Classic Texts in Australian and International Taxation Law

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32. Chapter 24 Estate and Gift Duty

24.1. Taxes on capital on the occasion of death are imposed by the Commonwealth and all States of Australia. Taxes on gifts are also imposed by the Commonwealth and all States. The main function of the latter is to support the death taxes: gifts during life put capital out of reach of taxes on capital passing at death. As Table 24.A indicates, revenue from these taxes, while not great, is by no means insignificant especially at the State level. Table 24.B shows the breakdown, for the most recent year for which published figures are available, of Commonwealth estate duty by size of estate.

TABLE 24.A: DEATH AND GIFT DUTIES: REVENUE STATISTICS

	Commonwealth
Year	Estate duty	Gift duty	Estate and gift duties		States:Estate, gift, probate and succession duties (a)		Commonwealth and States: Death and gift duties
	$m	$m	$m	per cent (b)	$m	per cent (c)	$m	per cent (d)
1955–56	19.2	3.3	22.5	1.2	43.2	21.1	65.7	3.2
1960–61	29.6	5.6	35.2	1.2	67.9	18.1	103.0	3.2
1966–67	41.5	7.7	49.2	1.1	106.6	15.8	155.8	3.0
1972–73	66.4	6.9	73.3	0.9	163.7	9.2(e)	237.0	2.3
1973–74	66.0	9.7	75.7	0.7	n.a.	n.a.	n.a.	n.a.
^note ^note

TABLE 24.B: COMMONWEALTH ESTATE DUTY: ASSESSMENTS ISSUED, BY SIZE OF ESTATE, 1972–73

	Estates		Dutiable value		Net duty assessed
Grade of net value of estate	Number	Per cent of total	Amount	Per cent of total	Amount	Per cent of total
$			$ million		$ million
0–19,999	2,265	13.5	8.3	1.4	0.3	0.4
20,000–39,999	7,063	42.2	73.5	12.4	2.2	3.5
40,000–79,999	4,552	27.2	169.6	28.7	9.5	14.8
80,000–119,999	1,489	8.9	113.3	19.2	10.5	16.3
120,000–199,999	876	5.2	104.4	17.7	14.0	21.8
200,000–349,999	358	2.1	65.7	11.1	13.5	21.0
350,000–499,999	72	0.4	22.0	3.7	5.6	8.7
500,000–999,999	49	0.3	23.3	3.9	6.0	9.3
1,000,000 +	10	0.1	10.6	1.8	2.8	4.3
Total	16,734	100.0	590.7	100.0	(a) [?]64.4	100.0
^note ^note

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24.2. Death taxes in Australia have been the subject of inquiry by the Senate Standing Committee on Finance and Government Operations which reported in December 1973. The taxes have been subject to strong criticism in submissions made to the Committee and in comment by members of Parliament, the Press and members of the public. Some of the criticisms concentrate upon the ineffectiveness that afflicts these taxes in their present form because of the narrowness of the base and the possibilities of avoidance by tax-planning techniques. These complaints are perhaps more applicable to the Commonwealth taxes than to some of the State taxes. Other critics urge that hardship is caused, especially to widows and dependent children, by rate structures which have not been adequately adjusted for inflation. A third criticism points to the complexity of a system of separate Commonwealth and State taxes and the considerable costs of administration and compliance that result. It is pointed out too that the revenue yield to the Commonwealth is only a relatively small fraction of its total revenue. Many then draw the simple conclusion that the Commonwealth taxes, if not also the State taxes, should be abolished.

24.3. The Committee acknowledges the force of these criticisms, but disagrees with the conclusion. It believes that the avoidance and hardship difficulties can largely be overcome, and that, in concert with the States, a system of Australian death taxes can be devised which would minimise costs of administration and compliance. Above all it believes that, though death taxes can never be simple taxes and though revenue from them will never be great compared with that from some other taxes, they have an essential role to play in the tax structure considered as a whole.

24.4. A death tax serves two main purposes. It serves to support the progressivity of the tax structure by the indirect means of a progressive levy on wealth once a generation. It also directly limits the growth of large inherited fortunes, a trend that most people would agree to have undesirable social consequences.

24.5. It is helpful, and essential, to the purpose of the income tax largely because much that is income on any wide definition cannot effectively be measured as such— for example, the enjoyment of works of art—though its capitalised value is accessible at death. Furthermore, it would be quite impracticable to distinguish in the income tax between income from savings and income from inherited fortunes. Finally, although the empirical and theoretical evidence if far from conclusive, the consensus is that death taxes are not as detrimental to saving, risk-taking and work effort as are higher marginal rates of income tax.

24.6. An annual wealth tax could in theory do what death taxes do, and the case for such a tax is examined in Chapter 26. The Committee believes a death tax is to be preferred. It is probably more acceptable to a person who has wealth than is a wealth tax: a death tax enables a person to enjoy for his lifetime the benefits of any saving he undertakes. Its disincentive effects are likely to be less than those of a wealth tax. And it has a number of administrative advantages. It is imposed at a time when, for the purpose of administering the estate of a deceased taxpayer, a complete inventory of his assets must be prepared. Valuations are required only once and not on a regular basis, thus ensuring that costs of collecting the tax are kept to a minimum. Also, it is imposed at a time when a significant proportion of assets would in any event be realised in the course of administering the estate. Even in the case of an illiquid asset such as a house, a business or a farm, it can be argued that death is an occasion when beneficiaries ought to take stock to determine whether they can or should hold the assets bequeathed to them.

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1. The Form of a Death Tax

24.7. The rather unpleasant term death tax has been used as a general expression for a wide class of possible taxes imposed at the time of death, some of which have long histories and some of which have been recently proposed:

(a) The present Commonwealth tax and that of most of the States is an estate duty, the distinguishing feature of which is that the tax is levied on the value of the estate as a whole.
(b) Inheritance taxes are those death taxes in which the tax is progressively related to the size not of the estate but of the individual bequests.
(c) Accessions taxes have been proposed in which the tax is related not just to the size of the bequest but to the total of the sums the beneficiary has received over some period of years (or his whole life) from either that testator or all testators and donors.
(d) A still nameless variant—that bequests and gifts be taxed as income in the hands of the recipients—was advocated by the Carter Commission (1966) which adopted the theory of the ‘comprehensive income base’.

24.8. Each of these has advantages and disadvantages by various tests. The schemes under (c) and (d) have prime concern for the situation of the beneficiary, if that be thought right. But each is somewhat arbitrary in the feature of his affairs that is held relevant to the rate of tax levied on his receipt: in one it depends upon his wealth and not at all upon his income and, in the other, it depends upon his income in the year of receipt. The Committee, however, believes that the wishes of the testator should predominate over the circumstances of the beneficiary: he (or she) after all saved the wealth in the estate or at least refrained from dissipating it, and subject to his obligations to his family it is rightly his privilege to dispose of it to whom he wishes with such regard as he wishes to their particular circumstances. Hence in the Committee's view the choice in equity between the four lies between an estate duty and an inheritance tax. They are also administratively the simplest.

24.9. While there is some merit, when taxing the assets of a deceased person, in having regard to the number of his heirs, the Committee prefers an estate duty partly because it is familiar and would be complicated to change but for other reasons as well. The Committee is unconvinced that, under the inheritance tax, the burden ‘falls on the beneficiary’ or that there is need in Australia to encourage wider dispersion of legacies. As regards the first argument, a testator can vary the incidence of the tax by the manner in which he makes his will. A person who wishes to leave a sum of money to a beneficiary can provide in his will that inheritance tax shall be charged not against that sum but against the balance of his estate. Even if express legislation forbids this, it will continue to be open to the testator to make a larger bequest to the beneficiary to compensate for the tax the beneficiary will have to pay. The other argument may have force where lingering traditions of primogeniture lead testators to concentrate their legacies on single heirs, but this is not the tradition in Australia. Furthermore, avoidance is probably more easily controlled under an estate duty, particularly where the law permits the creation of discretionary trusts and other equitable interests.

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II. Proposed Reforms

24.10. After recommending the preservation of a death tax, in the particular form of an estate duty, it is incumbent upon the Committee to demonstrate that it can be rendered a more effective levy than it is at present. It is certainly at present a tax which can be avoided by well-advised persons with ease, and which might almost be said to be paid principally from the estates of those who died unexpectedly or who had failed to attend to their affairs with proper skill. The Committee believes that far-reaching reforms are required, but it also believes that they are possible and that this tax, though inevitably a complex one, can be allotted and perform a significant role in any long-term reforms.

The Tax Base

24.11. The base of an estate duty must at least include that property owned by the deceased at the time of his death which in fact becomes part of his estate administered by his personal representative. However, the objective of taxing all wealth once a generation will require that the base be wider than this actual estate. In some circumstances property should be included in respect of which the deceased had only some of the incidents of ownership and which does not in fact pass to his personal representative. And valuable rights should be included which the deceased had at the time of his death but which ceased on his death or suffered a change on death that diminished their value. The tax base for the present Commonwealth estate duty and, though to a lesser extent, for the death taxes of the States, is too narrow and should be widened.

24.12. The Committee proposes that the base of estate duty should include property the deceased had power to acquire at the time of his death. Thus it would include property the subject of a power of appointment which the deceased had at the time of his death and could have exercised in his own favour. It should also include property in which a deceased person had an interest for life. If it is not included, property in which a life interest is given, for example in favour of a son, may escape tax for a generation: it would not be subject to tax until the death of the son's children who are given the property subject to their father's life interest. It is also proposed that there should be provisions whereby property subject to discretionary trusts will be brought to tax on the death of a beneficiary.

24.13. The base should include valuable rights in the form of an option to acquire property or a right to repayment of a loan or rights attendant on shares which the deceased had at the time of his death even though those rights are, by their terms, extinguished by his death. The option may be so expressed that it lapses on death; the right to recover the loan may be conditional on a personal notice being given which cannot be given after death; the articles of association of the company may provide that the shares will cease to carry certain rights on the death of the shareholder.

24.14. In addition to extensions to the tax base, it will be necessary to ensure that property included in the base is taxed at its true value. The law will need to take account of the various techniques used in ‘estate planning’ to bring about a change in the value of an asset on death so that the value for computing tax liability is far less than its value to the deceased during his life. Associated with this loss of value is an increase in the value of assets already owned by the deceased's heirs. One of the techniques involves a valuable parcel of shares which, by virtue of a provision in the articles of association of the company in which the shares are held, suffers a considerable decrease in value on the death of the shareholder.

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24.15. No extension of the tax base can ensure that all wealth is taxed at least once a generation. The law cannot forbid a grandfather leaving his property to his grandchildren when their parents are still living. Generation-skipping of this kind could be dealt with indirectly by provisions that would make tax on the grandfather's estate depend on the difference in age between himself and his grandchildren, but such provisions would be complicated and could produce some unexpected and probably unwelcome consequences.

24.16. The Committee's detailed proposals for the base of the reformed estate duty are set out in Appendix A to this chapter. The appendix also includes the Committee's proposals in regard to the base of a reformed gift duty which, as indicated in the next paragraph, should be integrated with the estate duty.

Integration of Gift Duty with Estate Duty

24.17. An estate duty must fall short of its objectives unless the tax base is extended to include gifts made by a deceased person during his lifetime. The present Commonwealth estate duty aggregates with the estate gifts made within three years of death. Any gift duty incurred on such gifts is credited against estate duty and will have diminished the estate for estate duty purposes. Gifts made outside the three-year period are in general subject only to gift duty. No tax is payable if a donor makes a gift and the value of the gift (when aggregated with the value of all other gifts he has made in the preceding 18 months and will make in the following 18 months) does not exceed $10,000. Thus, if a donor makes one gift of $10,000 after the end of each successive period of 18 months and no other gifts in between, he can dispose of assets to the value of $120,000 in a period of little more than 18 years, without incurring any liability for gift duty. Even if the gifts are larger and duty is payable, the amount of duty is modest compared with the saving in estate duty that usually results when a deceased survives a gift by three years.

24.18. A further shortcoming of the present Commonwealth gift duty is that many transfers that are, in substance, gifts but are cast in a form falling outside the ambit of the existing tax base manage to escape duty. A simple example is the interest-free loan, repayable at call, made by a husband to a member of his family. In substance, there is a gift of the income forgone by the lender; yet no gift tax is attracted. Partnerships, companies and trusts are commonly used by taxpayers to divert income from themselves to wives and children in circumstances that do not attract duty, even though a gift of the relevant income is in effect being made. Transactions involving companies are used to diminish the property of a donor and increase the property of a donee, again in circumstances attracting no gift duty. Allowing another to use property without any payment for its use does not attract gift duty. Valuable rights such as an option may be allowed to lapse without attracting gift duty.

24.19. In paragraph 24.12 it was stated that the objective of ensuring that wealth is taxed once a generation requires that property subject to a life estate or a discretionary trust should be taxed on the death of the life tenant or of a beneficiary under a discretionary trust. If provisions including such property in the estate duty base are not to be defeated by the assignment or surrender of the life estate or interest during the lifetime of the life tenant or beneficiary, the assignment or surrender must be made to generate a liability to gift duty.

24.20. The Committee proposes a full integration of estate duty and gift duty which will have the effect of treating gifts virtually in all respects in the same way as bequests. There will be only one rate structure. Gifts over life will attract increasing rates

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of duty set by the rate structure, the rate of tax on any gift being determined by the amount of the gift and the value of gifts already made. The rate of tax on bequests will be determined by the amount of bequests and the value of all gifts made during life. Thus an estate will attract the same tax whether it is given away wholly during life, partly during life and partly on death, or wholly on death.

24.21. An effect of the proposed integration will be to take away the incentive offered by the present law to make gifts during life. There seems no compelling reason why gifts during life should be treated more generously than bequests. In other words, gift duty should fully support the estate duty. The testator ought not to be encouraged by tax considerations, or be persuaded by his heirs with tax considerations in mind, to give up the security of wealth during his lifetime.

