Craven v Bradley
[2021] VSC 344
•16 June 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
TRUSTS, EQUITY AND PROBATE LIST
S ECI 2020 01677
| IAN KENNETH CRAVEN | Plaintiff |
| v | |
| WILLIAM ALFRED BRADLEY (in his capacity as executor of the estate of PHYLLIS MARGARET CRAVEN) | Defendant |
---
JUDGE: | Derham AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 1 June 2021 |
DATE OF JUDGMENT: | 16 June 2021 |
CASE MAY BE CITED AS: | Craven v Bradley |
MEDIUM NEUTRAL CITATION: | [2021] VSC 344 |
---
WILLS – Construction and interpretation – Preliminary questions ordered by consent to determine method and time of valuation of properties – Properties specifically devised to beneficiaries with equalisation clauses – One property subject to unrealised capital gain – Equalisation clause requiring determination and deduction of embedded capital gains tax liability – Whether CGT calculated according to level of estate income or deceased income at time of death – Second property valued by executor at time of death of deceased – Whether date for valuation should have been date of equalisation payment or date of distribution – Wills Act 1997 (Vic), s 49; Re Hillas-Drake Deceased; National Financial Bank v Liddell (1944) 1 Ch 235; Otto v Redhead and Thompson & Anor [2007] QSC 278; Application by Paul Andrew Brown as executor to estate of the late Joseph Kostyorz (No 2) [2018] NSWSC 334 referred to.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr T Mah | |
| For the Defendant | Mr JW McCoy | K&L Gates |
TABLE OF CONTENTS
Introduction........................................................................................................................................ 1
Background......................................................................................................................................... 2
Plaintiff’s submissions..................................................................................................................... 9
First question................................................................................................................................. 9
Second question........................................................................................................................... 12
Defendant’s submissions............................................................................................................... 18
Introductory matters................................................................................................................... 18
First question............................................................................................................................... 19
Second question........................................................................................................................... 22
Consideration.................................................................................................................................... 25
Introductory matters................................................................................................................... 25
First question............................................................................................................................... 27
Second question........................................................................................................................... 32
Section 49 of the Wills Act................................................................................................ 32
Does a contrary intention appear in the Will?............................................................... 36
Does the Will provide a method of calculating the valuation?.................................. 40
Does the law of Victoria provide a method of calculating the valuation?................ 41
Conclusion......................................................................................................................................... 43
HIS HONOUR:
Introduction
By originating motion filed on 2 April 2020, the plaintiff, Ian Kenneth Craven, issued this proceeding against the defendant, William Alfred Bradley, as the executor of the Estate of his mother, Phyllis Margaret Craven (‘deceased’ or ‘Phyllis’),[1] pursuant to r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 (‘Rules’) seeking various relief. The relief included directions with respect to the administration and distribution of the Estate, and an order for equitable compensation from the defendant personally in the event that the Court’s directions lead to an outcome whereby the plaintiff is owed entitlements from the Estate and the Estate has insufficient funds to meet those entitlements.
[1]Because all participants other than the defendant are members of the Craven family, I have used first names where appropriate. No disrespect is intended.
Under the deceased’s Will dated 12 November 2013 (‘Will’) (the details of which are discussed below) she gave her residuary estate to her three sons in equal shares but subject to two real properties being devised to the plaintiff and one of his brothers, Bruce Lindsay Craven (‘Bruce’), respectively, with the clauses then providing for distribution of the remaining estate being equalised between the three sons taking into account the different values of the properties (‘the equalisation clauses’). The deceased’s Estate has been partially distributed, including the distribution in specie of the two properties. In this proceeding the plaintiff alleges, among other things, that the values that the defendant has attributed to the properties for the purpose of the equalisation clauses are incorrect. The plaintiff also seeks compensation against the defendant for losses occasioned by that error.
On 1 March 2021, Keith JR made orders by consent pursuant to r 47.04 of the Rules for the trial of preliminary questions before the trial of the proceeding. The purpose of the preliminary questions is to determine how the properties should be valued for the purpose of the equalisation clauses. The questions are:
(a) For the purpose of clauses 7.4, 7.5 and 7.10 of the will of the deceased dated 12 November 2013, how and at what point in time should the value of the Point Lonsdale property be determined?
(b) For the purpose of clauses 7.8, 7.9 and 7.10 of the will of the deceased dated 12 November 2013, how and at what point in time should the value of the Balwyn North property be determined?
In the Order of 1 March 2021, Keith JR also made directions for the parties to provide the Court with a ‘case outline’ setting out a list of agreed facts and any documents to be tendered by agreement of the parties, a list of the legal issues to be determined, and a timetable for the hearing. On 20 April 2021, the case outline was filed. Many of the facts set out below under the heading ‘Background’ are taken from that document.
Background
The deceased died on 4 March 2016. Probate of the Will was granted to the defendant on 2 August 2016.[2]
[2]Saving the rights contained in clause 2.2 of the Will, which provided for the event that the defendant was unable or unwilling to act or continue to act as executor.
The Inventory of Assets and Liabilities of the estate of the deceased (‘Inventory’) states that the gross value of the Estate was $3,123,154.70. The Inventory lists the assets to be:
(a) the property situated at 31 Corhampton Road, Balwyn North (‘Balwyn North’) valued at $1,850,000.00. It is common ground that the value of this property at the date of the deceased’s death was this value;
(b) the property situated at 16 Golightly Street, Point Lonsdale (‘Point Lonsdale’) valued at $830,000. It is common ground that the value of this property at the date of the deceased’s death was this value;
(c) cash in bank accounts and managed funds, valued at $196,053.46; and
(d) shareholdings valued at $247,101.24.
Phyllis and her husband, William Kenneth Craven (‘William’), who pre-deceased Phyllis, had three children, being the plaintiff, Bruce and Neil Jarvie Craven (‘Neil’). William died on 29 July 2010. His last will is dated 7 July 1976 (‘William’s Will’). Letters of Administration with William’s Will annexed was granted to Neil on 2 March 2012. In the events that had happened, under William’s Will his whole estate went to Phyllis for life and thereafter was to be divided equally between the plaintiff, Bruce and Neil.
The deceased’s Will is expressly divided into three parts - Part A sets out how the Estate is to be divided and includes the general provision appointing the executor and providing that he shall hold the estate on trust; Part B includes general administrative provisions and Part C sets out a number of definitions used in the Will. The defendant is appointed executor and trustee of each trust under the Will unless and until another trustee is appointed pursuant to the Will or the relevant Act governing trustees in the deceased’s State of domicile at the date of her death. Clause 4.2 provides:
4.2Subject to the preceding subclause [which deals with the proceeds of any life insurance policy and the like], my Executors shall hold my Estate on trust and, subject to the powers set out in this Will, after the:
a)selling, calling in or converting into money of any part of my Estate; and
b)payment of all or any debts and testamentary expenses associated with my death or the administration of my Estate;
shall deal with the balance of my Estate as provided in the succeeding clauses of this Will.
The Will then deals with her personal chattels, makes pecuniary bequests of $10,000 to each of her grandchildren and then provides by clause 7.1 that:
My Executors shall divide the balance of my Estate not already dealt with under the preceding clauses of this Will (“remaining balance”) into three (3) equal parts, sections or portions, and shall hold on trust in accordance with Part B of this Will, and dispose of such parts, sections or portions as outlined in this clause.
The ‘remaining balance’ referred to in clause 7.1 of the Will is, in effect, the residuary estate. Clauses 7.2 to 7.9 of the Will are the most important for present purposes.[3] Clauses 7.2 to 7.5 deal with the transfer of Point Lonsdale to the plaintiff and how that must be accounted for in the equal division contemplated by clause 7.10, as follows:
[3]These clauses collectively constitute the previously defined “equalisation clauses”.
Property located at 16 Golightly Street, Point Lonsdale
7.2If the remaining balance is more than three (3) times the value of my property located at 16 Golightly Street, Point Lonsdale (“the Point Lonsdale property”, then I give the Point Lonsdale property to my son IAN KENNETH CRAVEN (“Ian”) free of all duties and encumbrances, and after all costs associated with its transfer have been met from my Estate, provided that he survives me by thirty (30) days and the value of the Point Lonsdale property is included in the gift to my son Ian in clause 7.10.
7.3If the remaining balance of my estate is less than three (3) times of the value of the Point Lonsdale property, then I give the Point Lonsdale property to my son Ian free of all duties and encumbrances, provided that he survives me by thirty (30) days and he pays to my estate the difference between the value of the Point Lonsdale property and one-third of the balance of my estate as aforesaid.
7.4Transfer of the Point Lonsdale property in accordance with the preceding subclause constitutes my son Ian receiving his one equal part in clause 7.10.
7.5The value of the Point Lonsdale property should be determined by a registered valuer and on terms that would be granted to an arm's length purchaser from my Estate less an amount equal to the capital gains tax liability my Estate would pay if the property were sold at the date of my death.
Clauses 7.6 to 7.9 deal with the transfer of Balwyn North to Bruce and how that must be accounted for in the equal division contemplated in clause 7.10, as follows:
Property located at 31 Corhampton Road, Balwyn North
7.6If the remaining balance is more than three (3) times the value of my property located at 31 Corhampton Road, Balwyn North (“the Balwyn North property”), then I give the Balwyn North Property to my son BRUCE LINDSAY CRAVEN (“Bruce”) free of all duties and encumbrances, and after all costs associated with its transfer have been met from my Estate, provided that he survives me by thirty (30) days and the value of the Balwyn North property is included in the gift to my son Bruce in clause 7.10.
7.7If the remaining balance of my estate is less than three (3) times the value of the Balwyn North property, then I give the Balwyn North property to my son Bruce free of all duties and encumbrances, provided that he survives me by thirty (30) days and he is [sic] he pays to my estate the difference between the value of the Balwyn North property and one-third balance of my estate as aforesaid.
