GREGORY v HUDSON & ORS

THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40736/97 ED 2493/96 MASON P HANDLEY JA COLE AJA

Monday 31 May 1999 AKIKO GREGORY v JOHN CHARLES HUDSON FAMILY PROVISION - appeal - challenge to provision ordered for widow - whether home unit inadequate - whether capital lump sum to be ordered instead of annuity - whether quantum of annuity sufficient The appellant widow challenged the provision made for her by her late husband's will. The estate was very large and there were no competing claims. The trial Judge awarded her a home unit, a legacy of $700,000 and an indexed annuity of $100,000 before tax. The appellant challenged these orders on the ground that the home unit and the annuity were inadequate and she sought a capital sum in lieu of the annuity. HELD: (1) The claim that the home unit was inadequate failed. Luciano v Rosenblum (1985) 2 NSWLR 65, 69-70 applied. (2) The claim for a capital sum failed. (3) The annuity failed to take into account the effect of income tax. The appropriate annuity was $100,000 indexed free of tax. ORDERS (1) Appeal allowed in part. (2) Set aside order 2(b)(iii) made by the Equity Division. (3) In lieu thereof order that the appellant receive during her lifetime out of the estate and notional estate of the deceased, in lieu of the provision made for her by the will of the deceased:

(a) An annuity of $100,000 payable by equal monthly instalments on and from 1 November 1997 the source and composition of which, for Australian tax purposes, shall be at the sole discretion of the Trustees of the estate and the Trust, (b) Such annuity shall be increased from 1 July each year by an amount which reflects the percentage increase during the previous 12 months in the All Groups Consumer Price Index applicable to Sydney, kept by the Commonwealth Statistician. If that Index is discontinued the annuity shall be increased by an amount which reflects the percentage increase in the Consumer Price Index which most nearly corresponds to the All Groups Index. Payments on and after 1 July in any year will be adjusted and additional payments made or credits given after the Index for the previous 12 months has become available. (c) An amount equal to the income tax, including provisional tax, and Medicare levy but not any tax penalty, chargeable in respect of the amounts payable to or for the benefit of the appellant pursuant to paragraphs (a), (b) and (c) herein, calculated on the basis that the appellant has no other income, capital gains, capital losses, or deductions (hereinafter referred to as "Australian income tax"). (4) Distributions and payments made by the Trustees to the appellant from the estate or the Trust after 8 October 1997 shall be treated as discharging, in whole or in part, the Trustees' obligations under these orders. (5) The amount or amounts payable by the Trustees in respect of Australian income tax shall be paid promptly after receipt from the appellant of notices of assessment or notices of amounts payable for provisional tax, and, in the discretion of the Trustees, either to the appellant or to the Australian Taxation Office. The source and composition of amounts paid or payable by the Trustees under this clause, for Australian tax purposes, shall be determined in the sole discretion of the Trustees. (6) Any adjustment for under or overpayment of Australian income tax may be deducted from or added to the next payment or reimbursement. (7) Order that the assets of the Trust be designated notional estate pursuant to the Family Provision Act 1982 and charged with payment to the appellant of the amounts referred to in these orders. (8) In addition to the provision made for her by the will of the deceased and these orders, the appellant shall be entitled to the following items presently in her possession: Lounge suite upholstered in cream leather Chrome traymobile with glass shelves Modernist side table in chrome with circular glass shelves Circular top pedestal and wine table on a circular brass base Kitchen table and chairs Petrified nautilus ornament installed on a chrome stand and a base Telescope Corby trouser press Television set Two crystal decanters (9) The Trustees shall be at liberty, in their sole discretion, to satisfy these orders, wholly or in part, by distributing capital or income to the appellant from the Trust by exercising their discretions under the Trust Deed in her favour. (10) These orders are subject to the condition that the appellant undertakes to the Court and the Trustees that she disclaims any interest as a discretionary beneficiary under the Trust which would or might entitle her, in the future, to receive distributions of income or capital from the Trust in addition to or in excess of the amounts payable under these orders. The appellant is to file and serve within 21 days her written undertaking to this Court and the Trustees duly witnessed and attested by her solicitor. (11) The undertaking given for the purposes of these orders by the appellant shall not have any force or effect if an application for Special Leave to appeal to the High Court is filed until the determination of that application or any appeal resulting therefrom. (12) The appellant's costs of the appeal against the orders made under the Family Provision Act shall be payable out of the estate or notional estate of the deceased, subject to a set-off in respect of the costs of the appeal from the declarations and orders made concerning the validity of the gift by will to the Trustees of the Trust. (13) No interest shall be payable in respect of any arrears presently payable pursuant to order 3(c) if the amount is paid within 28 days after receipt by the Trustees of a claim by the appellant supported by copies of her tax assessment and any other necessary documents. (14) The respondents' costs, on an indemnity basis, to be paid or retained out of the estate or notional estate of the deceased. (15) For the purposes of these orders "Trust" means the Royce Gregory Family Trust constituted by deed dated 3 June 1994 made between Ronald Kenneth Heinrich as Settlor and Royce Gregory Investments Pty Ltd as Trustee, as amended by a Deed between the same parties dated 30 June 1995. (16) Liberty to apply to the Equity Division. THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40736/97 ED 2493/96 MASON P HANDLEY JA COLE AJA