Deductions in Determining the Estate Duty Base

24.22. The base of the estate duty should be the value of assets included in the base less the amount of all liabilities of the deceased. In the case of contingent liabilities, an estimate should be made and allowed. The Committee considers that, in addition, certain other deductions should be allowed, including funeral expenses incurred in relation to the deceased (subject to a ceiling), and the cost of valuations required in connection with the assessment of duty.

Rate Structure

24.23. The present rate structure of the Commonwealth estate duty uses a ‘slab’ system, that is to say, rates are laid down for different sizes of estates, the appropriate rate being applied to the whole of the estate. An alternative is the ‘slice’ system. Under this system, each successive slice of an estate bears a different and higher rate. Each system involves a progressive rate structure. Only the ‘slice’ system, however, is appropriate to an integrated duty. A ‘slab’ system does not enable the final determination of the amount of tax on a gift.

24.24. Later in this chapter the Committee explains its view that a national system of estate and gift duty should replace the existing sets of Commonwealth and State provisions. And it is in terms of this national system that the rate structure is considered. The Committee does not wish to recommend a particular structure in quantitative terms, but three general comments may be made:

(a) To minimise administration and compliance costs, and relieve some of the very real hardships of the existing provisions, it is essential that there be a substantial minimum exemption limit, in the form of a zero-rated slice. At present prices a zero-rate slice of, say, $60,000 might be suggested.
(b) How high the rate should go on the top slices of large estates depends upon the desired rate of progressivity in the tax system as a whole which, as already suggested in Chapter 4, is very much a matter of prevailing political and social judgments. There is also here an interrelationship with the top marginal rate of income tax. A heavier tax on capital at death could be used to offset a lower tax on income during life, and produce the same overall progressivity. In terms of incentives such a combination might be superior to high lifetime rates and low death rates, since a man might save more to enjoy more possessions in his lifetime.
(c) In setting the rate, regard should be paid to the effect that integration of death and gift duties will have on smaller estates. For example, a rate equal to the combined New South Wales death and Commonwealth estate duty rates could well result in more tax being imposed on smaller estates than at present,

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due to the widened base. Regard should also be paid to the fact that the reforms to the tax base recommended in Appendix A will result in property being brought to tax more frequently than at present. And it must be borne in mind that the occasion of a gift or death will be a deemed disposal for capital gains tax purposes. The total tax liability on death may thus be considerable if the integrated tax is set at a high rate.

24.25. The Committee does not believe that the rate system should favour lifetime giving against bequeathing property on death. Some of the advantages of lifetime giving under the present system were explained in paragraph 24.17. Except for the effect of the annual exemption of a fairly modest amount recommended by the Committee, these advantages will no longer obtain under the proposed rate structure, provided that gifts are grossed up when duty is to be paid by the donor. The term ‘grossing up’ in this context means that duty is payable on an amount which includes the duty itself. Suppose, for example, that a person makes a gift of $1,400 and the rate of duty is 30 per cent. Under grossing up, duty (of $600) is payable on $2,000—the amount required to produce a net-of-tax figure of $1,400.

24.26. An estate duty is levied on the whole of the estate and then paid out of the estate, leaving a balance which passes to the beneficiaries. There is a want of equivalence between such a levy and a levy of gift duty which involves the application of the appropriate rate to the amount of the gift and the payment of the duty out of the other assets of the donor. To ensure an equivalence, the Committee proposes that where the gift duty is to be paid by the donor, the levy of gift duty should involve the application of the appropriate rate to the amount of the gift grossed up by the amount of the duty. For the purpose of determining tax on subsequent gifts, the gift must be treated as a gift of the grossed up amount—in the illustration given in the previous paragraph an amount of $2,000.

24.27. Even when, under the present law, there is some integration of estate and gift duties through a gift made shortly before death being brought back into the estate for the purpose of estate duty, there is still an advantage in lifetime giving, for the gift brought back is not grossed up by the amount of gift duty paid. This is illustrated in Appendix B to this chapter.

24.28. Where payment of duty is sought from the donee, equivalence with estate duty requires that gift duty, at the donor's rate, be levied on the amount of the gift. For the purpose of determining the tax on subsequent gifts by the donor, the amount of the gift should be the actual gift.

Concessions for Dependants

24.29. Two arguments suggest a case for special treatment of the surviving spouse's share of an estate. First, a husband has a moral and legal obligation to provide for his widow. Indeed, it might be said, in justice, that the support she has given him during his life has had its share in the creation of the property left to her by her husband. Secondly, if the purpose of an estate duty be to tax wealth once a generation, it is logical that property passing on death between spouses should be exempt.

24.30. The Committee agrees that there should be special treatment but would not recommend complete exemption. Complete exemption would be exceedingly generous in the case of large estates passing to a surviving spouse. In addition, it would open up avenues for abuses which would give rise to inequity. For example, a testator might leave half his property to his wife and half to his children. The half left

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to his wife would be taxed only on her death; but the result would be tax on two estates, each half the original estate, and under a progressive rate structure there could be substantial tax saving. Some planning of this kind will be available even under a partial exemption. The tax planning involved would be defeated in a degree if, notwithstanding the partial exemption, property passing to a spouse were taken into account in determining the rates of tax on property that is not exempt. This, however, could not be done under an integrated system of the kind proposed if the exemption available to a spouse is to be available in relation both to gifts and to bequests. This may be an argument for confining the exemption in favour of spouses to property passing by bequest, a matter discussed below.

24.31. The manner of any relief under an estate duty for a surviving spouse may take the form of an exemption of the bequest received by the spouse or a tax on part only of the bequest received. The initial question is whether the relief for a surviving spouse under the integrated system should be available for both gifts and bequests. If it is available for both, it follows that the exemption should be of a fixed money sum and not a fraction of the property passing to the spouse. Were it the latter, the amount of the exemption could not be determined until death. The Committee prefers, in any event, that the exemption should be of a fixed money sum.

24.32. If the exemption is made available in relation to gifts as well as bequests, there will be a measure of complexity, especially if the exemption in respect of a gift is made optional and any bequest on death is not sufficient to absorb the exemption. There are problems also in the operation of the exemption where the spouse who has received a gift dies or the marriage is dissolved and the donor remarries. There would need to be a separate exemption for each successive legal spouse.

24.33. The Committee is inclined to favour the availability of the spouse exemption in relation to both gifts and bequests. It does not propose that it be available to a de facto wife since, if the spouse exemption is available in relation to gifts during life, it will be impossible to define a de facto spouse in a manner that can be administered.

24.34. The size of the additional exemption for property passing to a spouse needs careful consideration. An amount of the order of $60,000 might be contemplated at today's level of prices, additional to the amount subject to zero rate referred to in paragraph 24.24. If the general exemption and the spouse exemption were each to be $60,000, the total exemption available to a surviving spouse would be $120,000.

24.35. The principal exemption proposed is that in favour of a surviving spouse, but other dependants of the deceased ought to attract some relief as well. The relief in the Committee's view should be based on dependency, not consanguinity. Also, it should be available only in respect of property passing on death: an exemption of a gift made to a dependent young person would provide a tax incentive for lifetime giving of a kind that would be difficult to justify. At present prices an exemption of $1,000 for each full year that a child is below the age of 18 years might be appropriate. The exemption should be available to the widow, to the extent that it is not absorbed on property passing to the child, if the child will be dependent on the widow.

24.36. There is no entirely satisfactory way of defining dependency. Dependency determined by age will fail to deal with many cases—the dependent parent of the deceased, for example. It would probably be best that relief be available where the Commissioner is satisfied, having regard to specified tests, that a beneficiary was dependent on the deceased.

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Other Concessions

24.37. In the Committee's view it is the size of the estate, not its composition, that matters. An estate should not attract special treatment merely because it includes assets of a particular class, such as a house, a farm or superannuation benefits. Such treatment directed towards particular assest distorts resource allocation and discriminates between estates by reference to what may be the fortuitous composition of the estate at the time of death.

24.38. The 1974 amendment to Commonwealth estate duty legislation providing for a limited exemption for an interest in a matrimonial home passing to a surviving spouse runs counter to these principles. Under the new law an interest in a matrimonial home is wholly exempt from tax where the value does not exceed $35,000; and there are shading-out provisions affording some exemption up to a value of $85,000. Curious consequences arise: where, for example, the matrimonial home is valued at $50,000 in an estate of $100,000, the duty concession is worth $4,300; but where the matrimonial home is valued at $35,000 in an estate of $200,000, the concession is worth $16,500. The Committee recommends that the concession in respect of a matrimonial home be withdrawn.

24.39. A claim for special treatment is often made on behalf of the illiquid estate, for example a grazing property or family business. Problems arise where an estate contains a high proportion of assets that cannot be realised easily and cash has to be found to meet the tax liability. These problems will tend to be accentuated in those cases where a liability for payment of capital gains tax also arises on death under the Committee's proposals in relation to capital gains tax. As some protection against forced realisation, provision should be made in the law giving executors a right, where illiquid assets form a significant part of the estate, to spread the payment of at least that portion of duty relating to such assets. The spreading of payment of duty in this way, permitted in a number of overseas countries, would be subject to interest and be limited to a specific period, say up to five years. Alternatively, the law could provide that the Commissioner shall extend the time of payment in circumstances specifically defined. However, the Committee favours the former alternative.

24.40. A person ought not to be obliged to account for the minor gifts he makes. Nor should he be charged duty in respect of moneys paid for the maintenance, education or support of persons dependent on him. Hence there should be an annual exemption, possibly of the order of $3,000, and an exemption in respect of gifts made by a person for the maintenance, education or support of dependants. The application of gift and estate duties to gifts and bequests to charities is dealt with in Chapter 25.

Adjustments for Inflation

24.41. The Committee believes that a regular review of any rate structure set in the future for an integrated duty is fundamental to its proposals. When the rate of inflation is high, as at present, an annual review might not be too frequent. The effect of inflation in the past has been to cause values to rise and thereby render estates dutiable that would not, when the rate was set, have been liable for duty. In the case of larger estates, it has meant a greater fraction of the estate being taken in duty than would have been taken on the basis of earlier values. It has eroded exemptions. The effect of inflation is further considered in Chapter 6.

24.42. Under an integrated system, it is essential that gifts made at one time can be meaningfully related to gifts made at another time. A gift of $1,000 made now should have the same fiscal consequences, so far as possible, as a gift made ten years hence of

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the sum that is equivalent to $1,000 in present currency. It follows that gifts made and assessed to tax should be regarded as fractions of a slice or slices for the purposes of determining the rate of tax on each subsequent gift. It also follows that any change in the rate structure should be made in relation to existing slices. An adjustment to the rate structure to take account of inflation should widen each slice. A decision to vary the weight of the tax should be reflected in the rates applying to slices. An illustration of adjustments to take account of inflation and to vary the weight of the tax is given in Appendix B to this chapter.

Advance Provision for Payment of Tax

24.43. The prime concern of a person who seeks to provide in advance for payment of estate duty is the assurance that a fall in the value of money will not erode the value of this provision. One possibility would be a government issue of bonds whose redemption return is increased by reference to an index of general prices, the increase not being subject to income tax or capital gains tax. If bonds of this kind were more generally available, there would be no cause to introduce a special security offering protection against inflation for an investment intended to provide for payment of estate duty.

24.44. On the assumption that indexed bonds are not generally available, the Committee sees merit in a proposal that special probate bonds, indexed in an appropriate way, be issued. The method of indexation might take the form of the application of an index of general prices. Alternatively, it might be related to the rate structure of the integrated estate and gift duty, the redemption value of a probate bond being increased in conditions of inflation by reference to the change made to the rate structure. This redemption value would be available only on death and only to the extent that the redemption value does not exceed the estate duty payable. Where this redemption is available, the bonds would be included in the deceased's estate at that value. The bonds would carry interest at a lower rate than non-indexed government securities.

24.45. Probate bonds could be confined to the function envisaged for them if the special redemption value is available solely for the payment of duty in the estate of the original investor. Redemption for any other purpose would involve repayment only of the original investment.

24.46. There will be a nominal gain in the value of the bond due to the indexation applied to it. The element of nominal gain might, it is true, be obscured by the method of indexation that involves changes in the rate structure of the integrated estate and gift duty; but it would be evident if indexation by reference to general prices were used. The Committee's proposal to tax a fraction only of capital gains is intended to go some way towards excluding from tax gains that are only nominal, an objective which it is administratively impossible to achieve generally in any precise fashion. In the present context the objective can be achieved precisely by excluding from capital gains tax the nominal gain on the deemed realisation of a probate bond on death. The Committee recommends that the nominal gain be exempt from capital gains tax and from income tax.

Quick-succession Relief

24.47. Quick-succession relief is intended to lessen the impact of estate duty in circumstances involving property passing as a result of two or more deaths within a short period. Extensions of the tax base proposed by the Committee will increase the

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number of occasions where property is brought to tax. In the result there may be a need for more generous relief than is provided at present. The principle adopted by the Committee is that all property should be taxed at least once each generation, but the operation of provisions necessary to ensure this should be mitigated when the result is more frequent tax. The relief should not be so framed that it is available only against the tax on a particular item of property. It would be wrong, for example, to provide relief for the estate of a widow who inherits a house she retains, and to deny relief if the widow sells the house shortly before her death and purchases a home unit and shares with the proceeds. The relief should take the form of a credit against the tax payable on the death of the person who inherits, and it should be related to the tax that was imposed on the inherited property on the occasion of the earlier death.

24.48. Where assets have been the subject of an inheritance and the estate of the person who inherits those assets includes on his death at least an amount equivalent to the value of those assets, a fraction of the tax already paid on the assets inherited should be credited against tax payable on that amount. The credit should be determined by spreading total tax on assets subject to tax over those assets. The whole of the tax should be available for credit where the death occurs within five years of the inheritance. It should be scaled down by one-tenth for each further year elapsing, so that there would be no relief available where death occurs more than fifteen years after the inheritance. The tax for which credit is available should not exceed the tax on the amount in the estate of the deceased equivalent to the inheritance. Illustrations of the relief are to be found in Appendix B to this chapter.