7.8Transfer of the Balwyn North property in accordance with the preceding subclause constitutes my son Bruce receiving his one equal part in clause 7.10.
7.9The value of the Balwyn North property should be determined by a registered valuer and on terms that would be granted to an arm’s length purchaser from my Estate.
Then clause 7.10 provides:
Gift to my Sons
7.10Each of my sons, including Ian, Bruce and NEIL JARVIE CRAVEN, who survives me by thirty (30) days shall receive one such equal part.
The balance of clause 7 is irrelevant as it deals with gifts to children of any son who does not survive the deceased and attain a vested interest in the Estate, and definitions. Then Part B of the Will contains ‘administrative provisions’. Clause 11 in Part B gives the defendant, as executor of the Will and trustee of the Estate, specific powers in the execution of the Will and administration of the Estate. These powers are only exercisable by the defendant ‘first having regard to the priorities and purposes of any governing terms of trust in this Will’ and are subject to those ‘priorities and purposes’ (clause 11.1). Those powers confer broad discretions on the defendant in dealing with the property of the Estate. They include a power to ‘sell…or otherwise dispose of assets’ of the Estate ‘on such terms as [he] consider[s] expedient’, (clause 11.1(i)) a power to ‘postpone the sale and conversion of any part of [the] Estate for so long as [he] think[s] fit without being responsible for loss, (clause 11.1(m)) and a power to ‘use income, capital or both income and capital to pay capital gains tax levied on the disposal of an Asset, and apportion liability for that tax’ (clause 11.1(q)).
It can be seen that the Will provides a method for valuing both Point Lonsdale and Balwyn North, but only the valuation of Point Lonsdale is expressly linked to a particular point in time (the date of death of the deceased). The method for valuing Balwyn North as expressed in clause 7.9 of the Will provides for no time of valuation.
There was undisputed evidence that Balwyn North was the family home and Point Lonsdale was the deceased’s and Williams holiday home.[4] No doubt this meant that that Balwyn North was the deceased’s main residence for the purpose of capital gains tax (‘CGT’), or was a pre-September 1985 acquisition, and thus in the deceased’s hands exempt from CGT, whilst Point Lonsdale was subject to CGT on disposal, having been acquired after 20 September 1985. That is a circumstance that explains the different treatment of the two properties in the Will. That is, the testator had in contemplation that the plaintiff would take Point Lonsdale subject to an unrealized capital gain and thus a future CGT liability that was partly attributable to the ownership by the deceased and, whilst William was alive, by the deceased and William as they were joint tenants.[5] Both parties proceeded on the assumption that these ‘surrounding circumstances’ should be taken into account in the interpretation of the Will.
[4]Affidavit of Ian Kenneth Craven made 25 March 2020, [8].
[5]Neil’s affidavit verifying the Administration account for William’s estate shows the real property owned by William was owned jointly with Phyllis: See affidavit of Neil Jarvie Craven made 31 May 2019 in exhibit IC-7 to the affidavit of Ian Kenneth Craven made 25 March 2020.
On or about 19 May 2016, the defendant obtained a valuation of Balwyn North prepared by Chris Mason & Associates Pty Ltd (trading as Mason’s Valuation Office) which valued that property at $1.85 million. The Inventory was prepared using this valuation. Balwyn North was transferred to Bruce in December 2017. Bruce became the registered proprietor of that property on 13 December 2017. On or about 1 February 2018, the plaintiff obtained a valuation of Balwyn North prepared by Chris Mason & Associates Pty Ltd (trading as Mason’s Valuation Office) which valued that property at $2.1 million. On 17 March 2018, Bruce sold it at auction for $2.44 million (with the sale completing on 15 June 2018).
On or about 10 June 2016 the defendant obtained a valuation of Point Lonsdale prepared by Gartland Property which valued that property at $830,000. The Inventory was prepared having regard to this valuation. The Point Lonsdale property was transferred to the plaintiff in February 2018, and he became the registered proprietor on 26 February 2018.
It is common ground that for the financial year ending 30 June 2016, the deceased’s income tax return shows that her taxable income for that financial year was $15,337. There was no tax return prepared for the Estate for that financial year. William’s estate tax return for that year states that his estate’s taxable income was $155,095.
In about July 2017 the plaintiff obtained a report from Cooper & Lockhart, an accounting firm, which calculated that the CGT liability payable for Point Lonsdale (had Point Lonsdale been sold at the time of Phyllis’s death) was approximately $135,600. This calculation was based on the following:
(a) the value of Point Lonsdale was $830,000;
(b) the total cost base in respect of Point Lonsdale was $227,370;
(c) the gross capital gain from Point Lonsdale was therefore $602,630;
(d) the net capital gain from Point Lonsdale was $301,315 after applying the 50% CGT discount for assets held for in excess of 12 months before the relevant CGT event; and
(e) on the assumption that the Estate’s income for the financial year ending 30 June 2016 was $180,000.
In about November 2017 the defendant obtained a report from Dillon Partners Accountants & Business Consultants (‘Dillon Partners’), an accounting firm, which calculated that the CGT liability payable for Point Lonsdale (had Point Lonsdale been sold at the time of Phyllis’s death) was $116,030.80. This calculation was based on the following:
(a) the value of Point Lonsdale was $830,000;
(b) the total cost base in respect of Point Lonsdale was $222,345.55;
(c) the gross capital gain from Point Lonsdale was therefore $607,654.45;
(d) the net capital gain from the Point Lonsdale Property was $303,827.23 after applying the 50% CGT discount for assets held for in excess of 12 months before the relevant CGT event; and
(e) the Deceased’s income for the financial year ending 30 June 2016 was $15,337.
In about June 2020, the defendant obtained a report from Shakespeare Rae Accountants and Business Consultants (“Shakespeare Rae”), an accounting firm, which calculated that the CGT liability payable for Point Lonsdale (had Point Lonsdale been sold at the time of Phyllis’s death) was $112,115. This calculation was based on the following:
(a) the value of Point Lonsdale was $830,000;
(b) the total cost base in respect of Point Lonsdale was $224,857.77, being the average of the costs bases of $227,370 and $222,345.55 relied upon by Cooper & Lockhart and by Dillon Partners respectively;
(c) the net capital gain from the Point Lonsdale Property was $302,571 after applying the 50% CGT discount for assets held for in excess of 12 months before the relevant CGT event; and
(d) the Estate’s income for the financial year ending 30 June 2016 was nil (save for the net capital gain received had Point Lonsdale been sold at the time of the Deceased’s death).
The plaintiff accepts the cost base of $222,345.55 calculated by Dillon Partners in November 2017 for the purposes of calculating the CGT liability payable had Point Lonsdale been sold at the time of Phyllis’s death.
Plaintiff’s submissions
First question
Clause 7.5 directs that the value of Point Lonsdale is to be determined by its purchase price if it was sold on the date of Phyllis’s death, less an amount equal to the capital gains tax liability that the estate would have to pay if it were sold on the date of death. The parties are agreed that this property is valued at $830,000 as at the date of the deceased’s death. The issue between the parties is whether the CGT is calculated by reference to the deceased’s taxable income or to the Estate’s taxable income at the date of the deceased’s death. In other words, the parties are in dispute as to the applicable income level that should be used in calculating the hypothetical CGT liability. This requires a determination of the point in time at which the deceased is deemed to have received the hypothetical capital gains and her level of income at that particular point in time.
The plaintiff submitted that in calculating the hypothetical CGT liability:
(a) the hypothetical capital gain should be deemed to have been received by the deceased on the date of her death; and
(b) on the date of her death, her income ought to have included the net income of William’s estate, as she had the life interest in that estate.
The plaintiff further submits, and the defendant does not disagree, that upon a taxpayer’s death the executor or administrator of their estate is required to file a final tax return for the financial year ending on and inclusive of the date of the deceased’s death. The tax return should include all taxable income received by the deceased in that financial year, including any income received on the date of the deceased’s death. During administration of the estate, the executor is also required to file tax returns for the deceased’s estate from the day after the deceased’s death to the end of that financial year, and every financial year thereafter until final distribution.
In the present case, the deceased died on 4 March 2016. Accordingly, the defendant was required to file a tax return for Phyllis for the period from 1 July 2015 up to and including 4 March 2016. The defendant should then file a separate tax return for the Estate for the period 5 March 2016 to 30 June 2016.
The drafter of the Will was clearly aware that, by devising Point Lonsdale to the plaintiff, the deceased would be passing on the potential CGT liability to the plaintiff, which would reduce his overall benefit from her estate. The direction in clause 7.5 to deduct the hypothetical CGT liability from the value of Point Lonsdale in determining the plaintiff’s entitlement is consistent with her stated desire to achieve equality. Clause 7.5 involves a hypothetical situation where that property is sold, and the sale is completed, on the date of her death for the purpose of calculating the value of Point Lonsdale and the relevant CGT liability. The intention of the hypothetical sale is that there is no time lapse between the date of sale and the final settlement in calculating the potential tax liability. The most clear support of this construction is the specific reference to the date of death in clause 7.5.
The plaintiff submitted that this leads to the conclusion that the proper construction of clause 7.5 is that the deceased intended that the CGT liability be calculated as if the hypothetical sale settled, and the proceeds of sale was received, on the date of the deceased’s death.
Although it is common ground that for the financial year ending 30 June 2016, the deceased’s income tax return shows that her taxable income for that financial year was $15,337, the plaintiff submitted that her income for the financial year ending on her date of death ought to have included the net income of William’s estate up to that date. That is because clause 3 of William’s Will provided:
If my mother the said ADA CRAVEN shall not survive me then and in that case only I GIVE DEVISE AND BEQUEATH the whole of my said real and personal estate unto my Trustee UPON TRUST as follows: -
(a) for my wife PHYLLIS MARGARET CRAVEN during her lifetime;
(b)after her death to my sons IAN KENNETH CRAVEN, BRUCE LINDSAY CRAVEN, and NEIL JARVIE CRAVEN as tenants in common in equal shares …
The plaintiff submits, and the defendant accepts, that sub-clause (a) [above] can only mean that William’s intention was to create a life interest in the whole of his estate for Phyllis.[6]
[6]David Haines, Construction of Wills in Australia (2007), [23.4].
