By Stuart O’Neill, Special Counsel

A recent decision of the Western Australian Supreme Court has highlighted the care that needs to be taken when drafting provisions in a Will dealing with residential property and the incidence of land tax.

The Court held a property owned by the trustee of a testamentary trust created under a Will was not exempt from land tax because the Will did not specifically grant an individual beneficiary the right to use the property has a place of residence.

In Caratti v Commr of State Revenue (WA) [2017] WASCA 128, the will-maker (the late Mrs Caratti) had left her properties, including her home, to her husband as trustee of a testamentary trust for the benefit of their four children. After her death, Mr Caratti and their son, Michael, continued to occupy the properties as their primary residence.

Under section 22 of the WA Land Tax Assessment Act 2002, private residential property owned by a trustee under a Will is only exempt if the Will identifies an individual as having a right to use the property as a place of residence.

Despite Mrs Caratti’s clear wishes that the trustee of the trust would make the properties available for her husband and children to live in, because the Will did not contain this express right, the Commissioner denied the exemption to the trustee and assessed the trustee for land tax on the property. When Mr Caratti appealed, the Supreme Court upheld the Commissioner’s assessment pursuant to the strict requirements of the Act.

The Queensland position

Under the Queensland Land Tax Act 2010, exemption from land tax for land used as a home is only available to a trustee under a Will where (amongst other things) the land is used as the home of all the beneficiaries of the trust. Mrs Caratti’s properties would appear not to satisfy this requirement either.

Where property is not exempt from land tax, the deceased’s estate (and therefore the residuary beneficiaries) will ordinarily bear the incidence of the tax even if the trustee grants (pursuant to a power contained in the Will) only one beneficiary a right of occupation as the beneficiary’s home.

The position is different where life interests are granted under the Will, or where property is left in the Will to a named beneficiary and the executor applies to the Commissioner for the beneficiary to be assessed for the land tax.

Importantly, any pre-testamentary arrangements, testamentary wishes of the Will-maker, and post-testamentary decisions by a trustee under the Will, are irrelevant to determining whether land tax applies.

Wills must be drafted in strict compliance with the legislation to ensure the desired land tax treatment is achieved.