24.49. Problems arise in determining whether there has been an inheritance requiring the application of the relief provisions. In paragraphs 24.64–24.66 reference is made to cases where what might be called notional estate is subject to estate duty. Quick-succession relief provisions should identify the person who may be treated as inheriting such an estate. Thus the person who becomes absolutely entitled to assets that were the subject of a life estate should be treated as having inherited those assets from the deceased life tenant. Where there is a succession of life tenants, provisions will be necesary to deem inheritances of the assets by each succeeding life tenant.

24.50. Quick-succession relief provisions have generally been thought of in terms of succession on death. The Committee's recommendations for integration of estate and gift duties raise the possibility of applying relief provisions where a gift is followed by a succession on death of the donee. (The possibility of relief provisions applying to a succession followed by a gift or to a series of gifts is excluded from consideration on the ground that the second occasion of transfer is in the discretion of the donor.) The Committee sees no reason in principle why relief should not be available where a gift is followed by a succession. The tax on the gift that may be the subject of credit would be determined by spreading the tax on all gifts in the relevant year of return over gifts made in that year.

24.51. In paragraph 24.42 proposals were made by which in conditions of continuing inflation gifts made at one time can be meaningfully related to gifts made at another. The Committee considers there should be measures to bring about an equivalence in value between tax paid on the inheritance and tax against which relief is allowable. These measures, based on the proposal in paragraph 24.42, are illustrated in Appendix B to this chapter.

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Fall in Value of Assets after Death

24.52. Estate duty may give rise to hardship when an estate includes assets, which, though worth a great deal on the death of the owner, have fallen significantly in value. Under the present law, duty is assessed on the value of assets as at the date of death. The problem does not arise where property is valued for gift duty purposes, as the donor can select the time of the making of the gift and the assets are immediately available to the donee. To permit the sale price of an asset to be substituted for the value of the asset on death raises problems, as the personal representative may be expected to realise those assets that have fallen in value after death and to retain those assets that have risen in value. There is no easy solution to the problem. Nevertheless, it has to be recognised that the present law can produce inequitable results and ought to be modified so that the estate is protected from the impact of tax resulting from the inclusion of a particular asset in the estate the value of which diminishes significantly after death.

24.53. Where the personal representative decides to retain an asset of which he is free to dispose, the operation of the law is not unfair if the asset later falls in value. Likewise, if the personal representative decides to dispose of an asset and fails to avail himself of whatever means are open to him to prove his title to the asset and to free it for realisation, the beneficiary ought not to complain if the asset, when finally realised, produces an amount less than the value on death. But for one reason or another, it may be impossible for the personal representative to realise the asset at the time most advantageous to the estate.

24.54. An alternative valuation date provides one solution, though a solution which is not always satisfactory. If the market is volatile, the value of the relevant asset on the alternative valuation date may be as arbitrary as the value on death. If the alternative date is a considerable time after death, the personal representative is likely to defer the administration of the estate to see if the value of the estate falls. The calculation of capital gains tax payable on death will be complicated where an alternative valuation date is allowed. An alternative valuation date could not be available in relation to stock or to other assets of a business which change as the business is conducted. An option to elect for valuation on an alternative valuation date would have to be limited to assets that are not subject to frequent change: these would include real estate, shares listed on a recognised stock exchange and significant holdings in companies whose shares are not so listed and whose affairs are not conducted between the date of death and the alternative valuation date so as to produce a reduction in the worth of the holding.

24.55. Another proposal considered by the Committee is a rule that the tax payable in respect of any asset in an estate of a deceased person be limited to the net amount received on realisation of the asset within three years of death or within such longer period as the Commissioner may approve. To determine the tax payable in respect of any asset, the total tax payable on the whole estate would be apportioned between the assets in the estate on the basis of the values of the assets on death. The rule would be limited to the kinds of assets described in the previous paragraph, and the realisation principles outlined in paragraph 24.58 would apply. The rule avoids the problems of recalculating capital gains tax payable on death which an alternative valuation date involves.

24.56. Nevertheless, of the two proposals the Committee favours an alternative valuation date and recommends its adoption.

24.57. The alternative valuation date should be the first anniversary of the date of death. The onus of electing for valuation on the alternative valuation date should rest

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on the legal personal representative. Where the legal personal representative elects, all real estate, shares in listed companies and substantial holdings in unlisted companies of the estate should be revalued.

24.58. Where an asset is realised during the twelve months following death in an arm's length transaction, the net proceeds of the realisation should be deemed to be the value of the asset on the alternative valuation date. In determining the realised value of an asset, the cost of realisation should be deducted from the proceeds of realisation. If a realisation during the twelve months following death is not an arm's length transaction, the Commissioner should have power to substitute, for the actual proceeds, the proceeds that might have been expected on a sale conducted at arm's length. There will be problems where the asset has changed in some way between death and realisation, and account will need to be taken of improvements and changes made to property. But these problems should not be insurmountable.

24.59. The amount of a gift for purposes of duty should be determined by valuation at the date of the gift, irrespective of what happens subsequently.

Valuation of Assets

24.60. The Committee has given consideration to the methods currently used in Australia in valuing assets for estate and gift tax purposes, and in Appendix A to this chapter rules are suggested for valuing particular assets. Section 16A of the Estate Duty Assessment Act (which contains provisions relating to the valuation of shares) should be repealed. It should be replaced by a provision enabling a person valuing shares in a company to take into account, in an appropriate case, the net value of the assets of the company on the date at which the valuation is made.

Jurisdiction of Integrated Estate and Gift Duty

24.61. The base of an estate and gift duty should include the real and personal property, wherever situated, of a deceased person or donor domiciled in Australia, and such of the real and personal property of a deceased person or donor domiciled outside Australia as is situated in Australia. Domicile, in broad terms, depends on where a person intends to reside permanently. In the case of a married woman, however, it depends on the domicile of her husband and this may be thought to make it less appropriate than residence as the basis of jurisdiction. However, domicile has a number of distinct advantages over residence. In other countries domicile is generally preferred and it will therefore assist in preventing double taxation problems if Australia retains domicile. Domicile is more difficult to change than residence and the retention of domicile will protect the Revenue against a change in place of living made to avoid Australian tax. The position of the married woman could perhaps be accommodated by allowing an exemption in respect of property outside Australia if a married woman has for a period of years before gift or death been ordinarily resident outside Australia.

24.62. In the past, reliance has been placed on the commom law rules to determine the situs of property. These rules largely depend on considerations of convenience and are not always appropriate in a taxation concept and sometimes permit avoidance. The Committee recommends that detailed rules be adopted. These rules are discussed in Appendix C to this chapter.

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24.63. Where property is situated outside Australia and the law of that place has a gift or death tax, the amount of any such tax which is imposed in relation to that property on a donor or deceased estate should be allowed as a credit against any Australian gift or estate tax which is imposed in relation to that property on that same person, the credit being limited to the amount of the Australian tax.

Incidence of Integrated Estate and Gift Duty

24.64. Since the base of the estate duty will include property not actually owned by the deceased at his death, it would be unfair to require that the whole estate duty be paid out of the property actually owned by the deceased which passes to his personal representative. The appropriate general principle is that duty should be apportioned between the actual estate and each item in what might be called the notional estate; and the personal representative and the Commissioner should, in respect of the duty attributable to the notional estate, have rights of recovery such that duty will fall on the person who might be said to be the beneficiary in that estate.

24.65. The application of the principle will be clear enough where the assets of a trust in which the deceased had a life interest are treated as part of his estate. Duty will be recoverable from the trustee. It will also be clear enough where assets over which the deceased had a general power of appointment that lapsed at his death are treated as part of his estate. Duty will be recoverable from the person who is or becomes owner in default of appointment. Where, however, shares are included in the estate at the value they would have had if rights attaching to them had not ceased on death, it may be difficult to identify the relevant property and the person who may be said to be the beneficiary. If ultimate liability to duty is to fall in any case on some person other than the personal representative, there should be a specific provision determining the incidence of duty.

24.66. Where a gift is made, the donor and the donee should have the choice as to who will pay any tax that may be attracted by the gift and an election should be made when the duty return is lodged by the donor. If the donor elects to bear the tax and the Commissioner is unable to recover the tax payable by the donor, he should have the right to assess the donee; conversely, if the donee elects and the Commissioner is unable to recover, he should be able to assess the donor. Where the tax base is extended in accordance with Appendix A to include deemed gifts, there should be a provision, wherever possible, identifying the donee.

24.67. Where the duty is assessed against the donor, then, as indicated in paragraphs 24.25–24.26, the gift must be grossed up by the amount of the duty. Where the duty is assessed against the donee, the tax should be assessed on the gift at the donor's rate. Neither a donor nor a donee who has paid tax should have any right to reimbursement from the other.

24.68. Where the legal personal representative is not resident in Australia and has no assets in Australia, it may be impossible under the present law for duty to be recovered because of the rule that the revenue laws of one country will not be enforced by another. This rule has been exploited in the past to the detriment of the Revenue, and the Committee recommends that steps be taken to prevent, as far as possible, its exploitation in the future. Where the Commissioner is otherwise unable to recover duty, each beneficiary should become personally liable for the whole of the duty up to the limit of the value of the property received by the beneficiary and interest should accrue on the unpaid tax. The legislation giving effect to this rule should be widely drawn.

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Assessment Procedures

24.69. Details of gifts made in each income tax year should form part of the annual income tax return, at least to the extent that gifts made in that year exceed the annual exemption recommended in paragraph 24.40. Gift duty assessments would be made on the basis of the details thus shown in income tax returns.

24.70. Procedures on objections and appeals from assessments for estate duty and gift duty should be the same as those for objections and appeals against income tax assessments.

A National Estate and Gift Duty

24.71. Criticism of the present death taxes on grounds of the complexity of separate Commonwealth and State taxes and the considerable costs in administration and compliance that result has force. A national estate and gift duty system, administered by one authority, is clearly desirable.

24.72. A national system could be achieved by the Commonwealth and the States each enacting uniform legislation which would be administered by the Commonwealth. The Commonwealth would also enact uniform legislation to apply, in addition to its legislation for the country as a whole, in the Commonwealth Territories. Under such a national system, there would be a set of rates for the whole country under the principal Commonwealth legislation, and there might be a different set of rates in each of the States and Territories. The jurisdiction of the legislation of the States and Territories would depend on the domicile of deceased persons and donors within the State or Territory and on property within the State or Territory of donors and deceased persons domiciled outside Australia.

24.73. The obstacles to the achievement of such a national system are the limited constitutional powers of the States and the difficulties of obtaining uniform legislative action by the Commonwealth and the States. If the constitutional powers of the States are extended, there will remain the difficulty of obtaining uniform action.

24.74. A satisfactory national system in present circumstances can only be achieved by a single piece of legislation enacted by the Commonwealth. State shares of the revenue raised by the Commonwealth would be distributed to the States, the shares being determined by reference to the domicile of deceased persons and donors within the State and property within the State of deceased persons and donors domiciled outside Australia. These shares need not be less than the revenue currently raised or which it may be proposed to raise by the State taxes displaced.

24.75. The Committee would not wish the Commonwealth to vacate the field of estate and gift taxation in favour of the States. It is true that if the powers of the States were extended it would be possible to have a national system which involves uniform legislation by the States, by the Commonwealth in relation to the Commonwealth Territories, but not by the Commonwealth for the country as a whole. The Committee however considers that taxes in this area have a necessary role to play in the overall Commonwealth tax structure.

24.76. In the event of the Committee's recommendations for a national scheme being adopted, it would be necessary to establish a system of transitional provisions for the orderly introduction of that scheme.

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33. Chapter 24: Appendix A: The Base of an Integrated Estate and Gift Duty

24.A1. In this appendix the term ‘estate duty’ is used to refer to the tax that may be imposed in relation to the estate of the taxpayer on his death and the term ‘gift duty’ is used to refer to the tax that may be imposed on a disposition of property by a taxpayer made during his life. The Committee has recommended that gift duty and estate duty be fully integrated. It follows that the base for each should correspond as closely as possible.

24.A2. One of the inequities of the present Commonwealth estate and gift duties is that it is relatively easy so to arrange one's affairs that the tax is reduced to a small amount or avoided completely. The intention of the Committee is that the estate and gift duties recommended by it should have a tax base sufficiently broad to remove this inequity. The Committee concedes that some of its recommendations for defining the tax base are arbitrary to a degree. The very diversity of the legal techniques available to taxpayers who seek to avoid tax does not always allow of a demonstrably fair and consistent approach.

24.A3. All real and personal property owned by a taxpayer at the date of his death should form part of his estate subject to estate duty and, in addition, the base must be broad enough to include the extensions recommended by the Committee.

24.A4. A gift for purposes of gift duty should include the conferring of any property, benefit or advantage on another person otherwise than by will (whether with or without an instrument in writing, and whether as a result of any action or inaction) without consideration in money or money's worth or for a consideration less than the value of the property, benefit or advantage that is the subject of the gift. The extent of the gift should be:

(a) the value of the property, benefit or advantage given, where there is no consideration; or
(b) the amount by which the value of the property, benefit or advantage exceeds the consideration, where the consideration is less than the value of the property, benefit or advantage given.

The definition must be broad enough to cover the extensions to the tax base recommended by the Committee.

I. Powers Over Property

24.A5. Where a taxpayer has power (for example, under a trust, will or contract) to acquire property, whether on or prior to death, such property should be treated as property of the taxpayer. Examples include property the taxpayer can acquire by the exercise of a power of appointment or by the revocation of a trust. It is arguable that such a principle is too wide and that it is unfair to impose a tax in relation to property if the taxpayer has not enjoyed the ownership of the property or at least the yield of income from it. The answer to such an argument is that it was always open to the taxpayer, had he so chosen, to acquire the ownership of the property.