Because Phyllis had a life interest in the William’s estate, she was entitled to the net income derived from the estate. It is implied, both under general law and the Trustee Act 1958 (Vic), that that the trustee may be indemnified from William’s estate for any costs incurred in administering the estate. However, William’s Will did not contain any provisions allowing the trustee to retain or withhold any part of the income. Accordingly, after payment of all trust expenses, the trustee of William’s estate must pay all net income to Phyllis during her life.
Pursuant to section 97(1)(a) of the Income Tax Assessment Act 1936 (Cth), the deceased’s assessable income should include the income of William’s estate, given she was, up to the date of her death, presently entitled to the income of that estate. The deceased’s final tax return should have included the net income of William’s estate.
Having regard to these matters, the plaintiff submits that the hypothetical CGT liability should be calculated based on an income level that combines the deceased’s income for the period between 1 July 2015 and 4 March 2016, and the net income of William’s estate for the same period.
The plaintiff also submitted that the words in clause 7.5 ‘… capital gains tax liability my Estate would pay…’ simply demonstrates the deceased’s awareness that ultimately the hypothetical CGT liability would be paid from her estate, since the hypothetical sale is to take place on the date of her death. Any other construction ignores the deceased’s stated intention to achieve equality between her children and would defeat the obvious intention of clause 7.5. The deceased was clearly aware that Point Lonsdale will have a CGT liability and clause 7.5 was drafted to reduce the impact of that liability on the plaintiff’s entitlement. To construe clause 7.5 in a way so as to eliminate a reduction of CGT liability in the valuation of Point Lonsdale so offends the deceased’s stated intention as to be entirely untenable.
The plaintiff submitted that it followed that the first question be answered:
For the purpose of clauses 7.4, 7.5 and 7.10 of the Will, the value of Point Lonsdale should be determined based on the following:
(a)the value of Point Lonsdale if it was sold at the date of Phyllis’s death is $830,000;
(b)The capital gains tax liability that would be paid had Point Lonsdale been sold on the date of the Deceased’s death is to be calculated based on there being a capital gains of $303,827.23 and an income level that combines the deceased’s income for the period between 1 July 2015 and 4 March 2016, and the net income of William’s estate for the same period.[7]
[7]Plaintiff’s submissions filed 10 May 2021, [38].
Second question
This Question is concerned with how and at what date the value of Balwyn North should be ascertained for the purpose of calculating the plaintiff’s and Bruce’s entitlement or liability to the estate, and Neil’s entitlement. The defendant has so far distributed the Estate on the basis that the value of this property is determined at the date of the deceased’s death.
The plaintiff contends that the value should be determined at the time when Bruce (who received Balwyn North) pays into the estate the difference between the value of that property and one-third of the remaining balance of the Estate, which I will call the ‘equalisation payment’. According to the administration account dated 27 May 2019 prepared by the defendant, that was on 17 May 2018. Alternatively, the value should be determined at the time when Balwyn North was transferred to Bruce, the date of its distribution.
The relevantly operative clause, clause 7.9 of the Will, provides that Balwyn North is to be valued by a registered valuer, however it does not expressly specify when the property is to be valued.
The plaintiff contends that s 49 of the Wills Act 1997 (Vic) (‘Wills Act’) has no application. That section provides as follows:
49 What is the effect of referring to a valuation in a will?
(1) If-
(a)there is an express or implied requirement in a will that a valuation be made or accepted for any purpose; and
(b)the will does not provide a method of calculating the valuation or the method of calculating the valuation is not provided for by the law of Victoria or of another jurisdiction-
the reference to the valuation in the will is to be construed as if it were a reference to a valuation of the property as at the testator’s death made by a competent valuer.
(2) Subsection (1) does not apply if a contrary intention appears in the will.
The plaintiff submitted that this section does not apply because:
(a) the Will evinces an intention that the value is to be assessed at the time when either Bruce receives Balwyn North in accordance with clause 7.6, or when Bruce pays the estate the difference between the value of Balwyn North and one-third of the remaining balance of the estate in accordance with clause 7.7. Accordingly pursuant to subs 49(2), subs 49(1) does not apply;
(b) the Will does provide a method of calculation in clause 7.9, accordingly the requirement under subs 49(1)(b) is not fulfilled; and
(c) the method of calculating the valuation is provided for by the law of Victoria, accordingly the requirement under subs 49(1)(b) is not fulfilled.
The contrary intention within the meaning of s 49(2) arises because as a matter of construction of the Will it could not have been the deceased’s intention for Balwyn North to be valued at the time of her death for the following reasons:
(a) Clauses 7.6 to 7.9 must be read in light of the deceased’s intention to achieve equality between her children.
(b) Clauses 7.6 and 7.7 set out how the Estate is to be divided depending on whether the remaining balance is more or less than three times the value of Balwyn North. If the remaining balance is more than three times the value of Balwyn North, Bruce receives the property as part of his gift of one-third share of the residuary estate. If the remaining balance is less than three times the value of Balwyn North, Bruce must pay to the estate the difference between the value of the property and one-third of the remaining balance.
(c) The required comparison between the value of Balwyn North and the remaining balance of the Estate can only be achieved, at the earliest, when the remaining balance has been ascertained and it is ready to be distributed. It is futile to make this comparison at the time of the deceased’s death. At the time of the deceased’s death her assets have not been called in and the liabilities have not been ascertained, it is therefore impossible to know the remaining balance in order to make a comparison with the value of Balwyn North.
(d) Accordingly, it could not have been the deceased’s intention for the Balwyn North property to be valued at the time of her death.
(e) Balwyn North was clearly more than one-third of the value of the likely residuary estate. Accordingly, clause 7.7 requires Bruce to pay to the estate the difference between the value of the property and one-third of the residuary estate. In light of the deceased’s obvious intention to achieve equality between her three children, it would have been the deceased’s intention that the value of Balwyn North was to be assessed at the time when Bruce makes the required payment.
(f) The Will does not set out when Bruce is to make the required payment. In the absence of such a stipulation the only construction of the Will that is consistent with the deceased’s intention to achieve equality is for the valuation to be assessed at the time of Bruce’s payment. Were the assessment to take place before or after the payment, then due to the fluctuation of property prices there is a real possibility that Bruce may either pay too much or too little under clause 7.7, thus failing to achieve the deceased’s intention to ensure equality.
(g) It is also significant that, in contrast to clause 7.5, a specified date of valuation is absent from clause 7.9. This contrast supports a finding that the deceased had intended the date of assessment of Balwyn North to be more flexible. That intention, coupled with her intention to achieve equality, means that it would have been her intention for the valuation to be assessed at the date that best achieves equality, which is at the time when Bruce makes the required payment.
With respect to the method of calculation under the general law, the plaintiff submitted that if the Court takes the view that on a proper construction of the Will there is no indication as to the deceased’s intentions as to the timing of the valuation, then under general law the relevant time is to be set at the date of distribution because:
(a) it is clear that s 49(1)(b) specifically provides that the general law relevant in the determination of method of valuation will continue to operate;
(b) where a will gives the estate to be divided among beneficiaries equally and has directed the beneficiaries to bring any advance into hotchpot, it is a general rule that, in the absence of contrary directions in the Will, the distributable assets are to be valued at the date of distribution, not at the date of the testator’s death;
(c) this principle was firmly established in Re Hillas-Drake Deceased; National Financial Bank v Liddell.[8] In that matter the testator gave his entire estate to pay an annuity to his wife, and then upon her death to his three children equally. The will also directed that any securities settled by him on the marriage of his children should be brought into hotchpot in ascertaining each of the children’s share. Simonds J stated that it is by taking the date of distribution in ascertaining the value of the distributable assets that would secure equality. The Judge further observed that if the assets are to be valued at the date of death, then the fluctuation of value of the estate would mean it was ‘almost certain’ that inequality would be achieved. The Judge further observed it has long been the practice to take the date of distribution for the purpose of valuation of the estate, subject to special provisions in the Will.[9] Indeed the Judge stated at the commencement of his judgment that it was ‘strange’ that such a question needed to be determined by the Court;[10]
[8](1944) 1 Ch 235 (Re Hillas-Drake’).
[9]Re Hillas-Drake, 238-9.
[10]Re Hillas-Drake, 237.
(d) there had been older cases where the date of the testator’s death was said to be the proper date for valuation.[11] However Re Hillas-Drake stated that it was those cases that are inconsistent with the long established principle and practice. The leading textbooks are now generally agreed that, in the absence of contrary directions in the will, the estate assets are to be valued at the date of distribution for the purpose of the hotchpot;[12]
(e) although the principle in Re Hillas-Drake is concerned with a hotchpot clause, the deceased’s intention to achieve equality among her children, despite making specific devises of real properties to two of them, is comparable to the principles that guides the hotchpot clauses. In Otto v Redhead and Thompson & Anor[13] the Supreme Court of Queensland appears to accept that the principle in Re Hillas-Drake was applicable, however the Court found that there was a contrary intention contained in the Will that the assets be valued at date of death;
(f) in light of the principles in Re Hillas‑Drake and the observations in Otto v Redhead, the plaintiff submits that Balwyn North should be valued at the date of distribution for the purpose of achieving equality. This is the most certain way to achieve equality. As Salmond J asked rhetorically in Re Hillas‑Drake, ‘why should the court, aiming at equality, deliberately miss the mark?’[14]
[11]In re Gunther’s Will Trusts [1939] Ch 985and In re Oram [1940] Ch 1001.