Monday 31 May 1999 AKIKO GREGORY v JOHN CHARLES HUDSON JUDGMENT

1 HANDLEY JA: This is an appeal by Mrs Akiko Gregory from a decision of Young J under the Family Provision Act. The appellant is the widow of the late Mr Royce Gregory, who died on 9 December 1995 at the age of seventy-six. He left a will dated 23 May that year, probate of which was granted to the respondents on 2 April 1996. 2 The deceased was also survived by two sons and two grandsons. For reasons which I need not detail, neither the sons nor the grandsons have any claims on the deceased's bounty in addition to the provision made for their benefit under the will and under the trust he established not long before his death. After substantial legacies have been paid and other benefits transferred to the sons, the estate remains one of the order of ten million dollars. 3 The marriage between the appellant and the deceased was a relatively short one lasting some two years, but the estate is extremely large and there are no competing claims. The relative shortness of this marriage, which was a second marriage for both parties, is not a factor which weighs significantly against the appellant in the exercise of the Court's discretion under the Act. 4 The deceased made provision for his widow in his last will and she was a discretionary beneficiary under the inter vivos trust he established. Young J found that the deceased had failed to make proper provision for his widow and made orders in her favour. The Judge's finding on the threshold question of power has not been challenged and I need not recapitulate his Honour's reasons for arriving at that conclusion. 5 The orders made by the Judge were in lieu of the provision made for the widow under the will and in addition to the provision made for her out of the estate and the trust before the hearing. The orders were subject to a further condition that the plaintiff undertook to the defendants and to the Court to disclaim any interest under the discretionary trust established by the deceased. 6 Subject to those conditions, the Judge ordered that the plaintiff should receive out of the estate of the deceased the home unit known as 63 Century Plaza, 171 Walker Street North Sydney, which had been part of the matrimonial home during their marriage, a legacy of $700,000 and an indexed annuity of $100,000 before tax. This obligation was to be met by setting aside an appropriate capital sum to meet the burden of the annuity. I need not refer to the other provisions in his Honour's orders. 7 The widow has challenged the orders as being inadequate on a number of bases. The order that she receive the unit, 63 Century Plaza, is challenged as an inadequate or perhaps an inappropriate provision for her housing needs. She has also challenged the quantum of the income order of $100,000 per year before tax and finally she has asked that in lieu of an order providing for payment of an annuity that she receive a capital sum in satisfaction of her entitlement to be maintained to a proper standard for the rest of her life. 8 I shall deal first with the challenge to the order that she receive unit 63. Ms Cohen reminded the Court of the decision of Powell J in Luciano v Rosenblum (1985) 2 NSWLR 65, 69-70 where his Honour said that: "… as a broad general rule, and in the absence of special circumstances, the duty of a testator to his widow is, to the extent to which his assets permit him to do so, to ensure that she is secure in her home, to ensure that she has an income sufficient to permit her to live in the style to which she is accustomed, and to provide her with a fund to enable her to meet any unforeseen contingencies". 9 Mr Hallen SC accepted the broad appropriateness of these principles which are well established and not in doubt. 10 Unit 63 was only part of the total area occupied by the widow and the deceased. They also occupied unit 64 next door. By special arrangement with the North Sydney Council, which for some reason was necessary, and because of the deceased's illness, they were permitted to open direct access between unit 63 and unit 64. However the Council required the direct access between the two units to be blocked up after his death. 11 The evidence includes plans of units 64 and 63. Unit 64 is the larger unit and contains three bedrooms and two bathrooms and the other usual rooms. Unit 63, the smaller unit, has two bedrooms and two bathrooms and other usual rooms, including a lounge room, a dining room, a kitchen and a room described as meals. It also appears to have two balconies, a foyer and a laundry. 12 The value of these units is not clearly established by the evidence. It appears that after the orders made by Young J the trustees sold unit 64 for $615,000. The amount seems surprising in view of the size of the unit and the location of the building, but the amount was not challenged. On the face of it it would appear that unit 63, which the Judge awarded absolutely to the appellant, would have a lesser value. 