24.A6. A power to appoint property may be described as a power held by a person which enables that person to determine the entitlement to property. The grant of such

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a power may be seen as a disposition of the property to which it relates and may constitute a gift by the grantor. Where the holder of a power can appoint the property to himself, the grant of the power may be seen as a disposition to the holder of the power coupled with a power in the holder to divest himself of the property in favour of any other person who may be considered under the power. Once it is accepted that a power to acquire property must be regarded as equivalent to ownership of the property for the purpose of imposing a tax, then property subject to a power held by a taxpayer, which enables him to appoint to himself, should be treated as property of that taxpayer for duty purposes.

24.A7. The Committee thus sees justification for imposing a tax in relation to the exercise or failure to exercise a power where the holder of the power can appoint to himself. A taxpayer should, however, be regarded as being able to appoint to himself if he can appoint to his creditors, and thereby discharge his debts, or to a company he controls or of which he is a shareholder or debenture-holder, or to a trustee of a trust (including a discretionary trust) in which he has an interest, or to his estate. The provision should extend to the cases where a company or a trustee holds a power and, by way of illustration, the company can appoint to its major shareholder or the trustee can appoint to a person who has power to remove him from office. If a taxpayer can appoint property between, say, three other persons and the relevant instrument provides that the property shall pass to the taxpayer if no appointment is made, the taxpayer should be treated as being able to appoint to himself.

24.A8. Assuming that a taxpayer has a power under which he may appoint to himself, questions arise as to the manner in which tax should be assessed in each of the following cases:

(a) the exercise of the power, whether during life or on death by will;
(b) the relinquishing or disclaimer of the power;
(c) a valid assignment or a similar dealing with the power;
(d) the expiry of the power by effluxion of time, the power not having been exercised; or
(e) the death of the holder of the power, the power not having been exercised.

In case (e), the property should be treated as part of the deceased's dutiable estate. On each of the other occasions, the holder should be deemed to have made a disposition of so much of the property concerned as does not pass to him. Subject to the following exceptions, the disposal should be treated as being a disposal for no consideration. If the holder is required to pay any consideration on the exercise of the power in his own favour, then, in determining the extent of the gift, such consideration ought to be set off against the value of the property. If the holder is paid a sum in consideration of his exercising or failing to exercise the power or his relinquishing or assigning the power, the consideration ought to be set off against the value of the property in question in determining the amount of the gift.

24.A9. Special provisions are required in relation to a settlement of property that is subject to a power in the settlor to appoint the property to himself, or to revoke the settlement except where the revocation is for the purpose of re-settling the property on trusts under which the settlor is not a beneficiary. A power to revoke in these circumstances is a power to appoint property to oneself. The Committee considers that, in determining the amount of the gift involved in making the settlement, one should ignore the power to appoint or revoke. The manner in which the amount subject to tax

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should be determined, at a later time, in any of the circumstances considered in paragraph 24.A8 will require that the amount be limited to any increase in the value of the property between the date on which it was settled and the date of exercise, relinquishment, assignment, expiry or death.

24.A10. A power to appoint income should be treated in the same way as a power to appoint capital. If A can appoint income to himself or to B or C and appoints the relevant income to B, A should be treated as having made a gift to B of the income appointed, irrespective of how the income may be treated under income tax legislation.

24.A11. There remain questions as to powers exercisable jointly or exercisable only with the consent of another person. If one or more of the holders of a power are members of the class of possible beneficiaries, then each such holder should be treated as owning a part of the property that is subject to the power, such part being the whole of the property divided by the number of holders. For example, if A and B hold a power jointly and the possible beneficiaries are A, C and D, the whole of the property subject to the power should be taxed in A's hands and not in those of B; if A and B hold a power jointly and the possible beneficiaries of the power are A, B, C and D, half the property should be taxed in A's hands and half in B's. A more sophisticated approach would be to determine the dominant party, where possible. The United States legislation attempts to do this. However, joint powers that include one of the holders as a possible beneficiary are fairly unusual, and the Committee doubts if the additional complications that would be involved in adopting the United States approach are justified.

24.A12. A consent may be required to the exercise of a power or to the selection of the objects or to both exercise and objects. The power is, in one view, tantamount to a joint power. On the other hand, it may be thought inappropriate to treat a right to withhold consent in the same way as a power under a joint power. The Committee prefers the former view, that a consent to the exercise of a power, where the person whose consent is required is an object of the power, ought to be recognised as equivalent to a power to appoint to oneself. The other view affords opportunity for avoidance.

24.A13. There should be a provision by which, if certain conditions are met, a power to appoint or a power to consent will be disregarded for the purpose of the taxing Act. The conditions would be that a taxpayer who has become the holder, or one of several holders, of a power to appoint or consent has, within a reasonable time after becoming aware of the existence of the power, taken all necessary steps to disclaim the power.

II. Options

24.A14. The Committee proposes that special provisions should apply defining the tax base of the integrated estate and gift duty in relation to options. An option normally involves a right in the option holder to call on the owner of property to which it relates to convey the property to him on the option holder paying the consideration specified in the terms of the option. But for purposes of defining the tax base it should extend to rights that are the same in substance. In the following paragraphs, the term ‘option transaction’ refers to any contract or series of contracts by which a person has a right to acquire property if the completion of the contract (that is, the acquisition of the property) might occur more than six months after the making of the contract.

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24.A15. The application of any special provisions relating to option transactions should be limited. The special provisions should apply only where the parties to the option transaction are related and only where the option transaction is not an ‘ordinary commercial transaction’, by which is meant a transaction that people, dealing at arm's length in a bona fide commercial transaction, would be likely to enter into. The definition of ‘relative’ in section 6 (1) of the Income Tax Assessment Act may be used to determine if parties are related but should be supplemented so that a taxpayer is deemed to be related to a company in which he or his relatives hold shares or debentures and to a trust in which he or his relatives are beneficiaries.

24.A16. An option transaction, in the narrower sense referred to in paragraph 24.A14, may involve a gift by the person whose property is to be acquired if he receives inadequate consideration for the option. It may involve a gift by the person who takes the option if he pays an amount for it greater than its value. An option transaction amounting to a contract to buy property may constitute a gift by one or other of the parties to the contract if the amount agreed to be paid, taking into account the time at which it may be paid, is greater or less than the present value of the property. If it were sought in all cases to determine the amount of the gift at the time an option transaction is entered into, near impossible problems of valuation would arise. In the Committee's view, it is more appropriate to delay the determination until the option transaction is completed by the acquisition of the property or until the rights to acquire the property lapse. If, however, one of the parties dies before completion or lapse, the determination should be made at the time of death.

24.A17. Where property is acquired on completion of the option transaction, any gift will be calculated by comparing the total of amounts paid by the person acquiring the property with the value of the property at that time. Any amount paid before the time of completion should be treated as increased by the application of an appropriate rate of interest. (In calculations in succeeding paragraphs amounts paid for options that are allowed to lapse or are disposed of should be similarly valued.)

24.A18. If a right to acquire property under an option transaction is allowed to lapse by effluxion of time (other than by reason of a legal disability or impediment that prevents the person who has the right to acquire the property from completing the transaction), there will be a gift by the person who had the right to acquire the property. The gift will be (i) any amount by which the value of the property at the time of the lapse exceeds the amount payable by him at that time to acquire the property, plus (ii) the amount, if any, by which the value of what was paid for the option exceeds the amount in (i). The same principles should be applied when an option lapses by reason of the death of the person who had the right to acquire the property.

24.A19. If the person who has the right to acquire property under an option transaction dies and the option does not lapse on his death, the value of the right should be included in his estate plus the amount, if any, by which the value of what he paid for the option exceeds that value. The value of the right will be calculated by reference to the value of the property at the time of death.

24.A20. These principles will need modification if the person who has the right to acquire property under an option transaction disposes of his right. Where the disposition is in the course of a bona fide commercial transaction, a gift will arise if the amount received on the disposition is more or less than the value of the amount paid to acquire the option. Where it is more the gift will have been made by the person who gave the option. Where it is less the gift will have been made by the person who took the option. Thereafter, the special provisions will be inapplicable.

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24.A21. If the disposition is not in the course of a bona fide commercial transaction, the person who takes the option under the disposition will be treated as the person who originally acquired the option under the option transaction though the special provisions should not give rise to a gift by him if he completes the acquisition. They would, however, apply on completion to determine any gift made by the person who gave the option. Where the option lapses the gift by the holder of the option will be the value of the property less the amount payable at that time to acquire the property. If the option does not lapse upon death and the holder dies the value to be included in his estate will be similarly calculated.

24.A22. The disposition of the option referred to in the previous paragraph will involve a gift by the person making the disposition of the amount, if any, by which the value of the amount paid to acquire the option exceeds the value of the option at the time of disposition. There will also be a gift by that person of the amount, if any, by which the value of the option exceeds the amount of the consideration received. There will be a gift by the person who takes the option under the disposition of the amount, if any, by which the consideration given exceeds the value of the option.

24.A23. If the person whose property may be acquired by some other person by virtue of an option transaction dies, the value of the property, less any amounts already paid by that other person, should be included in his estate. Any amounts payable under the option transaction after the death of the owner should not be included.

24.A24. The gift, in each case, should be deemed to have occurred at the time of completion, lapse, disposition or death, and not at the time the option transaction was entered into.

III. Settled Property

24.A25. Under Australian law, it is possible to settle property on trusts lasting for many years. There are rules against lengthy accumulations and perpetuities; but generally there is no difficulty in creating a trust extending over two generations of a family, and sometimes a trust can be effectively extended into the third generation. While such a trust continues, the rights of the beneficiaries to income or to capital can be stated in precise terms (for example, to A for life, then to his children B and C for life and then to such of the children of B and C as live to attain 21 years) or can be left to be determined during the life of the trust under discretionary powers conferred upon the trustees or other persons. A trust can be created to last for upwards of 80 years under which the income is directed to be accumulated, or distributed among a specific class, such as the descendants of A, at the discretion of the trustee. Until the trust comes to an end, no beneficiary has any right, as a rule, to an identifiable part of the trust property, although he may receive some of the income or may expect to receive some of the capital. Clearly, such a device lends itself to tax avoidance.

24.A26. Generally, the creation of a trust, whether by settlement or will or otherwise, gives rise to no difficulties. (One exception is a settlement where the settlor retains an interest; this case is dealt with later in this appendix.) If the trust is created by will, the property subject to the trust will form part of the estate of the deceased; if created during the taxpayer's life, the property will be caught by the gift duty provisions. Thereafter, however, there is no easy solution to the problem of taxing property held in trust.

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Life Estates

24.A27. The Committee has come to the conclusion that, in determining the tax base, property the taxpayer did not own but whose yield of income he had the right to enjoy ought to be included. In the case of a life estate, this means that the corpus supporting the life estate should be taxed as part of the estate of the life tenant on his death. It can be argued that such a principle is too wide, that it is unfair to tax the corpus in the hands of the life tenant since he did not have the right to dispose of the corpus during his life and he was never the owner of it. A fairer solution, in the case of a life estate, might be to tax the life tenant on his death on part of the corpus, such part being the actuarial interest of the life tenant in the corpus when he first became entitled to the life estate. However, this solution would permit part only of the wealth subject to successive life estates held by members of successive generations to be taxed. If the life tenant is taxed on part only of the trust estate on his death, there is unlikely to be anyone else to whom the balance may be appropriately attributed. One cannot tax the persons ultimately entitled to the corpus, as they may not be known. To tax the trustee on the balance, the whole of the estate will be brought to charge but the aggregate of duty payable will usually differ from what would have been payable had the whole estate been taxed in the hands of the life tenant. The actual difference will depend on the rates. Unless a special rate is imposed on trustees, there will be a tax advantage in creating a life estate or a number of life estates. In the Committee's opinion, an estate bequeathed by X to his son for life and then to the son's children, should bear broadly the same duty as the estate would have borne had it been bequeathed by X to his son and had the son then bequeathed it to his children. The Committee recommends that, on the death of a life tenant, the assets supporting his life estate should form part of his dutiable estate and the duty on it should be paid out of those assets.

24.A28. A life tenant may bring his life estate to an end while he is alive by a surrender or a partition or by some other means. It would hardly be fair to tax assets subject to a life estate on the death of a life tenant but not to tax assets where a life tenant has surrendered his interest immediately before his death. In the Committee's opinion, where a life estate is teminated other than by disclaimer the life tenant should be taxed as if he had disposed of the whole of the assets subject to the life estate for a consideration equal to the consideration in fact received by him. The difference between the value of the assets and the consideration should be taxed as a gift.

24.A29. Where a life interest (whether vested or contingent) is disclaimed, there should be no such deemed disposal. A disclaimer is a rejection of an interest by a beneficiary before he takes any benefits to which he may be entitled by virtue of the interest. The Committee considers that this treatment of a disclaimed interest should be extended to a surrender by a beneficiary of an interest where the surrender is made within six months of the date on which the beneficiary receives the first benefits to which he was entitled under the interest. This treatment should only be available if all benefits received by virtue of the interest are repaid to the trustee to be held by the trustee as if the interest had been disclaimed.

24.A30. It seems arbitrary to treat an assignment differently to a surrender or a partition. An assignment, other than by charge, should be treated on the same basis as a surrender or partition; that is to say, the life tenant should be deemed to have disposed of the assets supporting his life estate for a sum equal to the consideration, if any, received by him from the assignee. The difference between the value of the assets and the consideration should be taxed as a gift.

