Snap shot:

  • Always follow testamentary options strictly in accordance with the will.
  • Check for Revenue Rulings for guidance

Megan, a long-term client and friend comes in to see you about her late sister’s estate. Megan tells you she has been given an option in the will to purchase her sister’s house from the estate at a rather large, discounted price because she had helped look after her sister’s children. Megan tells you finance is approved and she is expecting a contract for sale tomorrow from the executor’s solicitor. You are surprised that the nieces aren’t up in arms about the discount but also very happy to hear that not all estate matters end up messy, as you have had a string of those lately.

Megan’s mortgage broker had asked her whether there was stamp duty payable, and although she googled it, asks you for advice.

Without even looking at the will you shudder at the thought of a testamentary option, as you are aware there can be significant stamp duty implications if the option isn’t exercised strictly in accordance with the will.

You review the will, under which Peggy provided a specific direction to her executors, to offer the property to Megan within two months of the date of Peggy’s death, with the offer open for six months. There are some other conditions about the price, and the form of notices and delivery.

Megan is required to pay the estate $500,000 for the property, which she tells you is worth around $2M.

You note s 63(1)(a) of the Duties Act 1997 (‘the Act’) provides that duty of $50 is chargeable in respect of:

  1. ‘a transfer of dutiable property by the legal personal representative of a deceased person to a beneficiary, being
  2. a transfer made under and in conformity with the trusts contained in the will of the deceased person…’

Megan assures you all the conditions in Peggy’s will have been met and is thrilled when you tell her that provided that is the case, she will only need to pay nominal duty. She tells you she can’t wait to sign the contract tomorrow.

You finish the day on that good note and decide to have an early night in.

Shortly after midnight you wake up in a sweat as you remember the last thing that Megan said on her way out – she was going to sign a contract in the morning…

The sting (that could have been)

You remember Revenue Ruling DUT 046 which provides guidance as to how s 63 of the Act operates and when concessions apply, particularly in relation to testamentary options:

28. Where an option to purchase dutiable property is granted… any transfer of land from the legal personal representative to the donee… would be a transfer of dutiable property by the legal personal representative of a deceased person to a beneficiary. It is a transfer made under and in conformity with… the will… within the meaning of section 63(1)(a)(i) of the Act and therefore liable to concessional duty of $50. If the exercise of the option is not strictly in accordance with the will, the concession will not apply.

29. The nature of a testamentary option was analysed by the High Court in O’Neill v O’Connell (1945-1946) 72 CLR 101 where in the ordinary case of a testamentary option, the donee’s exercise of the option, does not give rise to any contract for sale of the subject property between the testator and the donee. The Act will be administered on the basis that:

  • the section 63 concessional duty of $50 will apply to a transfer of dutiable property upon the exercise of a testamentary option to purchase, provided no written agreement for sale or transfer is entered into, and
  • no duty will be payable on any written notice of exercise of option.’

So if Megan signs and exchanges the proposed contract, as opposed to doing just a straight transfer pursuant to the will, the transfer of her sister’s family home to her will not meet the requirements of s 63 and ad valorem duty will be payable.

You send Megan a high importance email, ‘Do not enter into the contract for sale, please call me ASAP!’

It is important to note that whilst stamp duty may not be an issue with testamentary options, they can give rise to CGT issues.