[12]Jarman on Wills (8th ed, 1951), [1161]; Theobald on Wills (18th ed, 2016), [34-051]; Williams, Mortimer & Sunnucks on Executors, Administration and Probate (2018), [65-11].
[13][2007] QSC 278 (‘Otto v Redhead’).
[14]Re Hillas-Drake, 239.
This then gives rise to the next question, what is the date of distribution? Is it the date when the plaintiff received his cash distribution (in September 2018) derived from the payment from Bruce under clause 7.7? Or is it when Bruce made the required payment under clause 7.7 (in May 2018)? Or is it when Bruce received the distribution of Balwyn North (in December 2017)?
The plaintiff submitted that the proper date is the date when Bruce made the required payment under clause 7.7 into the estate. It is at that time that the estate is ready to be distributed. That is the time that equality between the beneficiaries can be best achieved. As it happened, Bruce made the payment in May 2018. At that time the defendant should have obtained an updated valuation of Balwyn North and calculated Bruce’s obligation based on that valuation, instead of relying on a valuation that was, by that time, more than 2 years old. By doing so the Defendant had, to quote from Salmond J in Re Hillas-Drake, ‘deliberately missed the mark’.
The other choice for date of distribution is the date when Balwyn North was transferred to Bruce (on 13 December 2017). But that is not the date of distribution. The plaintiff’s primary submission is that while Bruce received the benefit of this distribution at this time, the plaintiff did not. When Bruce received Balwyn North, the estate was not yet ready for final distribution because it had yet to receive the funds that Bruce was required to pay under clause 7.7 of the Will. However, the plaintiff accepts that it is open for the Court to accept 13 December 2017 as the date of distribution because it was then that Bruce received his distribution.
The plaintiff therefore submits that the second question should be answered as follows:
For the purpose of clauses 7.8, 7.9 and 7.10 of the Will, the value of Balwyn North be determined by a registered valuer and on terms that would be granted to an arm’s length purchaser from the Deceased’s estate as if Balwyn North was sold on 17 May 2018.[15]
[15]Plaintiff’s submissions filed 10 May 2021, [69].
Alternatively, the plaintiff submits that the second question be answered as follows:
For the purpose of clauses 7.8, 7.9 and 7.10 of the Will, the value of Balwyn North be determined by a registered valuer and on terms that would be granted to an arm’s length purchaser from the Deceased’s estate as if Balwyn North was sold on 13 December 2017.[16]
[16]Ibid, [70].
Defendant’s submissions
Introductory matters
The defendant submitted that the consistency of language used in clause 7 of the Will in relation to both properties demonstrates an intention on the part of the deceased that the distribution of those properties as part of the remaining balance of the Estate be as uniform as possible. The only relevant distinction between Point Lonsdale and Balwyn North in clause 7, aside from the different beneficiaries, is the direction to account for the Estate’s capital gains tax liability at the date of the deceased’s death when valuing the former. The properties are otherwise treated identically.
It is notable that the Will does provide some method for valuing both Point Lonsdale and Balwyn North. However, only the valuation of Point Lonsdale is expressly linked to a particular point in time (the date of death of the deceased). The method for valuing Balwyn North as expressed in clause 7.9 of the Will is temporally vague.
Due to the extent and complexity of the assets of the Estate, the distribution of the Estate has occurred over some years. It is still ongoing.
It is accepted that the deceased’s intention was to divide her residuary estate as equally as possible between her three sons. However, as the various directions in clause 7 demonstrate, it was also her clear intention to retain her real properties for the benefit of the plaintiff and Bruce. The ‘equal’ distribution of the residue is subject to that intention and the specific directions in clause 7 generally. The deceased was aware of the problems retaining her real properties would cause in equalising the distribution of her residuary estate. She gave very clear and specific directions in the Will in an attempt to ameliorate some of those problems. The allowance for capital gains tax in the valuation of one property but not the other demonstrates the deceased’s awareness of the differences between her properties.
However, what the deceased ultimately intended, and what the Will directs, is inherently unequal, in that the plaintiff is to receive Point Lonsdale and Bruce is to receive Balwyn North. Neil receives no real property at all. He is immediately at a disadvantage as compared to the plaintiff and Bruce; if Neil wanted to invest his share of the residue into real estate he would have to pay the costs of that investment, namely stamp duty, whereas the plaintiff and Bruce receive their properties free of that cost.[17] The Will does not make an allowance for this potential inequity in the final division and distribution of the Estate.
[17]The gifts of Point Lonsdale and Balwyn North are specifically ‘free of all duties and encumbrances’.
It follows that, in construing the Will, clause 7 should be given a meaning that is as consistent with equality of distribution between her sons as circumstances allow, whilst recognising that each son is to receive distinctly different assets in the ultimate distribution of the Estate. How those differences may manifest in the future was not the deceased’s concern. If she had wanted a perfectly equal distribution of her estate, she would have provided for it by directing the sale of Point Lonsdale and Balwyn North prior to distribution.
First question
The critical difference between the parties is the question of the amount of income by reference to which the CGT is to be calculated. The dispute centres around the calculation of the ‘capital gains tax liability [the] Estate would pay if the property were sold at the date of [the deceased’s] death’, as those words appear in clause 7.5 of the Will. On the assumption of a hypothetical sale of Point Lonsdale on the date of the deceased’s death, the amount of the Estate’s capital gains tax liability arising from that sale is to be deducted from the value of Point Lonsdale in the plaintiff’s hands for the purposes of the division of the Estate under clause 7 of the Will.
The plaintiff submits that the calculation of the capital gains tax liability for the purposes of the valuation of Point Lonsdale should be done as if the property was sold by the deceased during her life and the proceeds taxable in her hands. The plaintiff’s submissions are premised on a view that the words ‘capital gains liability my Estate would pay’ in clause 7.5 of the Will mean the liability the deceased would have paid if Point Lonsdale were sold on the day of, presumably immediately prior to, her death. With respect, that premise should not be accepted.
The distribution of Point Lonsdale to the plaintiff could have been effected in one of two ways: first, the property could have been sold by the Estate and the proceeds, net of all costs and expenses occasioned by the sale, including tax liabilities, distributed to the plaintiff;[18] or second, the property could have been distributed to the plaintiff in specie. The plaintiff elected to receive Point Lonsdale in specie. Clause 7.5 of the Will allows him to make that election without being penalised in the ultimate distribution of the Estate. This is because the capital gains tax liability that would pass to the plaintiff from the Estate is accounted for in the valuation of the asset.
[18]Pursuant to the broad powers and discretions conferred on the executor by clause 11 of the Will. The power in clause 11.1(j) is also notable: ‘sell, call in and convert into money the whole or any part of my Estate’.
The capital gains tax liability that would be triggered by the sale of Point Lonsdale in the hands of the deceased is not relevant to either of the options described above. Clearly, by the time the property came into the defendant’s hands as executor of the Will and trustee of the Estate, the possibility of the deceased selling Point Lonsdale, and the capital gain embedded in the proceeds being added to her taxable income, had well and truly passed. The property could only be sold by either the defendant as executor acting on behalf of the Estate or the plaintiff himself after receiving the gift. The capital gain would be received by, and added to the taxable income of, either the Estate or the plaintiff personally.
The plaintiff’s submission that the deceased’s personal income level is relevant to the valuation of Point Lonsdale under the Will—which would insert the word ‘I’ in place of the words ‘my Estate’ in clause 7.5 of the Will—is artificial. Under no scenario would the plaintiff face the prospect of paying the deceased’s capital gains tax liability on Point Lonsdale as if she had sold it during her life. To construe the Will in a way that seeks to protect him from liability does not make sense.
Clause 7.5 of the Will seeks to protect the plaintiff from the capital gains tax liability carried by Point Lonsdale, not at the time of conversion, but at the time of the deceased’s death. The liability should not be calculated as if the property was sold by the deceased during her life, and therefore added to her taxable income, because that circumstance could never arise. Accordingly, there is no need to protect the plaintiff from the liability calculated in that way. An interpretation of the Will that protects the plaintiff from a liability he would never incur is absurd.
Nor should the liability be calculated from the point of view of the plaintiff’s ultimate disposal of the property, for that would be impossible to calculate with certainty until the plaintiff actually did dispose of the property, which may be many years in the future. The deceased could not have intended to hold up the final distribution of the estate waiting for the plaintiff to incur a liability on his disposal of Point Lonsdale.
By the direction in clause 7.5 of the Will regarding the valuation of Point Lonsdale, the deceased could only have had in mind the capital gains tax liability that her Estate would incur if it sold the property during the administration. That is because it is the only liability that both:
(a) can be calculated with certainty (unlike the liability the plaintiff might incur upon some future disposal of the property); and
(b) may have actually been incurred by the plaintiff, in the event that he had elected to receive the proceeds of sale of Point Lonsdale from the Estate rather than the property in specie (unlike the entirely hypothetical liability of the proceeds of sale in the hands of the deceased during her life).
It follows that ‘the capital gains tax liability my Estate would pay if the property were sold at the date of my death’ in clause 7.5 of the Will should be calculated by applying the Estate’s income level for the year ended 30 June 2016, not the deceased’s personal income level or the plaintiff’s income level at any given time.
Second question
Clause 7 of the Will is a residuary clause. It directs the defendant to distribute the residue of the Estate in a particular way, principally by dividing it into three equal parts, with one part to be given to each of the deceased’s sons. Clauses 7.2 to 7.9 deal with the composition of those parts and how Point Lonsdale and Balwyn North are to be treated considering the gifts to the plaintiff and Bruce, respectively. Importantly, clause 7.5 of the Will requires Point Lonsdale to be valued as at the date of the deceased’s death. Clause 7.9 does not stipulate a time for the valuation of Balwyn North. The difference in language is explicable by reason of the deceased’s desire to insulate the plaintiff from any capital gains tax liability carried by Point Lonsdale.