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24.A31. The foregoing principles need to be supported by other rules:

(a) If there is a merger of the life estate by reason of the life tenant acquiring the remainder, the transaction should not attract any duty (unless the consideration paid is greater or less than the value of the remainder). Provided the assets comprising the corpus are still owned by the life tenant on his death, the whole will then be taxed.
(b) Sometimes a life estate is not in the whole of the assets held subject to the trust, but in part only of those assets. Where the part is a fraction of the whole, for example an interest in half the income from the estate for the life of X, the same fraction can be used to determine the extent of any liability for duty when the life tenant dies or deals with his interest in some way. Thus, if X is entitled to half the income from Blackacre during his life, half the value of Blackacre will be taxed on X's death. Sometimes the entitlement is fixed in money terms. For example, a settlor may direct that the first $5,000 of the income derived by the estate each year be paid to his daughter for her life, that half the balance be paid to his son for his life and that the remainder of the income be accumulated. The income from the estate may vary and, in a particular year, be less than $5,000. Where the entitlement is fixed in this way, the fraction A ÷ B should be employed to determine the interest in the corpus of the life tenant on his death or at some earlier point of time, where A is the total income that the life tenant became entitled to receive from the trust over the previous N years (or, if the entitlement has been for a lesser period, then that lesser period) and B is the total income derived by the estate during this period. The period of N years should be reasonably long—say ten years—to enable a clear picture to emerge. In applying the fraction, the income of the trust estate should be determined by principles of trust law rather than income tax law.
(c) For the purpose of applying the foregoing rules, distributions out of corpus should be disregarded unless there is undistributed income in the trust. Where there is undistributed income, applications from corpus should be deemed to be distributions of income to the extent of the amount of the undistributed income.

24.A32. If the assignment or surrender relates to a contingent life interest, that is to say, if a person assigns or surrenders his life interest before the interest vests, the transaction ought not to attract duty under the provisions recommended in paragraphs 24.A28 and 24.A30. If the consideration received on the assignment or surrender is greater or less than the value of the contingent interest at that time, there will be a gift of the difference.

24.A33. Once a life interest has been taxed, no further tax should be payable in relation to any subsequent dealings with the life interest for full consideration or on the death of the life concerned.

24.A34. The recovery of duty from the trustee of an estate in which a life interest is held is considered in paragraphs 24.64–24.65. Where the life tenant has died, it will be necessary to calculate what part of the estate duty is referable to the settled estate. In the Committee's view, the duty applicable to the settled estate should be the average rate of tax charged on the whole of the property owned or deemed to be owned or to have been disposed of by the deceased life tenant on his death. Where the person entitled to the estate next following that of the life tenant is a person in respect of whom an exemption is available, then so much of the exemption as is not absorbed by

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the actual estate of the deceased life tenant should be available against the duty charged on the corpus of the settlement.

Estates for a Term of Years or for the Life of Another Person

24.A35. Regard must be paid also to estates for a term of years and estates for the life of another person. If the legislation fails to deal with these kinds of interest, avenues of avoidance of the life estate provisions will be opened up. For example, instead of settling assets on his daughter (aged 30) for life, a settlor may provide her with an estate for a term of 60 years. Other illustrations are mentioned in the following paragraphs.

24.A36. One approach would be to treat the estate generally in a similar manner to a life estate, that is to say, to deem the relevant assets to have been disposed of by the holder of the estate on the expiration of the term or on an earlier assignment or surrender, but to bring to charge a fraction only of the assets. The fraction would be the ratio of the term of the interest to the life expectancy of the original holder of the interest at the time the interest was created, such fraction not to exceed one. An alternative approach would be to bring to tax the whole of the assets. This the Committee considers too drastic. It prefers that the former approach be adopted. There should be a provision, however, that if successive terms are created which have the effect of giving the holder of the terms a life estate, the whole of the assets will be taxed on the expiration, assignment or surrender of the last such term or on the death of the holder, credit being allowed for any tax paid on the expiration of the earlier terms. The rules mentioned in paragraphs 24.A28–24.A34 in relation to life estates should be applied to interests for terms of years and interests for the life of another.

Discretionary Trusts

24.A37. Discretionary trusts require further consideration. (‘Discretionary trust’ refers to a trust under which the trustee or some other person has a discretion as to how the trust income is to be distributed among persons entitled to be considered.) If

(a) a person is entitled to be considered in the exercise by another person of a discretion in relation to the distribution of income of a trust estate, and
(b) that entitlement ceases for any reason whatsoever (for example, the expiration of a term of years, the assignment of any future entitlement, the exercise of a discretion in relation to corpus or the death of the person entitled), and
(c) the person so entitled has received income as a result of the exercise of the discretion during a specified period of years (N years) preceding the date on which the entitlement ceases,

he should be deemed to have disposed of a fraction of the assets of the discretionary trust, such fraction being: (income received by that person over the N years) ÷ (total income of the discretionary trust during this period). The choice of an appropriate figure for N poses some difficulties. On the one hand, if N is small, say 5, one may expect that elderly beneficiaries will be phased out of income distributions as they advance in years, thus significantly reducing the fraction. But if the figure for N is large, there will be other problems. For example, if N is set at 50 and one person has received all the income from the estate during the last 20 years but little or nothing during the earlier 30 years, then only two-fifths of the assets would be brought to tax on the cessation or assignment of the interest. Conversely, it would seem somewhat unfair to tax the person who received the income during the earlier 30 years on a basis that would bring three-fifths of the value of the assets to tax at a date 20 years after he received the last benefit from the estate. In addition, a large figure for N will create

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administrative difficulties for the trustee and the Revenue. On balance, a smaller figure for N seems preferable, though it has to be recognised that this may encourage the establishment of discretionary trusts. The Committee suggests that a period of ten years be adopted; if the trust subsists for a lesser number of years, N should be equal to that number. For the purpose of determining the total income of the discretionary trust, concepts of trust law rather than income tax law should be employed and any applications from corpus should be deemed to be income to the extent that there is accumulated undistributed income in the trust.

Accumulating Income

24.A38. The foregoing rules do not deal with the case where income is accumulated. There are limitations in most jurisdictions on the extent to which income can be accumulated but some tax-haven countries have deliberately removed such limitations. To the extent that accumulation is permitted, the policy of levying duty at least once each generation is open to defeat since all the recommendations above depend on income being distributed.

24.A39. An estate may include non-income-producing assets such as works of art and land suitable for residential development purposes, or the gross income produced by or derived from an asset may be exactly set off by interest on borrowings or other outgoings. The concepts of income and outgoings can be defined by the relevant trust instrument in such a way that, though there is income for income tax purposes, there is no income for trust law purposes. A trust may have been established by a settlor with a view to deriving gains of a capital rather than of an income nature. The capital gains could be distributed to beneficiaries by means of distributions from time to time out of corpus. If the estate is wholly comprised of such assets, the rules suggested in paragraphs 24.A27–24.A37 will not be effective in relation to that estate.

24.A40. The Committee recommends that where during a relevant period (defined later) the trust has derived income and the income has not been wholly distributed during that period, the assets of the trust, or an appropriate part, should be brought to tax at the end of the relevant period. The fraction will be that part of the estate which is not brought to tax during the relevant period. Assume, for example, that a trustee has a discretion to accumulate the income or to make distributions to A or B during A's life and the trustee has, at all times, distributed one-third of the income to A and accumulated the balance. If A dies during the relevant period, one-third of the estate will be brought to tax on the death of A under the rule in paragraph 24.A37 and, at the end of the relevant period, the remaining two-thirds will be taxed. Alternatively, if A dies after the end of the relevant period, the whole estate will be brought to tax on the expiration of the relevant period. One-third will again be taxed on A's death, but here quick-succession relief will be available.

24.A41. In the case of a trust which, at any time during a relevant period, has held assets belonging to the class of assets described in the first sentence of paragraph 24.A39, the following rules should be applied:

(a) If a beneficiary who is a life tenant or who has an interest for the life of another has had the use or benefit of the asset during the term of his interest, the asset should be taxed on the expiry of his interest, or on a prior dealing, in the same way that it would have been taxed had the beneficiary received income from the asset.
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(b) In any other case, the whole or part of the asset should be brought to tax at the end of the relevant period. Tax should be levied on that part of the asset not brought to tax during the relevant period.

A beneficiary should be regarded as having the use and benefit of an asset if the asset is dealt with or used in accordance with the beneficiary's directions.

24.A42. In the case of trusts existing when any legislation giving effect to these recommendations comes into force, the first relevant period referred to in paragraphs 24.A40–24.A41 should be twenty-five years from date on which the legislation comes into force. In the case of trusts arising after any such legislation comes into force, the first relevant period should be twenty-five years from the date on which the trust comes into existence. The second relevant period would commence on the day following the last day of the first period and so on, each relevant period being twenty-five years. If the trust comes to an end and all the assets are distributed during any such period of twenty-five years, then the relevant period should end on that day. However, the deemed disposal should be part only of the fraction mentioned above, such part being: (number of years and fractions thereof in the relevant period) divided by 25.

24.A43. Rate of duty on assets brought to tax by virtue of the provisions recommended in paragraph 24.A40 and under (b) in paragraph 24.A41 should be set sufficiently high to discourage the use of trusts as a means of avoiding tax.

Special Cases

24.A44. Three cases that would be caught by the foregoing rules require special consideration.

24.A45. The first case relates to the situation where a taxpayer settles property on himself for life with the remainder to other persons. Where the life interest is in the whole of the settled property, the property will be taxed on the death of the settlor or on an earlier dealing by him with the life estate and no tax need be imposed when the settlement is created. If the life interest is not in the whole of the settled property, then the value of that part to which the interest does not relate should be taxed as a gift at the time of the settlement.

24.A46. The second case is where an existing interest is enlarged. For example, assume that A, B and C are each entitled to a third of the income from Blackacre during the life of C and that A and B are entitled to half of Blackacre on the death of C. Under the Committee's recommended rules, the whole or a fraction (greater than a third) of the value of Blackacre would be brought to tax on the death of C, half on the death of A and half on the death of B. The Committee recommends that where

(a) an interest (whether for life, for a term of years or for the life of another or as a potential beneficiary under a discretionary trust) is determined, and
(b) the whole or any part of the corpus is taxed to the person who was the holder of that interest, and
(c) that person is absolutely entitled to the whole or a fraction of the corpus,

the amount of the corpus brought to tax should be limited to the amount by which the corpus deemed to have been disposed of by that person exceeds the amount of corpus to which that person is actually entitled. Under this exception, in the example given above, a third only of Blackacre will be brought to tax on the death of C, and a half on

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each of the deaths of A and B. The exemption ought not to be available if the entitlement to corpus is contingent or can be defeated by some means.

24.A47. The third case is the protective trust. Such trusts are established for the benefit of a beneficiary (herein called the ‘protected beneficiary’) who is unable to manage his affairs properly or may be unduly influenced to his own disadvantage. Generally the trustee has a discretion as to distribution of income. If, on the death of a protected beneficiary who has had a life estate, three-quarters of the income derived during the life of the protected beneficiary has been distributed, three-quarters of the corpus will come to be taxed under the provisions recommended in paragraphs 24.A27 and 24.A31. In the meantime, the accumulated income will have resulted in tax being imposed by virtue of the provisions recommended in paragraph 24.A40. Such treatment, in the Committee's view, is inappropriate. In the case of a protective trust, the whole of the assets subject to the trust should be taxed on the occasion when the interest of the protected beneficiary is taxed under the provisions recommended in paragraph 24.A27. No tax should be imposed prior to this occasion by virtue of the provisions recommended in paragraph 24.A40.

24.A48. In this discussion of limited interests it has been assumed that the holder acquired the interest in circumstances that did not involve his giving any consideration for the interest: he may have acquired the interest under a will or in an inter vivos settlement. If purchased interests are excluded from the proposed provisions, opportunities for tax avoidance will be created. Assume, for example, that a grandfather is near death and is giving instructions in regard to his will. If, by his will, he leaves a life estate in property to his son with remainder to the grandson, estate duty will be paid on the full value of the property on the death of the grandfather and again on the death of the son. If, instead, the son acquires, by purchase, a life estate in the property from the grandfather, and the grandfather leaves a legacy to the son of the amount paid for the life estate and the remainder interest to the grandson, estate duty will be paid on the full value of the property (the value of the remainder plus the amount paid by the son for the life interest) on the death of the grandfather but no estate duty will be paid on the value of the property on the death of the son. In the Committee's view the treatment should not be varied merely because consideration was in fact given.

24.A49. Where a life estate or an estate for the life of another or an interest in a discretionary trust is assigned, the estate or interest will be taxed at that point. No further tax need be charged on the expiry of the estate or interest or on any further dealing with it for adequate consideration.

24.A50. The notion of limited interest is very wide and will include interests, for example that of a lessee of property, which arise in ordinary commercial transactions. It will be necessary to exclude from the operation of the proposed provisions interests that have been acquired by persons dealing with each other at arm's length in ordinary commercial transactions.

IV. Annuities

24.A51. An annuity involves a right to payments of money during the life of the annuitant or for a term of years. Where the annuity is charged on the income to be derived from assets, it may be indistinguishable from a life estate or an estate for a term of years. Clearly it should not be possible to escape the operation of the limited interest provisions by describing rights as an annuity, and the provisions defining

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interests should be wide enough to cover any situation in which a person has a right to income from property.

24.A52. Where the limited interest provisions are not applicable, an annuity will be treated like any other valuable rights. Where a person purchases an annuity, a question arises as to the adequacy of the consideration he has paid. This should be determined and any gift taxed at that point. Particular attention should be paid to the situation where the annuity is purchased from a relative or from an entity in which a relative is interested. Tables of life expectancy give only an average figure for the whole population. They may present a distorted picture in a particular case and should not necessarily determine the value of the annuity.

24.A53. A person may be entitled to an annuity under a will or settlement. Estate duty or gift duty on the property of the deceased or the property settled will of course have been paid. Where the bequest or gift of the annuity takes the form of a direction to the trustee to purchase an annuity for the taxpayer, the annuity will clearly not involve a limited interest. If the direction takes any other form, the annuity may involve such an interest. Thus a direction to pay an annuity from income of the trust, but to have recourse to capital if necessary, should be treated as giving rise to a limited interest.

V. Gift of Services

24.A54. Gifts do not always take the form of a transaction in property. A person who provides his services for the benefit of another is making a gift as effectively as someone who gives a sum of money sufficient to procure the performance of the same services by a third party. The law should not be concerned with the provision of services for the maintenance, support or education of members of a taxpayer's family or with services for philanthropic organisations or, more generally, for those in need. But if, for example, a businessman acts as the full-time managing director of a company and draws an annual salary of $5,000, whereas an appropriate salary, negotiated at arm's length, would be of the order of $20,000, it cannot be disputed that he is making a gift to the shareholders of the company (or to whoever else will receive the benefits) of the difference between what he could obtain and what he is obtaining. The same may be said of comparable services provided to another individual, or to a trust, or to a partnership. If there are no provisions to deal with such cases, there must be some loss of equity, which taxpayers may be more conscious of under a system that allows a much lower annual exemption than the present system.

