Death duties in Queensland – Who would have thought?

The Duties Act 2001 reintroduced death duties in Queensland from 1 March 2002.

This has been confirmed by two public rulings issued by the Commissioner of State Revenue.¹ Certainly the Queensland Parliament did not intend this to happen, so legislation having retrospective effect is needed to remedy this situation.

Statutory vesting on death

In Queensland, as in other Australian states and territories, there is legislation which vests the property of a deceased person in the executor of the person’s deceased estate.² In Queensland, the statutory vesting is activated by the death of the person.

Elsewhere in Australia, a grant of probate of the will by a court is necessary to activate the vesting but, when activated, the vesting is deemed to have taken place as from the death of the person.

In Queensland, there is the possibility of multiple vesting occurrences involving the same deceased estate. In circumstances where the court grants probate of a will having a different executor (for example, where the later will is found to be invalid for lack of capacity or undue influence), the property will be divested from the executor named in the later will and revested in the different executor.³

Also, if the court revokes the grant of probate and makes a subsequent grant, the property will be divested from the executor named in the revoked grant and revested in the executor named in the later grant.⁴

Is duty payable?

A statutory vesting is a distinct dutiable transaction and attracts duty to the extent the vested property is dutiable property. In Queensland, dutiable property includes land in Queensland and Queensland business assets. Unless an exemption applies, duty is payable on the unencumbered market value of the dutiable property.

Since the start of the Duties Act 2001, the commissioner has adopted the practice that the deceased estate exemption⁵ applied to the statutory vesting on death. The commissioner described the practice as treating the vesting as a transfer to effect a distribution of the estate of a deceased person to the extent that it allows for the administration of the estate.⁶

However, in a recent public ruling the commissioner proclaimed a statutory vesting is not a transaction to which s124 currently applies.⁷ This has always been the case – section 124 has never exempted a statutory vesting. Duty has always been payable on dutiable property vested by the statutory vesting on death. Every time a person dies owning land in Queensland or Queensland business assets, duty becomes payable from the person’s deceased estate regardless of where the person resided or where the death occurred.

Has the commissioner fixed the problem?

The public ruling made by the commissioner to overcome this Queensland death duty proclaims the s124 deceased estate exemption applies to the statutory vesting on death but only to the extent that the vesting gives effect to a distribution in the estate of a deceased person. What does this mean? To what extent does a statutory vesting on death cause a distribution in a deceased estate to be made? Not at all in my opinion.

A statutory vesting on death never effects an estate distribution. The ordinary meaning of ‘distribute’ is to ‘divide and bestow in shares, deal out, allot’. In the context of an estate administration, it is the division of estate assets among beneficiaries.

The vesting usually creates the estate. It is an inflow of property into the estate not an outflow of property from the estate to a beneficiary of the will. A beneficiary under the will does not obtain an interest in the vested property because of the vesting and does not obtain any interest in the estate at the time of the vesting.

Amending legislation specifically exempting the statutory vesting and having retrospective effect from the commencement of the Duties Act 2001 is required.

Case study

Let’s say Cynthia owned a real estate property portfolio just before her death. The market value of her properties was $5 million and the loans secured on these properties totalled $3 million. On her death these properties vested in her executor. If the s124 exemption does not apply, her estate will have to pay duty of about $268,000.

What happens in other Australian states?

In most Australian states and territories where duty is transaction based, the duty legislation contains an express exemption for the statutory vesting and a separate exemption or concession for distributions from a deceased estate.

In New South Wales, duty is charged on a vesting of land in New South Wales by statute law⁸ but the vesting of dutiable property in an executor under section 44 of the Probate and Administration Act 1898 is exempt.⁹ There is a separate deceased estates provision which imposes a $50 nominal duty on a transfer of dutiable property by the executor to a beneficiary made under and in conformity with the trusts contained in the will.¹⁰

In Victoria, duty is charged on a vesting of land in Victoria by statute law¹¹ but the vesting of dutiable property by virtue of section 13 of the Administration and Probate Law 1958 is exempt.¹² The deceased estates exemption refers to a transfer of dutiable property not made for valuable consideration by the executor to a beneficiary under and in conformity with the trusts contained in the will and to the extent the transfer is made in satisfaction of the beneficiary’s entitlement under the will.¹³