Both Point Lonsdale and Balwyn North form part of the residue of the Estate, or the ‘remaining balance’ as that term is defined in clause 7.1 of the Will. They should be treated consistently for the purposes of calculating the value of the residue.
The gifts of Point Lonsdale (clauses 7.2 and 7.3) and Balwyn North (clauses 7.6 and 7.7) require a calculation of both the value of the respective properties and the value of the remaining balance, which includes both properties. The value of Balwyn North is relevant to both the gift to Bruce, but also to the gift to the plaintiff and the gift to Neil, as it affects the value of the remaining balance for the purposes of working out the final distribution of the residue. The gifts cannot be considered in isolation.
For that reason, it would distort the ultimate distribution of the Estate if one property was valued at a particular time, and the other was valued at another time. If the plaintiff’s submissions were accepted, he would take the benefit of the transfer of Point Lonsdale in February 2018 without having to account for the increase in value of that property from the date of the deceased’s death in March 2016, because that property is required to be valued as at the date of death under clause 7.5 of the Will. He would also take the benefit of the later valuation of Balwyn North, which would increase the size of the residue and entitle him to more of what remains.
However, Bruce would have to account for the increase in value of Balwyn North between the date of death and his repayment to the Estate in May 2018, or the transfer of the property to him in December 2017, being the two alternative dates submitted by the plaintiff as the appropriate dates for the valuation of Balwyn North. He would also be penalised by the earlier valuation of Point Lonsdale, decreasing the size of the remaining residue and increasing the repayment he would be required to make to the Estate. There is nothing in the Will to suggest that is what the deceased intended.
Rather, the deceased goes to great lengths to treat her two real properties as consistently as possible in clause 7 of her Will. Insofar as she wanted to distinguish between them, she did so specifically in relation to the differential tax treatment. It should be accepted that she was aware of the value of real property in Melbourne and its surrounds at the time she made the Will, and its reputation as an appreciating asset. She would also have been aware of the different values of Point Lonsdale and Balwyn North—hence the detailed directions in clauses 7.2 to 7.9 of the Will - and the fact that they may appreciate differently in the future.
For those reasons, considering clause 7 on its terms and as part of the Will as a whole, the better view is that the defendant was required to value Point Lonsdale and Balwyn North at the same point in time for the purposes of making the final distribution of the residue of the Estate. It is agreed that the time for valuing Point Lonsdale was as at the date of the deceased’s death, as required by clause 7.5 of the Will. It follows that the value of Balwyn North should be calculated as at that time, and that the valuation prepared by Chris Mason & Associates dated 19 May 2016, being the most proximate to the date of death, should be accepted.
This construction is consistent with s 49(1) of the Wills Act. It is submitted that s 49(1), which stipulates that a requirement in a will for a valuation to be made ‘is to be construed as if it were a reference to a valuation of the property as at the testator’s death made by a competent valuer’, applies to the valuation of Balwyn North in clause 7.9 of the Will. Although that clause provides some method for the valuation, it does not provide a date from which the valuation is to be calculated. In that sense the method for the valuation of Balwyn North in clause 7.9 of the Will is incomplete and is amenable to the operation of s 49(1) of the Wills Act.[19]
[19]See s 34(1) of the Wills Act, whereby a will takes effect as from the date of death of the testator, and the property of the testator’s estate is ascertainable at that date. See also Chan v Valmorbida [2019] VSC 336 [25]–[33] (Daly AsJ).
The Will does not reveal a ‘contrary intention’ to the operation of s 49(1) of the Wills Act.[20] The terms of the Will are consistent with the operation of s 49(1) in that a valuation of Balwyn North as at the date of death of the deceased— the same time as the valuation of Point Lonsdale—best accords with the stated intention of achieving equality in the distribution of the residue of the Estate.
[20]See s 49(2) of the Wills Act.
Furthermore, the authorities referred to by the plaintiff provide little assistance in determining the proper approach to the valuation of Balwyn North in accordance with the terms of the Will in this case. Clause 7 of the Will is not a ‘hotchpot’ clause of the kind considered by the English authorities, including In re Oram; Oram v Oram[21] and Re Hillas‑Drake. Rather, it is a residuary clause that details a special method for distributing certain assets within the residue of the Estate and how they are to be valued for that purpose. Those authorities do not reveal a consistency of reasoning that can be applied to this case.
[21](1940) Ch 1001.
In any event, the guiding tenet is to construe a will according to its terms and give effect to the clear meaning of those terms where possible. That is the overarching consideration of the Court in answering the preliminary questions stated in the proceeding. It is consonant with the line of authority relied on by the plaintiff as applied in the Australian context.[22] It is submitted that the analysis set out above is consistent with that fundamental principle.
[22]See, for example, Re Tennant; Mortlock v Hawker (1942) 65 CLR 473, 495, 506 (Dixon J); Otto v Redhead [23] (Chesterman J).
Consideration
Introductory matters
The parties agree that, as McMillan J said in Re Niall,[23] in construing a will, the task of a court is to give effect to the testator’s intention through examination of the words used in the will, having regard to the will as a whole, aided as necessary by any admissible extrinsic evidence.[24] Prima facie, the words of a will must be given their ordinary meaning.[25]
[23][2019] VSC 423, [36].
[24]Fell v Fell (1922) 31 CLR 268, 273-4 (Isaacs J); Perrin v Morgan [1943] AC 399, 420 (Lord Romer); ANZ Executors & Trustee Co Ltd v McNab [1999] 3 VR 666, 667 (Fullagar J).
[25]Fell v Fell (1922) 31 CLR 268, 273 (Isaacs J), quoting Ralph v Carrick (1879) 11 Ch D 873, 878 (Cotton LJ).
Some further relevant principles are, at the expense of some repetition or overlapping, as follows:
(a) The interpretation of a will is analogous to the interpretation of a contract. This brings with it a consideration of the purpose of the will, or the purpose of its particular provisions, as well as the facts known or assumed by the maker at the time that the will was executed, applying common sense and ignoring evidence of subjective intention.[26] No will is made in a vacuum.[27]
[26]ReLapalme; Daley v Leeton [2019] VSC 534, [25]; Marley v Rawlings [2015] AC 129, 144 (Lord Neuberger).
[27]Perrin v Morgan [1943] AC 399, 414–15 (Lord Atkin).
(b) The testator’s intentions are not necessarily to be discovered by looking at the literal meaning of the words alone, if this leads to the frustration of their intentions. If, in the light of the surrounding circumstances, the literal interpretation gives rise to a capricious result which the testator can never have intended, then the literal interpretation should be rejected in favour of a sensible interpretation which accords with their intention.[28]
[28]Re Allsop [1968] Ch 39, 47 (Lord Denning MR); Lapalme; Daley v Leeton [2019] VSC 534, 30.
(c) If the law has consistently given a particular meaning to some word or phrase, that is the meaning which the word or phrase must, prima facie, be given.[29]
[29]ANZ Executors & Trustee Co Ltd v McNab (1999) 3 VR 666, 667.
(d) It is open to the Court, in construing a will, to insert missing words which are clearly necessary to give effect to the testator’s intention.[30]
(e) If, in the context of the will read as a whole, and of the surrounding circumstances, the ordinary meaning of the words in the will do not make sense, extrinsic evidence is admissible under the ‘armchair principle’. In effect, the court is able to consider evidence of the circumstances surrounding the testator at the time of executing the will.[31]
(f) A court is not entitled to rewrite a will merely because it suspects the testator did not mean what is said in the will.[32]
[30]Fell v Fell (1922) 31 CLR 268, 274; Butlin v Butlin (1966) 113 CLR 353, 357; Chan v Valmorbida [2019] VSC 336 [51].
[31]Re Staughton; Grant v McMillan [2017] VSC 359, [37] (McMillan J).
[32]Perrin v Morgan [1943] AC 399, 420 (Lord Romer). See also Re Mas; Weston v Donaldson [2018] VSC 405.
It is common ground that the deceased’s intention was to divide her residuary estate as equally as possible between her three sons. It is also clear that the specific directions in clause 7 show her intention to specifically devise the two properties to the plaintiff and Bruce. The deceased, no doubt as a result of advice from her lawyers, was aware that giving one property to each of the plaintiff and Bruce would result in inequality unless there were equalisation of the distribution of her residuary estate. That explains the condition (indicated by the words ‘provided that’) attached to each devise that an equalising payment is made if the remaining balance of the Estate is less than three times of the value of each property.
The allowance for capital gains tax in the valuation of Point Lonsdale but not Balwyn North demonstrates the deceased’s awareness of the differences between her properties. Balwyn North was her main residence, and thus exempt from CGT. Point Lonsdale was acquired after 20 September 1985, and was thus potentially subject to a CGT liability, although her executor would not be subject to that liability only the plaintiff as the recipient would be liable for the unrealised gain of the deceased during the time she owned it.
The equalisation between the three sons was, however, only approximate. As the defendant pointed out, Neil receives no real property at all and he is immediately at a disadvantage as compared to the plaintiff and Bruce. If Neil wanted to invest his share of the residue into real estate he would have to pay the costs of that investment, including substantial stamp duty, whereas the plaintiff and Bruce receive their properties free of that cost.[33]
[33]The gifts of the Point Lonsdale property and Balwyn North are specifically ‘free of all duties and encumbrances’.
Given the clear intention of the testator to attempt an approximate equality, and not a perfect equality, between her sons, that purpose should guide the construction of clause 7 so that it is given a meaning consistent with an equality of distribution between her sons as the circumstances allow, whilst recognising that each son is to receive distinctly different assets in the ultimate distribution of the Estate.