24.A55. The problem is to identify a gift of services with which the law ought to be concerned. The administration of the tax law cannot depend upon a determination of work value every time the provision of services is involved. It would be convenient to limit the operation of any provisions taxing a gift of services so that they apply only to the benefit of services performed for a related person. The notion of ‘related’ for this purpose would be wide enough to cover cases where one of the parties to the transaction involving services is an entity such as a trust, partnership or company and a relative of the other party has an interest in that entity or where a person has an interest in an entity which is one of the parties and a relative of his has an interest in an entity which is the other party.

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24.A56. Moreover, in view of the exemptions proposed by the Committee in paragraph 24.40, it would be appropriate to limit any provisions so as to apply only to services given to an individual, partnership, trust or company in relation to business operations conducted by that individual, partnership, trust or company.

24.A57. Nevertheless, the question remains whether the administrative costs of applying the provisions, notwithstanding these limitations on their operation, would be warranted. The Committee inclines to the view that the administrative costs in applying provisions extending to gifts of services involving all related persons would not be warranted.

VI. Use of Property

24.A58. Special provisions need to be made regarding the permitted use (as distinct from the right to use for a fixed term which a person may be entitled to) by one person of property owned by another where the former pays inadequate consideration for such use and the use does not fall within the exemption allowed for maintenance and support provided by a taxpayer for members of his family.

24.A59. Where, under a lease or some other legally binding arrangement, an owner gives another a right to use property for a fixed term, it is possible to determine the existence of a gift at the time the lease or arrangement is made. This approach is not appropriate, however, in the case where the right to use can be determined by the owner at will or on notice. The owner of a grazing property may make a gift by allowing a relative, or a partnership in which the relative is a partner, to work the property without any charge by way of rent. A father who buys a house and allows his daughter and son-in-law to have the exclusive use of the house at a nominal rent subject to one month's notice is making a gift no different from the father who gives to his daughter money to pay the rent of a house that she and her husband have leased. Of course, many such gifts will be exempt by reason of the operation of the annual exemption of $3,000.

24.A60. In cases of this latter kind, the gift is the value of the use of the asset during the actual period of use less any amount received by the owner for that use. It should be provided, however, that a gift will be deemed to be made in each year in respect of the use during that year.

24.A61. Where the party who receives the benefit of the use of the property is unrelated to the owner of the property, such use should be excluded from the provisions. The notion of ‘related’, for this purpose, should be wide enough to cover cases where one of the parties to a transaction involving use of property is an entity such as a trust, partnership or company and a relative of the other party has an interest in that entity or where a person has an interest in an entity which is one of the parties and a relative of his has an interest in an entity which is the other party. In addition to the normal exemptions, there should be an exemption where the use of property is allowed as an ordinary act of social or family duty.

24.A62. A gift may be made by a loan of money interest-free or at a low rate of interest. Similar principles should apply to such a gift as are applied to a gift of the use of property. If the loan is for a fixed term and the rate of interest cannot be varied by the lender, it is possible to determine the existence of a gift at the time the loan is made. The amount of the gift will depend on the rate of interest charged and the commercial rate prevailing for a loan of that kind at the time the loan is made.

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24.A63. Where the amount of the loan is repayable on demand or on notice given by the lender or the interest rate can be varied by the lender on notice to the borrower, it should be provided that a gift will be deemed to be made in each year in respect of the period of that year in which the loan subsists. The amount of the gift will depend on the rate of interest in fact charged for the loan and the commercial rate prevailing during the year for a loan of that kind.

24.A64. The exemption recommended in paragraph 24.A61 should apply in relation to all loans of money as well as to the use of property.

VII. Debts

24.A65. A taxpayer may lend a sum of money under a loan agreement which provides that the debt is repayable on demand made orally by the taxpayer or on a written demand signed by the taxpayer or, if no demand is made, by instalments over a long term. No gift duty is payable when the loan is made; however, if the taxpayer dies without having made a demand for repayment, the instalments remaining to be paid are discounted in determining the value of the debt included in the taxpayer's estate. This is a special instance of the kind of option considered in paragraph 24.A18. If the right to call for repayment of a debt is allowed to lapse, the creditor should be deemed to have made a gift equal to the difference between the value of the debt had the right been exercised and the value of the debt after the lapse. Thus, in the case of the loan agreement referred to above, the undiscounted amount of the unpaid instalments will be included in the estate.

24.A66. The release of a recoverable debt for inadequate consideration should constitute a gift of the amount of the debt by the creditor. A debt that becomes unenforceable should be deemed to have been released for no consideration at the time it becomes unenforceable if the Commissioner has reasonable grounds for believing that the debt was allowed by the creditor to become unenforceable in order to avoid gift duty. If, subsequently, the debtor makes a payment to his former creditor which, had the debt not become unenforceable, would have been consideration to which the creditor was entitled on account of the debt, the payment should not be deemed to be a gift by the debtor to the creditor. Any gift deemed to have been made by the creditor when the debt became unenforceable should be reduced by the amount of any such subsequent payment and an appropriate refund of tax allowed.

VIII. Partnerships

24.A67. A partner who receives a return from a partnership which is less than a fair proportion of the profits of the partnership, having regard to his contribution of property and capital, has made gifts to the other partners. The provisions necessary in this context to identify and determine the amount of the gifts are special applications of the general principles that it is proposed should apply to gifts involving the use of property and loans of money for inadequate consideration.

24.A68. It is not uncommon for a partnership agreement to contain a clause that the interest in the partnership of a partner may be acquired by the remaining partners on his retirement or death at a price determined in accordance with the agreement. The provisions regarding options, outlined in paragraphs 24.A14–24.A24, would have some application. In the Committee's view, it is more appropriate that there should be special provisions to govern the effect of such a clause. These special provisions

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would follow the principles adopted in relation to limited interests and those proposed later, in paragraph 24.A89, in regard to shares. They would require that the clause by which the remaining partners are entitled to acquire the interest should be ignored in determining the value of the interest of the retiring or deceased partner.

24.A69. A partnership agreement may require that the value of goodwill should be ignored in fixing the price payable by the remaining partners in respect of the interest of the retiring or deceased partner. There is a strong argument that in the case of a professional partnership goodwill is personal to the retiring or deceased partner so that it adds nothing to the value of his interest in the partnership, whether or not the partnership agreement has any requirement that it be treated as having no value.

IX. Companies

Transfer of Assets to a Company

24.A70. One of the methods of minimising estate duty without incurring gift duty is for the taxpayer to transfer part of his property to a company for full consideration. The purchase price often remains outstanding as a debt due from the company and the amount of the debt is not varied as a consequence of fluctuations in the value of the property transferred. The benefit of an increase in value accrues to the company and thus to the equity shareholders, who commonly are the relatives or dependants of the taxpayer. (Of course this method of minimising duty carries the risk of defeat if the property transferred falls in value.) The taxpayer may effectively control the company, in which event he will continue to control the transferred assets. The taxpayer may procure for himself benefits from the assets during the remainder of his life.

24.A71. If the retention of control of the assets after the transfer and the receipt of benefits from the assets after the transfer are disregarded, there remains a sale of the taxpayer's assets for full consideration. If the purchase moneys are outstanding as a loan, the provisions proposed in paragraphs 24.A62–24.A64 will bring to tax any gift involved in the terms of the loan. There is, in the Committee's view no justification under an integrated estate and gift duty for seeking to trace the assets transferred and to tax at some later time any increase in their value. Tracing is, in any event, a near impossible exercise if it is to be done fairly. The company may not own the assets on the taxpayer's death: they may have been sold and the sale price merged with other moneys of the company, or they may have been given away. And even should the assets be owned by the company at the time of the taxpayer's death, the increase in their value may at least in part be due to improvements made by the company.

24.A72. The question remains whether there is need for special provisions in relation to the retention of control after transfer of assets to a company or the receipt of benefits after such transfers.

Power or Control in Relation to Companies

24.A73. The Committee has recommended that, where a person has power under an agreement or an instrument to acquire property for himself and fails to do so, he ought to be taxed as if he had acquired the property. Such a principle might be thought applicable to the power or control that a taxpayer may have over a company and thus over its assets. The nature of a company is such that its affairs can be controlled in many different ways. The problem is to identify what should be regarded as control for present purposes. It may be possible to spell out in legislation what constitutes control in a particular situation, but taxpayers will no doubt then organise their

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affairs so that they do not appear to have such ‘control’. While it is one matter—often very simple—to recognise the situation in which control of the affairs of a company is effectively held by a taxpayer, it is another matter to describe all such situations in general terms.

24.A74. In any case, it may be questioned whether the control of a company is an appropriate basis for the imposition of a tax any more than the control, for example, that attends the office of a trustee. The mere enjoyment of a power to do or refrain from doing some act is not an appropriate basis. To find any such basis one must look to the benefits that could have been obtained by the taxpayer. This raises its own problems which must now be considered.

Benefits from a Company

24.A75. On the principle asserted by the Committee in relation to settled property, a taxpayer can be deemed to be the owner of an asset actually owned by a company where the taxpayer is entitled to the benefits to be derived from that asset. In the context of shareholding in a company, this principle would involve including only the value of the shares carrying the entitlement. If the principle were to be extended to include benefits the taxpayer could have taken for himself by virtue of the powers he has over the company's affairs, substantial difficulties would arise in applying the principle, especially when the taxpayer does not receive any benefits, or receives some benefits and directs others elsewhere. These difficulties arise because directors and majority shareholders of companies are obliged to act bona fide for the benefit of the company as a whole. These duties must be taken to impose some limitation on the amount of benefits that a taxpayer could have directed to himself, though it is not uncommon for a taxpayer to treat a company he controls as his own and for the other shareholders to accept this situation without complaint. A general rule that a taxpayer who ‘controls’ a company in some defined sense is to be deemed to be entitled to all benefits to be derived from a company's assets cannot be reconciled with basic company law.

24.A76. The Committee does not, therefore, propose that any attempt be made to impose duty by reference to control of a company or the power to take benefits for oneself. Apart from the difficulties mentioned, there would be a major problem under an integrated estate and gift duty of determining the time at which duty should be imposed. No doubt a person relinquishes control or the power to take benefits when he dies, and it is possible to look to the situation that obtained during a period before death to determine what control or power he has relinquished. But a gift duty requires finding a moment of gift during life by the relinquishment of control or power. The Committee is aware that the United Kingdom has legislation that seeks to tax by reference to control and power. But this legislation has been criticised by the Courts and seems rarely to be invoked; moreover, it was introduced at a time when there was no gift duty in that country.

Gifts in Transactions Involving Companies

24.A77. Basically, there are seven ways in which a company may be used by a taxpayer to effect a gift:

(a) The taxpayer may make a gift to a company.
(b) The company may make a gift of part of its assets.
(c) The company may allot shares in its capital, such allotment being at an under-value.
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(d) The rights attaching to issued shares in the capital of the company may be changed.
(e) Rights attaching to issued shares in the company may change.
(f) An obligation may arise to sell shares in a company to specified persons at a price specially determined.
(g) The company may declare and pay dividends on some shares but not on others, so that the income of the company is directed to particular persons.

24.A78. Gift to a company. A taxpayer may make a gift of property to a company. There may be a gift by allowing the company to use property belonging to the taxpayer. There may be a gift arising from an interest-free loan. These gifts should be treated as any other gifts by the taxpayer. However, if the taxpayer has an interest in the company he will, to the extent of his interest, be making a gift to himself and some allowance might be made for his interest in the company in computing the amount of the gift. The Commissioner might be given a discretion in this regard.

24.A79. Gift by a company. The present Commonwealth Gift Duty Act expressly applies to companies (section 11). Gifts for most patriotic or charitable purposes are exempt (section 14, paragraphs (c), (d) and (h)) as are some gifts incurred in connection with the business of a company (section 14, paragraphs (a), (b) and (f)). All other gifts within the present definition of gift are caught and the company bears the tax.

24.A80. Subject to appropriate exemptions, a gift by a company should be taxed if it takes any of the forms of gift already considered in this appendix. Thus there may be a gift of property or a gift by allowing the use of the company's property or a gift by an interest-free loan or a loan at nominal interest. Several questions arise: On whom should the duty be imposed? If the duty is imposed on the company, what should be the rate?

24.A81. If the duty is imposed on the company, it follows that:

(i) The burden of the duty will be borne, in effect, by the shareholders of the company who are the real donors, though some of them may be involuntary ones.
(ii) If the rate structure of gift tax applying to a company is the same as that applying to an individual, a person who has made substantial gifts will be able to obtain a fiscal advantage by arranging his affairs so that subsequent gifts are made by a company (whose shares he may own) of property transferred for full consideration by him to the company for this purpose.
(iii) If the company is incorporated abroad and has no property inside Australia and the gift is made outside Australia, there will be no jurisdiction to tax the gift even though the company may have been set up by a person domiciled in this country to be the medium of his gifts.

Quite apart from the question of fairness raised in (i) or that of enforcement raised in (iii), the policy of an integrated estate and gift duty will be thwarted if taxpayers can make gifts through the medium of a company and the tax is imposed on the company. The use of a series of companies involves gift splitting which will defeat the progressive element in the rate scale. Gift splitting would be prevented if a high flat rate of duty were applied to company gifts. However, this might be thought unfair when one of the real donors is a minority shareholder who is an involuntary party to the gift.

― 472 ―

24.A82. An alternative approach is to deem the gift as being made by the person who controls the company. The problem of identifying control has already been discussed, and the Committee sees little merit in this approach. Fairness requires that the real donors be taxed as if they had made the gift. This is the approach in section 4 (11) of the Victorian Gift Duty Act. By virtue of section 4 (11), a gift will be made if:

(a) the total property or the value of the total property of a person (the donor) is diminished;
(b) the total property or the value of the total property of another person (the donee) is or may be increased; and
(c) such increase is the direct or indirect result of anything done or omitted to be done: (i) by a company of which the donor is a director, shareholder or creditor or in which the donor has a pecuniary interest; or (ii) by a donor as a director, shareholder or creditor of the company.