In Tasmania, duty is charged on a vesting of dutiable property by a statute,¹⁴ but the vesting of dutiable property in an executor under section 12 of the Administration and Probate Act 1935 is exempt.¹⁵ The deceased estate provision imposes nominal $50 duty on a transfer not made for valuable consideration by the executor to a beneficiary in conformity with the trusts contained in the will.¹⁶

In the Northern Territory, the statutory vesting by which property vests in the executor under section 52 of the Administration and Probate Act 1969 is an exempt transaction.¹⁷ A conveyance made by an executor to a beneficiary in accordance with the will is exempt.¹⁸

In the Australian Capital Territory, the statutory vesting of property in the executor under section 39 of the Administration and Probate Act 1929 is dutiable.¹⁹ There does not appear to be an exemption. The deceased estate exemption exempts a transfer of dutiable property not made for valuable consideration by the executor to a beneficiary if the commissioner is satisfied it is made under and in conformity with the trusts contained in the will.²⁰

In Western Australia, duty is charged on a vesting of dutiable property by statute law.²¹ The deceased estates provision does not exempt the vesting under section 8 of the Administration Act 1903 but charges nominal duty on a transfer to the extent that it gives effect to a distribution in the estate and there is no consideration involved.²² Distribution is defined as a distribution under a will.

In South Australia, the duty regime is instrument based so as the vesting under section 46 of the Administration and Probate Act 1919 is not dutiable as it does not involve an instrument.²³

Estate distributions of partnership interests and units in unit trusts

The Duties Act 2001 also imposes duty on a partnership interest or a unit in a unit trust distributed from a deceased estate by the executor to a beneficiary under the terms of the will.²⁴ The current remedy to this situation provided by the commissioner is for the taxpayer to apply for ex gratia relief which the commissioner will consider on a case-by-case basis and which the commissioner will grant if the commissioner considers it appropriate for the section 124 deceased estates exemption to apply.

All distributions from deceased estates to beneficiaries made in accordance with the will should be legislated to be exempt from duty rather than taxpayers being forced to rely on an arbitrary exercise of power by the commissioner.

Case study

Let’s say a married couple, Bill and Jean, have a business partnership which owns a business and business premises. The business assets (including goodwill) and real estate are valued at $5 million. Bill dies and his will leaves his partnership interest to Jean. When the executor of the deceased estate distributes the partnership interest to Jean, there will be a dutiable transaction – a partnership acquisition – and Jean will have to pay duty of about $268,000.

A major problem for self-assessors

Law firms which act in estate administration matters and are duty self-assessors face the daunting prospect of incurring penalties and facing negligence actions if they fail to identify situations where these death duties may be payable.

Editor’s note: Queensland Law Society has written to the Queensland Treasurer seeking legislative amendments to the Duties Act 2001 (Qld).

Vince Bailey is the Principal at Vince Bailey Lawyer, Cairns.

Footnotes
¹ Public Rulings DA124.3.2 Exemption for deceased person’s estate – extension to certain statutory vestings & DA000.10.1 Transfer duty – relief for certain trust acquisitions, trust surrenders and partnership acquisitions.
² Section 45(1) of the Succession Act 1981.
³ Section 45(2) of the Succession Act 1981.
⁴ Section 45(3) of the Succession Act 1981.
⁵ Section 124: Exemption – Deceased Person’s Estate – Duties Act 2001.
⁶ OSR letter dated 24 November 2004 to the author.
⁷ Paragraph 6 in PR DA124.3.2
⁸ Section 8(1)(b)(vii) Duties Act 1997.
⁹ Section 65(12) Duties Act 1997.
¹⁰ Section 63(1) Duties Act 1997.
¹¹ Section 7(1)(iib) Duties Act 2000.
¹² Section 42(2) Duties Act 2000.
¹³ Section 42(1)&(3) Duties Act 2000.
¹⁴ Section 6(1)(c)(i) Duties Act 2001.
¹⁵ Section 57AA(a) Duties Act 2001.
¹⁶ Section 47(1) Duties Act 2001.
¹⁷ Schedule 2 – 4(c) Stamp Duty Act 1978.
¹⁸ Schedule 2 – 4(d) Stamp Duty Act 1978.
¹⁹ Section 7(1)(a) Duties Act 1999 and definition of ‘transfer’.
²⁰ Section 232D(1)(a)(i) Duties Act 1999.
²¹ Section 11(1)(d)(i) Duties Act 2008.
²² Section 139(2)(a) Duties Act 2008.
²³ Section 4 & schedule 2 Stamp Duties Act 1923.
²⁴ See Public Ruling DA000.10.1.