First question
The matters relevant to the determination of the answer to this question do not include the actual value of Point Lonsdale, which it is agreed between the parties for the purposes of clause 7.5 of the Will is $830,000; nor do they include the detailed calculations in the accountants’ reports that are referred to in the agreed statement of facts. Indeed, that part of the question that asks ‘at what point in time should the value of Point Lonsdale be determined’ is not in dispute. Both parties rightly submit that clause 7.5 provides a clear answer to that part of the question by specifying the date for determining the hypothetical value of the property - ‘if the property were sold at the date of my death’.
However, the parties do not agree as to whose income is to be used to calculate the hypothetical ‘amount equal to the capital gains tax liability my Estate would pay’ on a sale of Point Lonsdale. Is it the income of the deceased as at the date of her death or the income of the Estate? Given the hypothesis dictated by clause 7.5 being a sale by the Estate (‘on terms that would be granted to an arm’s length purchaser from my Estate’) and the hypothetical CGT being that which would be paid by the Estate (less an amount equal to the capital gains tax liability my Estate would pay) it might be said that the easy answer is that it is the income of the Estate for the relevant tax year.
However, clause 7.5 sets up a hypothetical set of circumstances as at the date of Phyllis’s death. It contemplates a sale on that date, which as the CGT law applies means a disposal of the property on that date. That fixes the value of Point Lonsdale for the purposes of calculating CGT. But the wording of clause 7.5 also dictates that the Estate’s liability to pay CGT be calculated ‘as at that day’ because that liability is the CGT her ‘Estate would pay if the property were sold at the date of my death’.
Neither party considered it necessary to analyse the operation of the CGT provisions of the Income Tax Assessment Act 1997 (Cth) (‘1997 ITA Act’), but each assumed a simplified understanding of how it operated. Essential to that understanding is the concept that CGT affects a taxpayer’s income tax liability because their assessable income includes any net capital gain for the income year. A net capital gain is the total of capital gains for the income year, reduced by certain capital losses made.[34]
[34]1997 ITA Act, s 100.10(1).
The application of the law depends on Point Lonsdale being a CGT asset (which is assumed) in relation to which there is a CGT event. The CGT event is the disposal of the property on the date of Phyllis’s death as, under s 104-10, a CGT event is deemed to include a change of ownership of an asset. The time of that change in the case of the sale of property is the date of the contract.[35] The gain over the cost base or reduced cost base is added to the taxpayer’s assessable income.[36] The applicable tax rate depends on the extent of the taxpayer’s other income. But who is the relevant taxpayer? Phyllis or her Estate?
[35]1997 ITA Act, s 104-10(3).
[36]Where the asset is held for more than a year, then half the gain is added.
If the legal personal representative sells an asset they must calculate a capital gain or loss by reference to the cost base of the asset in the hands of the deceased and if the asset is sold for more than its cost base, a capital gain may be deemed to accrue to the estate. In this case, the question is whether the legal personal representative or the deceased is the hypothetical seller of Point Lonsdale? Although clause 7.5 supposes a sale by the Estate (because the sale is ‘on terms that would be granted to an arm’s length purchaser from my Estate’) and calculates the value for the purposes of the equalisation of the bequests to the three sons after deducting ‘an amount equal to the capital gains tax liability my Estate would pay’), the income to which that CGT gain must be added has to be that determined at the date of Phyllis’s death.
The logic of deducting the hypothetical CGT ‘my Estate would pay’ from the value of Point Lonsdale for the purpose of the equalisation of the distributions, is a comparison with the CGT liability that will potentially be borne by the plaintiff on taking the property in specie. Under Division 128 of the 1997 ITA Act, relief from CGT is granted arising from the death of an individual. Section 128-10 sets out the basic rule that any capital gain or capital loss from a CGT event in respect of a CGT asset that the deceased owned is disregarded. Accordingly, a transfer of an asset from the deceased to the legal personal representative does not give rise to a tax liability.
Further, s 128-15(3) provides that where an asset that formed part of the estate of a deceased person passes to a beneficiary, any capital gain or loss ‘a legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded …’. However, the beneficiary is taken to have acquired the asset on the day the deceased died[37] and the asset is taken to have the same cost base or reduced cost base as the asset had in the hands of the deceased.[38] Therefore, any unrealised gain may ultimately be realised when the beneficiary sells the asset (which is a CGT event under s 104-10).
[37]1997 ITA Act s 128-15(2).
[38]1997 ITA Act s 128.15(4).
The parties, in accepting the proposition that during administration of the estate the executor is required to file tax returns for the deceased’s estate (see above at [25]) recognise that for income tax purposes, the deceased estate is treated as a trust estate from the date of death and is subject to the trust provisions contained in Division 6 of Part III of the Income Tax Assessment Act 1936 (‘1936 ITA Act’). The key provisions for present purposes are ss 95, 97 and 99:
(a) By s 95 of the 1936 ITA Act ‘net income’ of a trust estate is defined, in part, as meaning:
‘the total assessable income of the trust estate calculated … as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions…’.
(b) By s 97 of the 1936 ITA Act it is provided, in effect and in part, that
“… where a beneficiary of a trust estate … is presently entitled to a share of the income of the trust estate … the assessable income of the beneficiary shall include … that share of the net income of the estate …”. [emphasis added]
(c) To the extent that there is no beneficiary presently entitled to the net income of a trust under s 97, it will (subject to various exceptions) give rise to a liability to tax imposed upon the trustee under s 99 (for deceased estates).
(d) To be ‘presently entitled’ to a share of the income of a trust estate, the beneficiary’s right to the income must be vested in interest and vested in possession, and the beneficiary must have a present legal right to demand and receive payment of the income.[39] Until the administration of the estate is complete no beneficiary is presently entitled to any income of the estate and s 99 would normally apply to tax the legal personal representative.[40]
[39]FCT v Harmer (1991) 173 CLR 264, 271.
[40]FCT v Whiting (1943) 68 CLR 199.
It cannot be known or anticipated, however, what might be the income of the plaintiff when he comes to sell Point Lonsdale, if he ever does. So assuming that Point Lonsdale carries an unrealised net capital gain attributable to the deceased that would give rise to a CGT liability on the date of her death had it then been sold, that will not give an answer to the potential liability of the plaintiff, which will be calculated by reference to his income level in the tax year in which he dispossess of it, or it is the subject of a CGT event. So the imputed knowledge of the deceased that she was aware that, by devising Point Lonsdale to the plaintiff, the deceased would be passing on the potential CGT liability to the plaintiff does not assist in construing clause 7.5 — in so far as concerns identifying the person to whom the liability for CGT attaches. There is no provision, so far as I am aware, which would give the plaintiff the benefit of a reduction of CGT to the level that the deceased would have paid by reference to her income at the date of her death.
Nevertheless there is some support for the plaintiff’s interpretation of clause 7.5 arising solely from the stated hypothesis that there is a CGT event (the property is sold) on the date of Phyllis’s death. The intention of the hypothetical sale is that there is no time lapse between the date of sale and the final settlement in calculating the potential tax liability. In the result, the hypothesis must continue as if the proceeds of sale were received by the deceased on the date of her death and thus the CGT included in her assessable income as at the date of her death. If the plaintiff is correct that Phyllis was entitled during her life to the net income of William’s Estate, then the ultimate CGT liability will then be determined by adding the CGT to Phyllis’s assessable income up to the date of her death. It is important to observe, however, that although prima facie that would seem to follow from Division 6 of Part III of the 1936 ITA Act, the determination of whether the net income of William’s estate up to the date of Phyllis’s death should be included in Phyllis’s final income tax return is not a part of the questions stated for my determination.
The references in clause 7.5 to ‘an amount equal to the capital gains tax liability my Estate would pay ‘ is capable of being construed as a necessary expression for the hypothetical sale, given that the hypothetical CGT liability would ultimately be paid from the Estate, without resulting in an interpretation that fixes the CGT to the income of the Estate for the relevant tax year. But it is not so easy to explain away the reference to the value of the property being determined by a registered valuer ‘and on terms that would be granted to an arm’s length purchaser from my Estate’.
In my view, the plaintiff’s argument does violence to the express words of clause 7.5. It requires absolute primacy to the phrase ‘if the property were sold at the date of my death’ whilst ignoring that such hypothetical sale must be by ‘my Estate’. This seems to me to follow from the reference to the determination of the value of the property being by a registered valuer ‘and on terms that would be granted to an arm’s length purchaser from my Estate’. Reading clause 7.5 as a whole, the final phrase should be understood as saying ‘if the property were sold by [my Estate as] at the date of my death’. That gives consistency of meaning to the clause read as a whole so that the hypothetical sale is by, and the hypothetical CGT liability is of, the Estate of the deceased.
I would therefore answer the first question accordingly and as follows:
For the purpose of clauses 7.4, 7.5 and 7.10 of the will of the deceased dated 12 November 2013, the value of the Point Lonsdale property should be determined as at the date of death of the deceased by a registered valuer on terms that would be granted to an arm’s length purchaser from the Estate less an amount equal to the capital gains tax liability the Estate would pay if the property were sold by the Estate as at the date of the deceased’s death.
Second question
Section 49 of the Wills Act
The first matter to be determined in order to answer this question is whether s 49 of the Wills Act is applicable. If it is, then the answer is straight forward and the date of valuation of Balwyn North is as at the date of death. There is very little authority to assist in the construction of this section. The parties referred to no authority as to its origin, purpose, or interpretation.
My own research reveals its source as s 22B of the Wills Act 1958 (Vic), introduced into that Act by the Wills Act 1981 (Vic). The terms of that section give some indication of its purpose. It provided:
Where a will refers expressly or by implication to a valuation made or accepted for the purpose of assessing probate duty or any other form of death duty, that reference shall, if the valuation contemplated by the reference is not at the relevant time required under the law of Victoria or under the law of any other jurisdiction, be construed as if it were a reference to a valuation of the relevant property as at the date of death of the testator made by a competent valuer. [emphasis added]
At that time there were two forms of death duty, first Probate Duty under Victorian legislation;[41] second, Estate Duty under Commonwealth legislation.[42] Both duties were abolished around the time s 22B was introduced.[43]
[41]Probate Duty Act 1962 (Vic).