The Committee favours applying this approach generally. The possibility, under it, of giving some relief to the involuntary donor is considered later in this appendix.

24.A83. Provisions drafted on the Victorian model will not be wide enough to apply to cases where there has not been any actual diminution in the value of the donor's property. If the company allows the use of its property without charge, or lends money interest free, the donor's property will not have diminished in value: it will simply have failed to increase. In a case of this kind there seems no alternative to taxing the company at a deterrent rate.

24.A84. Allotment of shares. The present Commonwealth gift duty provides that an allotment of shares is a disposition of property which may constitute a gift. It has been held that an allotment of shares by a company at an under-value is a gift by the company. It seems to the Committee that this is a case where the duty should be imposed not on the company but on the real donor. Taxing the company is subject to all the objections raised in paragraph 24.A81. The provisions framed on the Victorian model referred to in paragraph 24.A82 should be wide enough to extend not only to an allotment of shares but also to any other kind of company restructure, including a redemption or forfeiture of shares.

24.A85. Variation in share rights. A taxpayer may acquire shares or other interests in a company and, later, the rights attaching to them may be varied in a way that diminishes their value and increases the value of other interests in the company. Where the variation is the result of company action taken during the life of the donor, there does not seem to be any serious problem in taxing the donor. The provisions proposed in paragraph 24.A82, drafted on the Victorian model, should be adequate to ensure that the real donor is taxed.

24.A86. Change in share rights without concurrent company action. A more difficult problem arises where there is a variation in the rights attached to the shares or other interests in a company, either by virtue of company action taken some time previously or by reason of the terms on which the shares were originally taken up. The most common example of this technique is to be found in the so-called ‘Robertson’ case: in that case the shares held by the deceased which were valuable prior to death become shares of little value on death by the operation of a provision in the articles of association of the company. The holder of the valuable shares is sometimes given the power to prevent the change in rights (and hence in value) taking place on his death, the power being exercisable only during his life. Clearly, it will be insufficient to make new provisions solely in relation to the situation where the rights change on death, as

― 473 ―
taxpayers will then arrange matters so that the change occurs at some other time. For example, a person in his fifties could subscribe for shares in a company which entitle him to all of the dividends and the voting power for the next thirty years. These shares will be worth, when they are taken up, slightly less than the value they would have if the rights were not subject to any change. On death, say 25 years later, the shares will be worth considerably less. Moreover, the provision should be wide enough to cover a case where the rights attaching to the shares do not themselves change, but are nonetheless affected in some way so as to diminish their value, for example by a change in the rights attaching to the other shares that increases the value of those other shares.

24.A87. The method proposed by the Committee for dealing with the ‘Robertson’ case is for the relevant shares to be valued on the footing that the rights attaching to them or to other shares have not changed and will not change. Clearly it is not sufficient merely to provide for the inclusion in the deceased's estate of the difference between the value before the change and the value after it. The shares immediately before the change will have been depressed in value by the prospect of the change. The method proposed could be adapted to meet the case where the rights change at some point prior to death by providing that the taxpayer will be deemed to have made a gift of an interest in the shares to the extent of the difference between the value of the shares assessed on the assumption just mentioned and the actual value. There should be an exception where the fall in value is due to a change in rights attaching to shares issued in an ordinary commercial transaction between persons dealing with each other at arm's length.

24.A88. The method proposed will be effective where the change in rights is to occur after death. The shares will be valued at death and on the occasion of any dealing in the shares before death as if they were not subject to the prospect of change.

24.A89. An obligation to sell shares to specified persons at a price specially determined. The Committee has recommended that a life interest should be treated as ownership of the assets supporting the life interest. The interest in a corporate enterprise represented by a share in the enterprise should, in some respects, be treated as part ownership of that enterprise. At least, it is appropriate that restrictions on the transfer of shares and on the price which can be obtained for shares should be ignored. The Committee has taken a similar approach in relation to restrictions on the disposal of an interest in a partnership.

24.A90. The Committee recommends that, where shares subject to restriction on transfer are dealt with by the shareholder or are included in his estate on his death, they should be valued on the assumption that they are not held subject to those restrictions.

24.A91. Declaration of dividends. Under company law it is possible to create and issue shares carrying all kinds of different entitlements to dividends: thus the directors of a company may be given a discretion to pay a dividend on some shares without at the same time paying a dividend on others. Under such a corporate structure, a company may be used by a person to make gifts of income to others (the income being what he himself would have derived, but for the arrangement) without incurring a liability for gift duty under the present Commonwealth legislation. Some State legislation attempts to deal with the problem but not, in the opinion of the Committee, in a wholly satisfactory manner.

― 474 ―

24.A92. Some would claim that arrangements of this kind are justified as constituting legitimate arrangements between members of a family. Such arrangements may be made with an aim that is not solely the reduction of taxation. However, it is apparent that, by this means, income tax payable is being significantly reduced and gifts effected in this way escape duty. If a taxpayer wishes to provide for members of his family, the Committee sees no reason why he should not do this by making a gift to the person concerned or establishing a trust for that person's benefit.

24.A93. The identification of the donor where a differential dividend has been declared raises a number of issues. Under some legislation an endeavour is made to identify the donor as being the person who ‘controls’ the company or who instigates the payment of the dividend. This kind of endeavour carries with it a number of problems already discussed. The better approach, in the Committee's view, is to look to the persons whose property is affected. Where a dividend is paid by a company on shares whose rights to dividend in relation to other shares are not fixed by the company's constitution, or by agreement made when the shares were acquired, and the amount received by a shareholder is less than the amount he would have received had the dividend been paid to all shareholders in proportion to the capital paid by them, the shareholder should be treated as having made a gift of the difference. The notion of ‘fixed by the company's constitution’ may pose difficulties of definition but they should not be insurmountable. Differential dividend rights that serve an evident commercial purpose should be excluded from the operation of the provisions. There will be shareholders who were not consulted when the declaration and payment of the dividend were made, and could not have prevented the declaration and payment. The problem of the involuntary donor will thus arise here as under the Committee's proposals in paragraph 24.A82. Further observations in this regard are made in paragraph 24.A95.

Definition of a ‘Family’ or ‘Closely Controlled’ Company

24.A94. Estate and gift duty legislation in some Australian States and elsewhere seeks to define those companies (identified as ‘family’ or ‘closely controlled’ companies) which are likely to be used by a taxpayer or by a group of taxpayers to avoid or minimise their taxes, and to confine special provisions of the kind discussed in previous paragraphs to transactions involving such companies. These attempts have not achieved their purpose, and the Committee therefore proposes that its recommendations be applied to all companies. It believes that bona fide business transactions need not be prejudiced by its recommendations. In paragraph 24.A93 a specific provision is proposed in regard to ordinary commercial transactions. Specific provisions of this kind may also be helpful in other contexts involving companies: for example, in regard to a gift by allotment of shares.

X. Involuntary Gifts

24.A95. Several references have been made in previous paragraphs to the problem of the ‘involuntary donor’—a person who is treated as having made a gift though he has not intended this result. Most often the problem arises in a transaction involving a company; but there may be other occasions, for example in a transaction involving a partnership. The Committee considers that some relief should be given. The donee only should be liable for the tax, and the gift should not be aggregated with other gifts for the purpose of determining the rate of tax on subsequent gifts by the donor.

― 475 ―

XI. Insurance and Superannuation

24.A96. In the Committee's view, proceeds of life insurance policies and premiums paid in respect of such policies, under an integrated estate and gift duty, should be treated as follows:

(a) Where the deceased owned the policy on his life at the time of death, the whole of any proceeds should be taxed as part of his estate on his death, irrespective of who paid the premiums during his life.
(b) Where the policy was not owned by the deceased at the time of his death, the proceeds should not form part of his estate even though the deceased may have paid some or all of the premiums during his life.
(c) Premiums paid on a policy owned by another person should be treated as gifts and taxed accordingly.

24.A97. The Committee, in paragraph 24.37, rejects any concession for specific assets and in so doing rejects any general concessional treatment of superannuation benefits in relation to estate duty. A lump sum received by a beneficiary on the death of a member of a superannuation scheme should not be treated differently from a lump sum received by a member on retirement which forms part of his estate on death.

24.A98. There may, however, be justification for according special treatment to an annuity or a pension that becomes payable to one spouse on the death of another, whether under a life policy or a superannuation scheme. To tax the actuarial value of the annuity or pension may present liquidity problems and it is relevant that the annuity payments will be subject to income tax in the hands of the surviving spouse. The matter has already been considered in Chapter 21.

XII. Joint Ownership

24.A99. In the Committee's view, the interest of a joint tenant that passes to another joint tenant on the former's death should be included in his estate. Provided it is a beneficial interest, no part of the surviving joint tenant's interest should be included. Thus if husband and wife own a house as joint tenants, half only will be taxed on the death of the first spouse. Any gift that may have been made by the deceased joint tenant of funds applied in acquiring the surviving tenant's interest should be taxed when made and should not affect the manner in which a joint tenancy is taxed on death.

XIII. Exempt Transactions

24.A100. Certain transactions that might conceivably fall within the ambit of the tax base, as defined in earlier paragraphs, should be expressly exempt from tax.

24.A101. A disposition under a void contract should not constitute a gift. Further, where property is re-conveyed to the taxpayer under a void contract, no liability for duty should arise. However, the Committee recognises that these exemptions, if unqualified, could afford opportunity for avoidance. The exemptions should be available only where it is apparent that the contract was not entered into for the purpose of evading or avoiding duty.

24.A102. A contract for the sale of property may give rise to a gift and any such gift should be taxed at the point when the contract is made. There is usually an interval

― 476 ―
between the date of the contract and the date on which the transfer is effected. During this interval the property may have increased in value. In general, a transfer under a contract should not involve a gift of this increase in value. However, an exception to this principle is referred to in paragraph 24.A17.

24.A103. A disposition by a trustee to a beneficiary, whether giving effect to a resulting trust or otherwise, should not give rise to a gift where it is in accordance with the beneficiary's entitlement to the trust property. This exemption should be available in the case where assets are distributed in specie, even though the trust instrument calls for the trust assets to be converted into cash and for the cash to be distributed.

24.A104. Any transaction between a company and an associated company should be exempt from duty. An associated company ought, for this purpose, to be defined sufficiently widely so as at least to include:

(a) a company which is in substance the wholly-owned subsidiary of another company; and
(b) a company which is another wholly-owned subsidiary of the company of which the donor is a wholly-owned subsidiary.

Where there is a minority interest involved at any point, the principle in paragraph 24.A82 should apply.

XIV. Interrelation of Income Tax and Gift Tax

24.A105. In Chapter 7, the Committee has recorded its decision not to include gifts as such in the income tax base. In some circumstances, however, a donor may make a gift and the property given or benefit conferred will be income of the donee under existing principles. The fact that the property or benefit is taxed as income does not preclude the liability of the gift to gift duty. A number of situations may be distinguished:

(a) Where there is an assignment to a donee of royalties or interest, each payment to the assignee should be treated as a gift of the amount of the payment, reduced by the amount of the income tax that would be payable by the donee.
(b) The donor who carries on a business may make an excessive payment to the donee for goods supplied or services rendered by the latter. The gift is the amount by which the payment exceeds the consideration given, diminished by an amount equal to the income tax payable by the donee.
(c) The donor who does not carry on a business may make an excessive payment to the donee for services supplied by the donee. The fairest outcome will follow if the Commissioner does not treat the excess remuneration as income of the donee (assuming that it is open to him to go behind the form of the transaction), in which case the amount of the excess is the gift.
(d) The donor may supply goods for an inadequate price to a donee who carries on a business. In this case the amount by which the value of the goods exceeds the consideration should be treated as a gift, diminished by any income tax assessed against the donee.
(e) The profits distributed to a member of a partnership may exceed a fair return for the partner's contribution of capital or the use of his property. The

― 477 ―
amount of the excess, after deducting the income tax payable by that partner, should be treated as a gift by the other partner.
(f) Differential dividends paid within a company may operate to divert income from one shareholder to another. The gift should be determined in accordance with the rule proposed in paragraphs 24.A91–24.A93, but the deemed gift should be reduced by the amount of the income tax payable by the shareholder receiving the dividend.

Some of the foregoing illustrations are likely to be part of an income splitting arrangement. The Commissioner may, in certain of these cases, have power to deny the reduction in income tax sought by the arrangement. Nevertheless, if the gift tax legislation is to be effective, gifts of the kinds described above must be subjected to gift tax, irrespective of what action the Commissioner may be empowered to take in relation to the gift under income tax legislation.

― 479 ―

34. Chapter 24: Appendix B: Rate Structure

I. Present Duties and Grossing-Up

24.B1. The present Commonwealth estate and gift duties favour lifetime giving as against bequeathing property on death. This may be illustrated as follows. Assume that a taxpayer dies domiciled in Australia and by his will bequeaths all of his estate to persons who are not related to him, and that the value of the estate is $600,000. The total duty payable, ignoring duties at the State level, will be $161,400. Assume that another taxpayer with an estate of $600,000 makes a gift of cash of $400,000, three months before death, to a person not related to him, files a gift duty return, is assessed and pays the duty. Assume also that the value of the remainder of his property does not change between the gift and death. In this case the total duty payable will be $131,683, calculated as follows:

	$
Gift	400,000
Gift duty	105,600
Actual estate after gift	200,000
less Gift duty paid out of estate	105,600
Actual estate on death	94,400
plus Notional estate	400,000
Estate on death	494,400
Gross estate duty	131,683
less Credit for gift duty	105,600
Estate duty liability	26,083

Total estate and gift duty is thus $29,717 less than the duty on the estate of the first taxpayer. There would, of course, be no tax saving in the second case if the notional estate were grossed up, for estate duty purposes, by the amount of gift duty on the gift.

