TAX FILES
Some taxation considerations as to the manner of Compromising Deceased Estate Litigation BERNIE WALRUT, MURRAY CHAMBERS
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t is now commonly suggested that deceased estate litigation is a growth area and that much of that litigation is settled before trial or in the course of the trial. This may lead to terms of compromise, that whilst seeking to allocate responsibility for the payment of the various taxes that may be involved, does not adequately consider the possible relief available, and how the form the compromise takes may affect the availability of some of that relief.
CAPITAL GAINS TAX In an article in this column in late 2012 the requirements for disregarding any capital gain or loss from a capital gains tax (CGT) event arising on death in respect of a CGT asset1 owned by the deceased2 under Division 128 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) were described. In effect the CGT asset must pass to the legal personal representative or beneficiary in one of a number of specified ways. Firstly, under the taxpayer’s will, including under a will as varied by a court order.3 Secondly, by operation of the laws of intestacy, including the application of those laws as varied by a court order. Thirdly where the legal personal representative satisfies a pecuniary legacy or some other interest or share in the estate by appropriating an asset of the estate to the beneficiary in satisfaction of such legacy, interest or share.4 Finally, a distribution of property of the deceased at the death of the death pursuant to a deed of arrangement will pass for these purposes, if it is entered into by the beneficiary to settle a claim to participate in the distribution of the estate where the consideration given by the beneficiary for the asset consists only of the variation or waiver of a claim to other capital gains tax assets that form part of the estate.5
22 THE BULLETIN April 2021
STAMP DUTY Whilst stamp duty under the Stamp Duties Act 1923 (SA) (SDA) is now limited to interests in residential land and primary production land6 (qualifying land),7 much of the current deceased estate litigation includes interests in such land. One of the exemptions from stamp duty for conveyances of such land is to be found in section 71(5)(h). It applies to a transfer by a legal personal representative of a deceased or the trustee of the estate of a deceased, being a transfer made in pursuance of the provisions of the will of the deceased or the laws of intestacy and not being a transfer in pursuance of a sale. Section 10 of the Inheritance (Family Provision) Act 1972 (SA) (IFPA) provides that every provision made by an order under the IFPA shall, subject to the Act, operate and take effect as a codicil where the deceased died testate and a will where the deceased died intestate. In practice this has meant that where there is a conveyance pursuant to an order under the IFPA of qualifying land the exemption in section 71(5)(h) applied, unless it constituted a sale.
COMPROMISING ESTATE LITIGATION Some Methods of Compromising Litigation Any litigation, including estate litigation may be compromised in one of many ways.8 In Green v Rozen9 Slade J said that there are various ways an action can be disposed of where there are terms of settlement and the action comes on for hearing or is settled during the course of a trial. Slade J says that in his experience there are at least five methods and they are not exhaustive. They are then described as: make the terms of compromise a rule of court, provided the terms provide for that; secure an order of the court by
consent; obtain a Tomlin Order; obtain an order of the court by consent staying all further proceedings in the action on the terms agreed and endorsed on counsel’s brief; the fifth method, is where there is no order of the Court at all, the Court merely being told by counsel that the case has been settled on agreed terms,10 and often the matter is then discontinued. Foskett describes in chapter 9 the methods of compromising an action in much more detail.11 Foskett’s list includes an exchange of letters, particularly where the proceedings have not been commenced; a deed or memorandum; a consent order; where the terms of compromise go beyond the court’s normal jurisdiction and the parties desire the agreement to be readily enforceable, it is suggested the terms be made a rule of court; a consent judgment for the payment of money; a Tomlin Order; an adjournment to enable the parties to carry out terms of the compromise and the discontinuance either on terms or unconditionally of the proceedings. Compromise Arrangement without Orders Where the estate litigation is compromised without an order of the Court, Division 128 of ITAA97 will only apply to the passing of the property under that compromise if section 128-20(1) (d) is satisfied, namely there is a deed of arrangement, it is entered into by the beneficiary to settle a claim to participate in the distribution of the estate, and the consideration given by the beneficiary for the CGT asset consists only of the variation or waiver of a claim to other CGT assets that form part of the estate.12 From a stamp duty perspective, if the property involved in the deceased estate includes qualifying land, in many situations
