Land Tax: Caratti v Commissioner of State Revenue [2017] WASCA 128

A recent decision in the Supreme Court of Western Australia shows that pre-testamentary wishes are difficult to prove unless they are expressly provided for under a valid Will. In Caratti, the deceased mother made a decision during her lifetime that her son, and future beneficiary of her estate, could reside at her house for as long as he wished. However, there was no provision of this right in her Will. The consequence was that the deceased’s son was not eligible for an exemption to land tax despite using the property as his place of residence.

Land Tax in Western Australia

A taxpayer is liable for land tax on their real estate in Western Australia. The rate of land tax depends on the aggregate value of the taxpayer’s Western Australian property. The good news is that exemptions do apply and most Western Australian landowners are exempt from land tax for their primary residence.

Another exemption applies where the beneficiary of a deceased’s estate uses the estate property as the beneficiary’s place of residence (“Beneficiary of an Estate Exemption”). Section 22 of the Land Tax Assessment Act 2002 (WA) provides that a private residential property is exempt for an assessment year if, at midnight on 30 June in the previous financial year:

(a)   it is owned by an executor or administrator of a will as trustee; and

(b)   an individual identified in the will:

(i)    is entitled under the will to the property as a tenant for life; or

(ii)   has a right under the will to use the property as a place of residence:

(A)   for as long as he or she wishes; or

(B)   for a fixed or ascertainable period,

whether or not the individual is or may become entitled under the will to ownership of all or part of the property at some future time; and

(c)   the individual uses the property as his or her primary residence.

The decision

The late Mrs Loretta Caratti was the owner of real property (“the property”) in Western Australia. She passed away and pursuant to her Will, the property was to be liquidated as part of her estate and distributed to her four (4) children as tenants in common in equal shares. The taxpayer was the deceased’s husband who was the executor of the deceased’s estate (“Executor”).

The Executor and his son, Mr Michael Caratti, continued to reside at the property. The Commissioner of State Revenue issued land tax liabilities to the Executor once he realized that the land ownership had passed to the estate. The Executor applied for the Beneficiary of an Estate Exemption as his son was a beneficiary of the estate and he was using the Property as his place of residence. At first instance, the Supreme Court found for the Commissioner.

On appeal, the Court of Appeal consisting of Martin CJ, Murphy JA and Beech JA decided that the fundamental issue was the proper construction of the Beneficiary of an Estate Exemption. Their Honours found that section 24(2) of the Trustees Act 1962 (WA)which provides a statutory right for a trustee to retain a residence for a beneficiary’s was irrelevant as the right to use the property as a place of residence had to originate from the Will and there was “no such right under the terms of that instrument”. It held that the Executor was therefore not eligible for the land tax exemption.

Things to consider

If the Will had provided that a beneficiary could use the trust property as a residence, then the next issue for consideration is whether the Executor had a duty to sell the property within a “reasonable time”. It was unusual that the Executor did not attempt to liquidate the property within 12 months from probate as would ordinarily be expected. This issue was not discussed in detail in the appeal and is a relevant matter for an executor to consider if they seek to apply the Beneficiary of an Estate Exemption.

It is crucial for all will makers to expressly provide their intentions in their will, including wishes expressed during the will maker’s lifetime. It is also critical for an executor to be conscious of their duties and obligations when administering an estate, including their duties to revenue authorities.