement decreases the property’s taxable value.
The Will stipulates that Sandy and Alex inherit equal shares of family and holiday homes. The family home’s value is $400,000, and the value of the holiday home is $500,000.
Sandy and Alex agreed that Sandy would take full ownership of the family home while Alex would take full ownership of the holiday home.
Consequently, Sandy must pay tax on the 50 per cent share of the family home bequeathed to Alex—the tax on the $200,000 half-share amounts to $5,490.
Similarly, Alex must pay tax on the 50 per cent share of the holiday home bequeathed to Sandy—the tax on the $250,000 half-share amounts to $7,240.
The matter
In Cohen v Chief Commissioner of State Revenue [2024] NSWCATAD 136, Harry Cohen bequeathed his estate equally to his three children, Stephen, Peter, and Wendy, including a property in Goulburn, NSW. Stephen wanted to keep the Goulburn property, so an agreement the Children agreed that Stephen could acquire the property if he paid Peter and Wendy for their one-third share plus an extra $100,000 each. The beneficiaries submitted a contract to Revenue NSW in 2017, with taxes assessed on the reduced amount.
Therefore, Stephen was entitled to one-third of the property under the Will; he only had to pay taxes on two-thirds of the taxable value of the Goulburn property, which is a significant discount in a competitive property market.
The Chief Commissioner has up to five years after an assessment to issue a reassessment of tax liability. In March 2022, the Chief Commissioner informed Stephen about investigating the tax liability on the contract. In May 2022, just nine days before the reassessment deadline, Stephen received a Duties Notice of Assessment for taxes based on the total price in the contract, not the reduced amount. Additionally, interest was applied.
The decision
The issue to be determined by NCAT is the accuracy of the reassessment.
The applicant challenged the reassessment, arguing that the transfer resulted from the contract following an agreement among beneficiaries. Stephen lost the appeal, with NCAT upholding the reassessment.
The Chief Commissioner acknowledges that s 63(2) applies to a transfer from a legal personal representative to a beneficiary but not to an agreement for sale.
Section 8 of the Duties Act imposes a duty on specific transactions related to dutiable Property, including on a transfer of dutiable Property (s 8(1)(a)) and on an agreement for the sale or transfer of dutiable Property (s 8(1)(b)(i)). According to the Act (s 8(2)), each of these is considered a dutiable transaction.
Section 9(1) states that the duty is charged as if each such dutiable transaction were a transfer of dutiable Property. However, an agreement for sale or transfer is not a transfer but duty is charged as if that were the case.
A duty liability arises when a dutiable Property transfer occurs (s 12(1)). In the case where the dutiable transaction is an agreement for sale or transfer, the transfer of the dutiable Property is deemed to have occurred when the agreement is entered into (s 9(2)(c)).
In this case, the applicant acquired the Property through the sales contract and a memorandum of transfer, each subject to duty as a separate dutiable transaction. The contract is not a transfer of dutiable Property; therefore, s 63(2) of the Duties Act does not apply, and the contract is subject to ad valorem duty. The dutiable value is the higher of the consideration for the dutiable transaction and the unencumbered value of the dutiable Property (s 21(1)(a)). (Since the transfer was executed under the contract, the duty charged on the transfer is $10 under s 18(2).)