13 The appellant contended at the trial that unit 63 was not appropriate for her needs. She said that the bedrooms were too small and that there was not enough room for a desk for her son, Tiaga, to take his personal computer. 14 The Judge had a view of both units and held that unit 63 was appropriate for the appellant. The deceased himself was also of that view because his will left her the unit although only for life or until she remarried or entered into a de facto relationship. 15 The widow said at the trial that she should receive sufficient to enable her to buy a house with a garden in the lower North Shore area at a cost of up to a million dollars. The Judge said in his judgment that she had not given details of any search for houses or for her preference for any particular area of Sydney. He also said that she was free to sell unit 63, if she wished, in order to move elsewhere. He noted that the proceeds, then estimated at $650,000, would not enable her to buy a house on the harbour foreshores but that there would be many houses within twenty kilometres of Sydney which could be acquired for that sort of sum. 16 It appears, with respect, that his Honour overlooked the widow's evidence that she wished to live in the lower North Shore area and that houses in that area would cost in the order of one million dollars. I am also satisfied that there is no reason why this widow should have to move twenty kilometres out from North Sydney in order to be able to afford proper accommodation in accordance with her wishes. To that extent I have concluded, with respect, that his Honour fell into error. Nevertheless, I have not been persuaded that these errors vitiate the order that she receive unit 63 in satisfaction of her entitlement to secure housing. 17 The Judge had the benefit of a view of this unit which has been denied to this Court and he considered that it was an appropriate provision for her housing needs. The deceased, likewise, was familiar with the two units and considered that unit 63 would be appropriate for the needs of his widow. The deceased spent a substantial amount of money in redecorating unit 63 to a high standard and further substantial sums have been spent on the unit since his death. 18 The complaints of the appellant about the inadequacy of unit 63 are in my respectful view vague and lacking in content. We have not been furnished with any plan of unit 63 in its current form. The plan, included in the appeal book, clearly enough is taken from the strata plan and reflects the internal arrangements of unit 63 when the building was originally constructed. 19 On the face of the plan in the appeal book, bedroom number one in this unit is a substantial size and larger than any bedroom in unit 64. Of course this may have been altered, but there is no clear evidence about this and to that extent this part of the claim has not been satisfactorily proved. 20 This was a substantial part of the area occupied by the deceased, the appellant, and the nursing staff. Bearing in mind his own knowledge of the unit, and the benefit the Judge obtained from a view, I have not been persuaded that the order that the appellant receive this unit is appealably inadequate. 21 I would therefore dismiss that part of the appeal. 22 The income order made by the Judge of $100,000 a year before tax was in lieu of a provision made in the will that the appellant receive $50,000 a year, but this was not the only income provision made by the deceased for her benefit. Clause 5(a) of the will may well have given her the right to have the expenses of maintaining the unit borne by the estate. 23 Whether that is strictly so or not, the deceased left statements of his wishes to assist the trustees of his inter vivos trust in exercising their discretion as to the distribution of the trust income after his death. In these documents he stated that the trust was to meet out of the income the expenses of the unit which, on the evidence, are not less than $10,000 a year, the expenses of maintaining her car, at least $4,000 a year, and the cost of an annual visit to Japan, $15,000 a year. 24 There is a further inference from the terms of the will, and the surrounding circumstances, that the $50,000 a year annuity the deceased provided in his will was intended to be free of tax in the widow's hands. Whether that is strictly true does not matter for present purposes, but the trustees administered the estate and the trust between the date of death and the date of the Judge's order on that basis. In any event, it is clear that the direction for the payment of car expenses, unit expenses and the cost of an annual holiday to Japan were intended to be free of tax in the hands of the widow. 25 In these circumstances it is apparent that the provision made and the wishes expressed by the deceased, as understood by the respondent trustees, required a payment to the widow of the order of $79,000 a year free of tax, which represents an amount before tax of well over $100,000 a year. 26 The payments made by the executors and trustees of the inter vivos trust, to or for the benefit of the widow, appear at p 440 in the blue appeal book. In the period of six and a half months, from the date of death to 30 June 1996, the widow received distributions of an income character totalling $90,000, which included payments for her tax. In the following twelve months she received distributions totalling $131,000, which included a payment of just under $3,000 towards her tax. 27 In these circumstances, it is apparent that his Honour failed to properly take into account the effect of income tax on his order that the widow receive $100,000 before tax out of the estate in lieu of the provision made for her benefit under the will and the trust. 