II. Illustration of a Scale of Integrated Duty

24.B2. The Committee does not wish to recommend a particular rate scale for an integrated estate and gift duty. The following rate scale is illustrative only: it was necessary to devise a scale for the purpose of constructing the examples of inflation adjustment and quick-succession relief presented later in this appendix.

Value of estate	Marginal rate
$	per cent
0–60,000	0
60,001–120,000	20
120,001–200,000	30
200,001–300,000	40

The amount of tax that would be imposed by such a scale on estates of varying sizes is as follows:

― 480 ―

Value of estate		Duty
$		$
50,000		nil
100,000	(20% of $40,000)	8,000
150,000	(20% of $60,000 + 30% of $30,000)	21,000
200,000	(20% of $60,000 + 30% of $80,000)	36,000
250,000	(20% of $60,000 + 30% of $80,000 + 40% of $50,000)	56,000

III. Adjusting the Rate Scale

24.B3. In paragraph 24.42, the Committee has indicated the principles that must be followed in changing the rate structure and in relating gifts made at different times. These principles are now illustrated.

24.B4. If it is decided to adjust the rate structure to take account of inflation of say, 10 per cent, each slice would be increased by 10 per cent. The scale in paragraph 24.B2 would become:

Former slice	Rate	New slice
$’000	per cent	$’000
0–60	0	0–66
60–120	20	66–132
120–200	30	132–220
200–300	40	220–330

24.B5. If it is then decided to increase the weight of the tax, the marginal rates would be increased. The scale would then become:

Value of estate	Rate
$’000	per cent
0–66	0
66–132	22
132–220	33
220–330	44

24.B6. If a person makes a gift of $92,000 when the scale in paragraph 24.B2 applies (all previous gifts being exempt), the duty will be $8,000. A gift of $92,000, when grossed up, will represent the whole of the first slice and two-thirds of the second slice. Thus, if the scale is revised in the manner indicated in paragraph 24.B5, the balance of the second slice available to the donor will be one-third, i.e. $22,000. If the donor dies when the scale in paragraph 24.B5 is in force without having made any other taxable gifts and with an estate of $40,000, the estate (assuming no exemptions apply) will attract duty as follows:

	$
22 per cent of $22,000	4,800
33 per cent of $18,000	5,940
	10,740

― 481 ―

It will be noted that the gift duty on any gift is finally determined at the time of the gift and expresses the weight of tax then applying.

IV. Quick-Succession Relief

24.B7. The principles to be followed in granting quick-succession relief are outlined in paragraph 24.48. The application of the principles is illustrated below:

Example 1

Assume that the estate of John Smith, on his death, is made up as follows:

	$
House: value on death	60,000
Shares: value on death	120,000
Moneys on deposit or in hand	30,000
	210,000
less Capital gains tax on death	20,000
Net value of the estate	190,000

Assume that Smith, during his life, gave $50,000 to his wife and made no other non-exempt gifts. Assume that Smith leaves the whole of his estate to his wife. Duty will be assessed on $180,000, i.e. $190,000 less the remaining $10,000 of the wife's exemption (paragraph 24.34), all but $10,000 of the exemption having been used before death. Duty, on the basis of the scale in paragraph 24.B2, will be $30,000. Assume that Mrs Smith dies 3 years later, leaving an estate with a net value of $230,000. The house and share portfolio bequeathed to Mrs Smith may form part of the estate or may have been sold. This will not affect the quick-succession relief. The full relief will be available in that Mrs Smith has died within 5 years of her husband's death and because the estate (net value $230,000) may be assumed to include an amount equivalent to the value of the inherited assets ($190,000). Assume that the scale in paragraph 24.B2 has not been changed and that the whole estate is left to the adult children of Mr and Mrs Smith:

	$
Duty on $230,000	48,000
less Relief	30,000
Duty payable on Mrs Smith's estate	18,000

24.B8. In example 1, it was assumed that no change in the rate scale occurred between the deaths of Mr and Mrs Smith. As indicated in paragraph 24.51, where there has been a change in the width of slices in the rate scale to take account of inflation, the Committee favours measures to bring about an equivalence in value between tax paid on an inheritance and tax against which relief is available. These measures should relate a gift or an estate to slices and parts of slices in the rate scale so that, if the scale has thus varied, so too will the quantum of the gift or estate. The following examples of quick-succession relief illustrate the principle.

Example 2

Assume that, in example 1, Mrs Smith dies exactly 9 years and 1 month after her husband and that, on her death, the rates are those in paragraph 24.B5. The tax on the death of Mr Smith was $30,000, assessed on an estate of $190,000. The equivalent of an estate of $190,000, under the scale in paragraph 24.B5, is one of $205,333, and the

― 482 ―
equivalent tax on such an estate is $38,720. Mrs Smith's estate (net value $230,000) can be assumed to include an amount equivalent to the value of the inherited assets ($205,333), so that the whole of the $38,720 less four-tenths of it (9 complete years having elapsed since the death of Mr Smith) will be available as a credit:

	$
Duty on $230,000	47,960
less Relief (6/10 × $38,720)	23,232
Duty payable on Mrs Smith's estate	24,728

Example 3

Assume that, in example 1, Mr Smith left half his estate to his wife and the other half on trust for his wife during her life and thereafter to his adult son. Assume that Mrs Smith dies 9 years and 1 month after her husband and that, on her death, the rate scale in paragraph 24.B5 applies, that the value of the assets in the trust fund is $120,000, that the value of Mrs Smith's actual estate is $30,000, and that Mrs Smith leaves her actual estate to her adult son. The equivalent of an estate of $95,000 (i.e. ½ × $190,000) under the scale in paragraph 24.B5 is an estate of $104,500, and the equivalent tax on such an estate is $19,965 (i.e. ½ the tax on 2 × $104,500). Mrs Smith's estate will be:

	$
Actual	30,000
plus Life estate	120,000
	150,000
Duty on $150,000	20,460
Duty attributable to trust estate $120,000/$150,000 × $20,460	16,368

The trust estate (net value $120,000) may be assumed to include an amount equivalent to the inherited assets ($104,500)—indeed, unless the trustee has made distributions from corpus it can always be assumed to include such an amount—so that part of the relief will be available:

	$
Duty on the trust estate	16,368
less Relief (6/10 × $19,965)	11,979
Duty payable by the trust estate	4,389

Mrs Smith's actual estate ($30,000) cannot be assumed to include all of the inherited assets ($104,500), so that the relief will be limited as follows:

		$
Duty on Mrs Smith's actual estate	$30,000 × $20,000	4,092
	$150,000
less Relief	(6/10 × $30,000 × $19,965)	3,434
	$104,500
Duty payable on actual estate		658

― 483 ―

35. Chapter 24: Appendix C: Situs of Assets

24.C1. The common law has various technical rules for determining the situs of an item of property. These rules are based largely on considerations of convenience. Some Australian taxing legislation has relied exclusively on the common law rules: the present Estate Duty Assessment Act, for example, contains no rules as to the situs of assets. Other Australian taxing legislation has modified the common law rules to some extent by introducing rules applying in particular situations: section 13 of the Gift Duty Assessment Act contains a number of rules of this sort.

24.C2. In the Committee's view the common law rules are not always appropriate in this context: in certain areas, including speciality debts and interests in trust estates, they have been used in the past to avoid tax. The modifications to the common law rules in the Gift Duty Assessment Act are inadequate in some instances and go too far in others. For example, the Act ignores the problem of determining the situs of a trust estate, yet treats shares in a company incorporated outside Australia as being situated in this country if the shares are listed on a branch register of a company in Australia. Shares in a company incorporated in Australia should be taxable under Australian law irrespective of where the register on which the shares are listed is kept, since the company is substantially dependent on Australian law for its existence and continuance. For the same reason, shares in a company incorporated outside Australia should not be treated as being situated in this country even where they are listed on a register in Australia. In the case of a trust estate, the common law rules, which depend on how far the administration of the trust estate has proceeded, should not be followed. An interest in a trust estate, fully administered or otherwise, ought to be treated as situated in Australia only in so far as any of the assets of the trust estate are, on the relevant date, situated in Australia. In determining the extent of the Australian assets, those liabilities of the trust estate not charged against particular assets should be apportioned over all the assets. The Committee can see no justification for imposing a tax on an asset merely because one or more of the trustees reside in Australia or for making the liability for tax depend on whether or not a trust estate has been fully administered.

24.C3. The rules contained in Article III of the estate duty convention between the United States and Australia provide a reasonable balance. The Committee therefore proposes the following rules, based on that convention:

(a) Immovable property (held otherwise than by way of security) should be deemed to be situated at the place where the land concerned is located.
(b) Tangible movable property (held otherwise than by way of security and other than property for which specific provision is made) and bank or currency notes and other forms of currency recognised as legal tender at the place of issue should be deemed to be situated at the place where that property or currency is located, or, if in transitu, at the place of destination.
(c) Debts (including bonds other than those referred to in (d), bills of exchange and promissory notes, whether negotiable or not), secured or unsecured and whether under seal or not, excluding the forms of indebtedness for which specific provision is made elsewhere in these recommendations, should be deemed to be situated at the place where the debtor is resident. However, if

― 484 ―
the debtor, at the time when the debt is to be valued, has an established place of business in the country in which the owner of the debt was domiciled and the debts were incurred in carrying on the business of that establishment, the debts so incurred should be deemed to be situated in that country.
(d) Bonds, stocks, debentures, and other debts being securities, issued by any government, municipality or public authority should be deemed to be situated at the place where that government, municipality or public authority is located.
(e) Bank accounts should be deemed to be situated at the place where the bank or branch thereof, at which the account was kept, is located.
(f) Moneys, payable under a policy of insurance or under an annuity contract, whether under seal or not, should be deemed to be situated where the policy or annuity contract provides that the moneys are payable; or, if the policy or annuity contract does not provide where the moneys are payable:
- (i) at the place of incorporation, in the case of a company; or
- (ii) at the place of residence of the person by whom the moneys are payable, in any other case.
(g) A partnership should be deemed to be situated at the place where the business of the partnership is carried on, but only to the extent of the partnership business at that place.
(h) Ships and aircraft and shares thereof should be deemed to be situated at the place of registration of the ship or aircraft.
(i) Goodwill as a trade, business or professional asset should be deemed to be situated at the place where the trade, business or profession to which it pertains is carried on.
(j) Patents, trade-marks and designs should be deemed to be situated at the place where they are registered.
(k) Copyright, franchises, and rights or licences to use any copyrighted material, patent, trade-mark or design should be deemed to be situated at the place where the rights arising therefrom are exercisable.
(l) Rights or causes of action ex delicto surviving for the benefit of an estate of a deceased person should be deemed to be situated at the place where such rights or causes of action arose.
(m) Judgment debts should be deemed to be situated at the place where the judgment is obtained.
(n) Shares in a company should be deemed to be situated at the place where the company is incorporated.
(o) An interest in a trust estate, whether fully administered or otherwise, should be deemed to be situated in Australia only in so far as any of the trust assets are situated in Australia; provided that the liabilities of the trust estate which are not charged against any particular asset may, if the trustee so elects, be apportioned between the Australian and ex-Australian assets on the basis of their respective values but, if the trustee does not so elect, shall be treated as being charged against the ex-Australian assets.

― 485 ―

36. Reservation to Chapter 24: Estate and Gift Duty

My reservation relates to the Committee's proposals in regard to gifts of services. In paragraph 24.A57 the Committee declined to commit itself to a recommendation that the base of the gift duty should include, to the extent that they are unrewarded, the value of services given to an individual, partnership, trust or company, where the services concern business operations conducted by that individual, partnership, trust or company, and the parties are related persons. In my view the base of the gift duty should be extended in this way. If a father employed by an unrelated person wishes to make a gift to his children, he must make a gift out of the salary he has received and his gift will be subject to gift duty. A father who is a member of a family partnership, or is employed by a trust or company in which his children have interests, may make a like gift by taking as his share of partnership profits or his salary an amount less than the value of his services, but this gift will not be subject to gift duty unless the base of the duty is extended in the way proposed.

Valuation of services is already undertaken in the administration of the income tax to determine whether a reward for services paid to a relative is excessive. And in paragraph 24.A 105 the Committee proposes that an excessive reward in these circumstances will involve a gift. The valuation called for is no different when the purpose is to determine whether a reward is inadequate.

The taking of an inadequate reward for services should be treated as a gift for gift duty purposes within the limits explained in paragraphs 24.A55 and 24.A56 and subject to an allowance for income tax in accordance with paragraph 24.A105. The gifts referred to in paragraphs 24.A67 (relating to partnerships) and 24.A78 (relating to gifts to companies) should include gifts of services.

R. W. Parsons

― 487 ―

37. Reservation to Chapter 24: Estate and Gift Duty

My reservation refers to the Committee's proposals in relation to partnerships and in particular to its view, stated in paragraph 24.A68, that a clause in a partnership agreement to the effect that the interest of a retired or deceased partner may be acquired by the remaining partners at a price determined in accordance with the agreement should be ignored in valuing this interest for estate and gift duty purposes.

It is my understanding that the present law as determined by judicial interpretation provides that, for estate duty purposes, the value of an interest in a partnership held by a deceased partner at the time of his death is its value as fixed by the terms of the partnership arrangements because this is its realisable value. Were the value to be fixed at a figure in excess of its realisable value and duty assessed on the higher figure serious hardship may be suffered by the widow and dependants of the deceased partner. In addition, the value agreed upon by unrelated members of a partnership for the amount which the continuing partners shall pay for the interest of an outgoing partner is normally fixed by arm's length negotiation having regard also to other partnership provisions. In these cases it would be inappropriate for the law to provide that the agreement should be ignored when valuing an interest for estate and gift duty purposes.

Accordingly, in my view, the Committee's proposal in paragraph 24.A68 should apply only to interests in partnerships where the outgoing partner is related to one or more of the continuing partners.

K. Wood

The University of Sydney- Classic Texts in Australian and International Taxation Law