Super tax equalisation clauses in wills — devil is in the detail
Many tax and estate planning specialists argue that tax equalisation provisions in wills generally, and particularly in relation to superannuation death benefit payments, are rarely appropriate.
The case of Todd v Todd & Ors  SASC 36 further reinforces a number of the issues in this regard.
Relevantly, a key clause in the will provided that the assets be "divided between (the beneficiaries) in such a manner so as to ensure that as at the finalisation of the administration of my estate all of my said children have received an equal value of bequests under this my will".
In question was whether the accumulated (latent) CGT liability attached to each of the key assets should be taken into account in determining the value of the individual bequests or alternatively ignored.
The will itself was unclear on the approach to take and the court confirmed the cases were similarly confused, and indeed possibly in conflict.
The court did however confirm the following general principles and while the focus was on the tax payable in relation to assets owned individually by the willmaker, the observations are arguably also very relevant by analogy to any death benefit payment from a superannuation fund:
- Whether the incidence of CGT should be taken into account in valuing a particular asset varies according to the circumstances of the case, including the method of valuation applied to the particular asset, the likelihood or otherwise of that asset being realised in the foreseeable future, the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to that asset.
- If the court orders the sale of an asset, or is satisfied that a sale of it is inevitable, or would probably occur in the near future, or if the asset is 1 which was acquired solely as an investment and with a view to its ultimate sale for profit, then, generally, allowance should be made for any CGT payable upon such a sale in determining the value of that asset for the purpose of the proceedings.
- If none of the circumstances referred to in item 2 above apply to a particular asset, but the court is satisfied that there is a significant risk that the asset will have to be sold in the short to midterm, then the court, whilst not making allowance for the CGT payable on such a sale in determining the value of the asset, may take that risk into account as a relevant factor, the weight to be attributed to that factor varying according to the degree of the risk and the length of the period within which the sale may occur.
- There may be special circumstances in a particular case which, despite the absence of any certainty or even likelihood of a sale of an asset in the foreseeable future, make it appropriate to take the incidence of CGT into account in valuing that asset. In such a case, it may be appropriate to take the CGT into account at its full rate, or at some discounted rate, having regard to the degree of risk of a sale occurring and/or the length of time which is likely to elapse before that occurs. Arguably this last point is a practical example of "The Vibe" principle, popularised in the movie The Castle.
In this case, the court held there was nothing to support an argument that "value" should notionally bring potential future CGT liabilities to account. Furthermore, the will evidenced no intention that the process of ascertaining the equal value of bequests required the taking into account of the future potential taxation liability.
It was also held to be incorrect to say that a property bequeathed to a person in the highest bracket of income tax payable for a given year would have a higher value had it been bequeathed to a person who had nil taxable income.
This is because such a proposition ignores the fact that CGT liability in respect of a property only arises when (and if) that property is disposed of, and only then will the resultant tax payable (if any) be able to be determined.
Practically there are a myriad of reasons why tax equalisation clauses are rarely appropriate, for example:
- Often a client will only want to take into account the tax position in relation to a particular asset (for example, superannuation). This can lead to significant imbalances in relation to other assets in the estate – most classically, a family home which, like superannuation, can often be received tax free by a beneficiary;
- While there are embedded tax attributes in relation to certain assets, there can also be embedded tax attributes with the recipient – for example, if a beneficiary is a non resident at the date they receive the asset, this can trigger a completely different tax outcome as compared to a beneficiary who is an Australian resident. Often these issues will change radically between the date of drafting the will and the date of death;
- Similarly, whether a beneficiary who is a dependant for superannuation purposes is in fact a tax dependant at the date of death can change fundamentally between the date of drafting the will and the date of death (infant children becoming independent adults being an obvious example);
- Where assets are to pass via a testamentary trust, this can cause a wide range of potential tax differentials, many of which may be unknown for a significant period of time, including whether a properly crafted superannuation proceeds trust is created under the will;
- Similarly, to the extent that there are assets held in other, non-superannuation, related entities (for example, family trusts or private companies), there may be a wide range of potential tax ramifications which again may be unknown for a significant period of time;
- The calculations in relation to the net position of each beneficiary can potentially be limitless – for example, additional payments made to 1 beneficiary to compensate for the fact that they received assets that may have a latent tax liability may themselves cause a further tax liability, which then would trigger a further payment, which of itself would cause a further tax liability; and
- Most clauses in this area are also crafted with reference to precise tax provisions at a particular moment in time – there is a material risk that those tax rules will have changed by the time the will actually comes into effect. Indeed, in relation to superannuation, history would suggest that the tax rules are certain to change in the future.
In light of the above difficulties, it is therefore normally preferable to simply set out directions in the memorandum of directions to the trustees of the estate to ensure that they seek specialist advice at the point of administering the will to ensure that the optimal legitimate tax outcome is achieved for the estate (and therefore the underlying beneficiaries) as a whole.
In relation to superannuation death benefits however, this approach would also need to overlay the impact of any binding death benefit nominations.
Matthew Burgess, director, View Legal
Tony Zhang is a journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.
Since joining the Momentum Media team in 2020, Tony has written for a range of its publications including Lawyers Weekly, Adviser Innovation, ifa and SMSF Adviser. He has been full-time on Accountants Daily since September 2021.