[42]Estate Duty Act 1914 (Cth) and Estate Duty Assessment Act1914 (Cth).
[43]In Victoria, abolished progressively by the Probate Duty Act 1981 (Vic) so that for deaths after 1 January 1984 there was no duty payable. In the Commonwealth, abolished by the Estate Duty Amendment Act 1978 (Cth) for deaths after 1 July 1979.
The Attorney-General at the time, Haddon Storey QC, introduced the Wills Bill 1981 into the Legislative Council and in the Second Reading speech said, relevantly to s 22B of the Bill:
The first of the amendments proposed is to amend the Wills Act to include a provision which is designed to provide an alternative method of valuing assets and estates where reference is made to probate values in wills.
Many wills prepared in Victoria were drafted at the time when most estates were subject to the payment of probate duties. Some of these wills contain provisions under which dispositions of property depend upon the valuation of the property for death duty purposes. There are two main examples of such provisions:
(i)A provision giving a person an option to purchase a specified property at the value placed on it for probate duty purposes; or
(ii)a provision specifying that land or property is to be devised to one person with a direction that he pay to another person the value placed on the property for succession duty or probate duty purposes.
As a result of changes to Victorian death duty legislation, these types of provisions are rendered meaningless in cases where no probate duty is levied. For instance, in cases where husbands, wives or their children are entitled to property, probate duty is no longer payable and consequently there is no measuring stick or means by which the value can be calculated.
Accordingly, proposed section 22B of the Act provides for an alternative method of valuing assets and estates where reference is made to probate values··in wills. The effect of the provision is that a reference to such a valuation shall, where not required by law, be read as a reference to a valuation made by a “competent valuer”. ….[44]
[44]Hansard, Legislative Council, 14 April 1981, p. 7311.
It can be seen that the particular focus is on provisions in Wills that may be affected by changes to the incidence of death duties under the Victorian legislation. No mention is made in the second reading speech of the time of the valuation, the focus being on the method of using a competent valuer.
The Law Reform Committee of the Parliament of Victoria reported in 1994 to the Parliament upon an Inquiry into the 1991 Draft Wills Bill.[45] The Draft Wills Bill 1991 was designed to restate and reform the provisions of the Wills Act 1958.[46] Recommendation 60 of the LRC Report was that unless a law of Victoria or another jurisdiction requires some other method, or the will otherwise provides, an express or implied reference in a Will to a valuation is to be taken as referring to a valuation made by a competent valuer, and that the time of valuation is as at the testator’s death.[47]
[45]Law Reform Committee, Parliament of Victoria, Reforming the Law of Wills: Report on an inquiry into the 1991 Draft Wills Bill (May 1994) (‘LRC Report’).
[46]LRC Report, para 1.5, p 49. That Bill was prepared in July 1991 by Parliamentary Counsel on instruction of the then Attorney General in response to recommendations made by the Wills Working Party in its Interim Report of 1984, which was adopted in 1986 without amendment as its Final Report: LRC Report, para 1.6, p 50.
[47]LRC Report, p. 206.
The LRC Report noted that the provision in the 1991 Draft Wills Bill was a briefer version of s 67 of the Queensland Succession Act 1981. The Committee noted that:
s.36.3 The limited purpose of the draft section and of s.22B of the Wills Act 1958 is to provide a method of valuation in case the statutory sources in death duty legislation are not available. The 1991 draft has dropped the word “as” in the expression “as at the date of death”, which alters the meaning inappropriately. Beyond that comparatively minor criticism the Committee considers the section could be made more useful by making provision for any other requirement for valuation where no method is clearly laid down. Such a requirement may result from an express or implied reference in a will, or a reference to some other tax provision. Capital gains tax, which was introduced in 1985, may be such a tax.[48]
[48]LRC Report, p.205.
A provision equivalent to s 49 appears in a number of other jurisdictions in Australia, including NSW,[49] Queensland,[50] Tasmania[51] and the Northern Territory.[52] The equivalent provision in South Australia is in an older form and refers to the application of the rule for the purpose of succession or death duty. Western Australia and the Australian Capital Territory have no equivalent provision that I can find.
[49]Succession Act 2006 (NSW), s 45.
[50]Succession Act 1981 (Qld), s 33S.
[51]Wills Act 2008 (Tas), s 59.
[52]Wills Act 2000 (NT), s 44.
The result of these matters is that the legislation as originally introduced for the limited purpose of ‘assessing probate duty or any other form of death duty’ was enlarged in its scope in consequence of the LRC Report to provide a ‘method of calculating’ a valuation ‘for any purpose’. It provides a form of back-up for circumstances where there is an express or implied requirement in a Will for a valuation to be made (or accepted) for any purpose and the Will provides no ‘method of calculating’ the valuation and the law of Victoria or of another jurisdiction also does not provide such a method, then the valuation is to be construed ‘as if it were a reference to a valuation of the property as at the testator's death made by a competent valuer.’ By s 49(2) it is, of course, subject to a contrary intention appearing in the Will.
The reference to ‘the law…of another jurisdiction’ is probably intended to refer to another jurisdiction whose laws are relevant to the property the subject of the disposition in the Will. For example, where the cost base of property for the purposes of calculating a capital gain is determined under the 1997 ITA Act as at the date of death.[53] The fact that that is the same time as provided for by s 49 is beside the point. It is used as an illustration of the purpose of referring to the law of another jurisdiction. The reference to the law of another jurisdiction should not to be taken as a reference to a law that has no connection with the subject matter or to the administration of the estate of the deceased.
[53]1997 ITA Act, s 128-15(4).
The only decision on the application of the section is in New South Wales in the decision of Ward CJ in Eq in Application by Paul Andrew Brown as executor to estate of the late Joseph Kostyorz (No 2).[54] In that case, the relevant provision in the will gave an option to two beneficiaries to purchase the balance of a property not already devised to them, in the following terms:
It is my further express wish and desire that if Erika and Andrew elect to purchase from my estate the 20% of the property which forms part of my Residuary Estate then I direct my Executor and Trustee shall obtain two valuations of the property from registered valuers and the mean value of those valuations shall be the agreed and accepted value of the property to enable the transfer and sale by my estate to Erika and Andrew of that remaining 20% of the property.[55]
[54][2018] NSWSC 334 (‘Estate Joseph Kostyorz’). That decision needs to be read with the earlier decision in Application by Paul Andrew Brown as executor to estate of the late Joseph Kostyorz [2017] NSWSC 1774.
[55]Estate Joseph Kostyorz, [8].
Her Honour had little difficulty concluding that the date of the valuations of the property required upon the exercise of the option was after such time as any election had been made, so that for the purpose of s 45 of the Succession Act 2006 (NSW), which makes provision to the same effect as s 49 of the Victorian Wills Act, the will of the deceased provided a contrary intention. That was because, of course, the particular provision –
… contemplates that the valuation of the property was to take place after such time as any election had been made and that the mean value of the valuations was to be the agreed and accepted value of the property “to enable” the transfer and sale of the property. That speaks to a valuation (for the purposes of a sale of the 20% interest) taking place at a time after the relevant election to acquire the property has occurred in order to enable the sale to take place. In my opinion that points to the valuations being required to be obtained upon (or as soon as reasonably practicable after) the election has taken place and points to the valuations being carried out as at the date of the election. In other words, the will is requiring valuations for a purpose other than determining the estate as at the date of death. It is requiring valuations to enable a sale to take place after there has been an election to purchase the property (and only requires such valuations if there has been such an election).[56]
[56]Ibid, [14].
The plaintiff’s submissions as to the application of s 49 are threefold. First, a contrary intention appears in the Will. Second, the Will provides a ‘method of calculating the valuation’. Third, the ‘method’ is provided by the law of Victoria.
Does a contrary intention appear in the Will?
The argument advanced by the plaintiff, it is set out above at [41]. The starting point for my analysis is that clause 7.9 makes no express provision for the date of the valuation of Balwyn North. Any contrary intention must be implied from the reading of the Will as a whole, particularly clause 7.
The reliance by the plaintiff on the matters referred to above at [41], are submitted to point to an intention to value Balwyn North at a later date than the date of death of the deceased, and thus to an intention contrary to the application of s 49 of the Wills Act. At the expense of repetition, in summary, those matters are:
(a) Clause 7 as a whole is intended to effect approximate equality between the deceased’s three sons.
(b) In the absence from the Will of a time for Bruce to make his equalisation payment, the only construction of the Will that is consistent with the deceased’s intention to achieve equality is for the valuation to be assessed at the time of Bruce’s payment. If the valuation takes place before or after the payment, then due to a fluctuation in property prices there is a real possibility that Bruce may either pay too much or too little under clause 7.7, thus failing to achieve the deceased’s intention to ensure equality.
(c) In contrast to clause 7.5, which deals with Point Lonsdale and fixes a date for determination of its value, clause 7.9 specifies no date. That supports a flexible approach to the determination of value at a time that best achieves equality between the three sons.
(d) The valuation as at the date of the deceased’s death obtained for the purpose of the application for probate, and set out in the Inventory, enables a prediction that the value of Balwyn North will be more than three times the remaining balance, so that it was clear from the outset that clause 7.7 would be applicable and Bruce would have to make an equalisation payment to the Estate of the difference between the value of Balwyn North and on-third of the remaining balance.
(e) The calculation of the remaining balance, which is necessary to the determination of that equality, can only be achieved after the deceased’s assets have been got in and her debts and liabilities have been paid. Until then no final determination of the comparison between the remaining balance and three times the value of Balwyn North can be made.
(f) To give effect to the deceased’s intention to achieve equality, a valuation at a date later than her death, so as to take into account the calculation of the remaining balance and either depreciation or appreciation of the value of Balwyn North, would further that intention.
However, on the other side of the ledger, so to speak, the defendant argues (see above [63]-[71]), in summary, that the deceased intended a valuation of the two properties at the same time, an intention consistent with s 49 of the Wills Act, because:
(a) The inclusion of a date for valuation of Point Lonsdale in clause 7.5 is explicable by the deceased’s desire to insulate the plaintiff from any unrealised capital gains tax liability that might be said to be ‘embedded’ in the value of Point Lonsdale.
(b) Both Point Lonsdale and Balwyn North form part of the ‘remaining balance’ of the Estate. They cannot be considered in isolation and should be treated consistently for the purposes of calculating their values as a part of the remaining balance. For this reason, it would distort the ultimate distribution of the Estate if one property was valued at a particular time, and the other was valued at another time
(c) In the current circumstances, where the values of both properties have risen,[57] the valuation of Balwyn North at the date of distribution or equalisation payment will distort the ultimate distribution of the Estate so that the plaintiff has the benefit of the increase in value of Point Lonsdale and the benefit of the later valuation of Balwyn North, which would increase the size of the remaining balance. Bruce is correspondingly disadvantaged. This is a result that defies the evident intention of the deceased to achieve approximate equality in the distribution of her estate.
[57]There is an assumption that the value of Point Lonsdale has risen, although there is no evidence of that. The defendant submitted that the deceased should be taken to be aware of the generally appreciating value of property in Melbourne compared with Point Lonsdale.
The arguments appear at first to be finely balanced. But, one might ask rhetorically, is it plausible that a time for the valuation of North Balwyn was deliberately left out of clause 7.9 so as to allow a flexible approach for the time of valuation, so as to achieve approximate equality? Hardly. Also, one might ask rhetorically, is it plausible that the deceased foresaw rising prices of property (so the properties must be valued at the same time to achieve approximate equality)? Each is mere supposition with the benefit of hindsight. To attribute to the deceased and her solicitor who drafted the Will such foresight is most unlikely and the arguments are premised on knowledge of the events since the date of death, as they have happened.
Had the two properties’ values remained stable during the administration of the Estate, it would not matter whether the valuations were made at the same time or at different times. By contrast with the benefit to the plaintiff from rising prices impacting a valuation at the date of distribution or payment of the equalisation payment, if the two properties depreciated between the deceased’s date of death and the date of distribution or equalisation payment, then valuing Balwyn North at the later date would partially benefit Bruce to the disadvantage of both the plaintiff and Neil by the equalisation payment being lower. Other results are available where the values of the properties increase or decline differently over time. With the valuation of Point Lonsdale being fixed, it is impossible to achieve perfect equality where property prices are rising or falling. The closest one can get to approximate equality is if the properties are valued at the same time. I agree with the defendant’s submission that it would distort the ultimate distribution of the Estate if one property was valued at a particular time, and the other was valued at another time.
Both parties rely on the fact that the values of both properties are critical to the calculation of the remaining balance, which cannot be accurately and finally calculated until all the assets are got in or quantified and all the debts and liabilities of the deceased and the Estate are paid, or quantified. There is nothing unusual in valuing the estate assets at the time of death, but finally calculating the amounts to be distributed later when the totality of the assets are ‘got in’ and the debts and liabilities are paid. This is a common occurrence and the fact that the final figures might not be known until much later does not give rise to particular difficulty or provide a persuasive reason for finding an intention of the deceased to value Balwyn North at a date later than the date of death. Commonly, in this situation, interim distributions are made (as they have been in this case) and moneys are retained by the executor until the final calculations can be made.
The contention that the absence from the Will of a time for Bruce’s equalisation payment is consistent with the deceased’s intention to achieve equality by the valuation being assessed at the time of Bruce’s equalisation payment is a proposition that cuts both ways. It is also consistent with a valuation at the same time as Point Lonsdale is carried out. It is, accordingly, neutral so far as finding the deceased’s intention.
There is nothing capricious or absurd in construing clause 7 as showing no intention contrary to a valuation of Balwyn North at the date of the deceased’s death. In this case, consistency between the dates of valuation of both properties is more likely to have been intended so as to achieve approximate equality between the three sons.
These matters lead me to conclude that no contrary intention to the application of s 49(1) of the Wills Act can be gathered from the terms of the Will. It is only possible to arrive at a contrary intention appearing in the Will by the application of hindsight. I agree with the defendant’s argument.
Does the Will provide a method of calculating the valuation?
Section 49(1)(b) of the Wills Act states as a condition of its application that the will does not provide a method of calculating the valuation. There are two elements of the method of calculating the valuation set out in s 49(1). Clearly a part of the method is provided by the instruction that the value of Balwyn North ‘should be determined by a registered valuer and on terms that would be granted to an arm’s length purchaser from my estate’. The aspect of the method missing from the express terms of the Will is the date of the valuation. The plaintiff contends that the matters that show a contrary intention as summarised above also show the intention of the deceased that the valuation of Balwyn North be as at the date of Bruce’s equalisation payment. For the reasons just given, I am not persuaded that the deceased expressed that intent.
Although clause 7.9 provides a part of the method for the valuation, it does not provide a date from which the valuation is to be calculated. In that sense the method for the valuation of Balwyn North in clause 7.9 of the Will is incomplete and is amenable to the operation of s 49(1) of the Wills Act.
Does the law of Victoria provide a method of calculating the valuation?
Section 49(1)(b) of the Wills Act also states as a condition of its application that the law of Victoria or of another jurisdiction does not provide the method of calculating the valuation.
The plaintiff contends that the deceased’s intention to achieve equality among her children, despite making specific devises of real properties to two of them, is comparable to the principles that guide the interpretation of hotchpot clauses. The headnote of the decision in Re Hillas-Drake states the rule succinctly:
Where a testator has by his will given personal estate to be divided in shares among his children or issue, and has directed that any advances which he has given to or settled on the beneficiaries during his lifetime are, in ascertaining their shares of his estate, to be brought into hotchpot, it is a general rule of administration, whether in court or out of court, settled by practice over a long course of years, that, in ascertaining the shares of the beneficiaries, the distributable assets are to be valued as at the date of distribution and not at the date of the testator’s death, and that advanced beneficiaries are to be debited with interest at four per cent. per annum on the amount of their advances down to the date of distribution. This rule should always be observed, unless there is an express direction in the willto the contrary.[58]
[58][1944] 1Ch 235. There is some controversy as to this rule, referred to in the decision itself and in the learned texts. But as the plaintiff pointed out, the leading textbooks are now generally agreed that, in the absence of contrary directions in the will, the estate assets are to be valued at the date of distribution for the purpose of the hotchpot: see Jarman on Wills (8th ed, 1951), [1161]; Theobald on Wills (18th ed, 2016), [34-051]; Williams, Mortimer & Sunnucks on Executors, Administration and Probate (2018), [65-11].
The justification for this rule is, as Simonds J explained in Re Hillas-Drake:
… since the object of a hotch-pot provision is to ensure equality between beneficiaries, it is relevant to ask what date for valuation will serve that end. If I take the date of distribution as the proper date, I have no difficulty in securing equality. [an example is given]… If, on the other hand, I take the date of the testator's death as the proper date, and value as at that date the assets which are available for distribution, I do not necessarily secure equality. It is, indeed, almost certain that I shall obtain inequality in greater or less degree.[59]
[59][1944] 1Ch 235, 238.
Such comparability was also considered by Chesterman J in Otto v Redhead, but there the Will in question directed a valuation at a date other than distribution and was given effect. There was no scope for argument. The division of assets to achieve equality was to occur on the basis of a valuation carried out as at the date of death.[60]
[60]Otto v Redhead, [13].
The justification of the rule as explained by Simonds J would be equally applicable in this case, despite the absence of a hotchpot clause, but for one matter. That is, the terms of clause 7.5 that, it is agreed rightly between the parties, requires the valuation of Point Lonsdale as at the date of the deceased’s death. The justification for the application by analogy of the rule applicable to hotchpot clauses fades away. It would be a perversion of the rule to value Point Lonsdale at the date of death and Balwyn North at the date of distribution or payment of the equalization amount, unless there were a provision in the Will which enabled some allocation of gains or losses by reason of the different dates of valuation that restored the aimed for equality.
In Otto v Redhead there was a form of equalization provision that enabled profits made after the date of death by an entity going to one son to be brought into account where the entity given to the other son had not made comparable profits. There is no such provision in the Will in this case.
I agree with the defendant’s submission that it would distort the ultimate distribution of the Estate if one property was valued at a particular time, and the other was valued at another time. The gifts of the two properties in specie cannot be considered in isolation one from the other. The value of Balwyn North is relevant to both the gift to Bruce, but also to the gift to the plaintiff and the gift to Neil, as it affects the value of the remaining balance for the purposes of working out the final distribution of the residue.
The result is that there is no basis to exclude the operation of s 49 (1) of the Wills Act and Balwyn North should be valued as at the deceased’s date of death.
Conclusion
For the reasons above given the questions will be answered as follows:
(a) Question 1:
For the purpose of clauses 7.4, 7.5 and 7.10 of the will of the deceased dated 12 November 2013, the value of the Point Lonsdale property should be determined as at the date of death of the deceased by a registered valuer on terms that would be granted to an arm’s length purchaser from the Estate less an amount equal to the capital gains tax liability the Estate would pay if the property were sold by the Estate as at the date of the deceased’s death.
(b) Question 2:
For the purposes of clauses 7.8, 7.9 and 7.10 of the will of the deceased dated 12 November 2013, the value of the Balwyn North property should be determined by a registered valuer and on terms that would be granted to an arm’s length purchaser from the Estate as at the date of death of the deceased.
It seems to me that the costs should follow the event, but I will give the parties an opportunity to address that question. I will ask the parties to consult and submit draft orders to give effect to these reasons.
2
4
0