28 In the year to 30 June 1997 she received $131,000 from both sources, including what appears to have been a sufficient payment to meet her tax, having regard to the benefit of the imputation credits available to her on the trust income, yet his Honour considered that $100,000 year indexed before tax would be a sufficient provision for her benefit. It is evident therefore that insufficient attention was given to the impact of income tax on his Honour's order. In these circumstances I am satisfied that his Honour's exercise of discretion miscarried and this Court must re-exercise the discretion. 29 Before considering what would be a proper amount for this purpose it is necessary to deal with the other substantial ground of appeal argued by Ms Cohen on behalf of the appellant. This was a submission that the appellant should receive a capital sum, which would necessarily be in seven figures, in full and final satisfaction of her rights to be maintained at the expense of the estate during her lifetime. 30 While I do not think that the shortness of the marriage, and the relative shortness of the total association between the deceased and the appellant, should affect to her disadvantage the quantum of an income order made in her favour, in my opinion they are relevant in considering whether she should receive a seven figure sum of capital for her maintenance. 31 Clearly the deceased did not think that it was appropriate or necessary for the appellant to receive any substantial capital sum of this order. Likewise the Judge, in considering what order was adequate for the proper maintenance of the appellant, did not consider that it was appropriate for a capital sum of this amount to be provided for this purpose. The deceased himself expressed a wish, which was quite understandable in the circumstances, that the capital of his estate, within limits, be preserved for the benefit of his grandchildren, of which there are presently two. In the circumstances I have not been persuaded that his Honour's exercise of discretion on this question miscarried. 32 In my judgment an appropriate income order, indexed, which takes proper account of the burden of income tax will be adequate for her proper maintenance needs, especially as it will not be limited to widowhood, and will not cease upon entry into a de facto relationship as provided in the will. 33 I therefore would dismiss the appeal on the third ground. 34 I return now to the question of the quantum of the income order. I bear in mind the provision made by the trustees themselves for the benefit of the widow during the twelve months ended 30 June 1997, the widow's statement of her needs to be found at p 48 of vol 1 of the appeal book, and the effect of other payments made for her benefit by the trustees. I also bear in mind the discharge of the mortgage on her unit in Yokohama, the improvements to that unit and to unit 63, and the substantial assets she owned in her own right. Having regard to these matters, it seems to me that an appropriate income order would be that she receive an annuity of $100,000 indexed free of tax. The provision for tax should be calculated without regard to any other income and deductions available to the widow so that the burden on the estate is only to pay such tax as is needed to ensure that she receives $100,000 indexed free of tax as if it were her total net income after tax. 35 I think it is also appropriate for an order to be made designating the assets of the inter vivos trust as notional estate and the annuity should be charged on both the estate and the notional estate. The parties should be directed to bring in short minutes and I would propose that in the first instance those minutes be brought in before a single judge of this Court. 36 MASON P: Young J was satisfied that this was a case where it was appropriate to make an order in the appellant's favour. At issue in this appeal is the provision that he ordered. It is well established that such an appeal calls for appropriate appellate restraint and I take the principles to be as discussed by Kirby P in Golosky v Golosky, Court of Appeal unreported 5 October 1993. I bear these principles in mind. 37 I have not overlooked Mr Hallen's submissions indicating that the amount of a lump sum of $700,000, which is a component of the orders made by his Honour, contains a significant cushion against contingencies, especially when the appellant's evidence at blue appeal book 48E-F is read in conjunction with the cross-examination at black appeal book pp 11-14. Nevertheless, it is in my view appropriate to look at the appellant's challenge to the other components of the award made below, treating those components independently. 38 I agree with what Handley JA has said in relation to the annuity sum. I would simply add that I disagree with the indication (red appeal book 60J) that in the circumstances of this case it was appropriate to take into account the widow's capacity to earn income or the capacity to let out or sell her unit in Yokohama. Having regard to her age and the size of the estate I would not weigh those matters in the balance in determining an appropriate annuity for her living expenses. 39 I find myself in disagreement with Handley JA in relation to the component relating to the residence for the appellant. As his Honour points out it would appear that Young J overlooked the appellant's evidence at blue appeal book 152 where she expressed the view that having regard to the events that have occurred she did not particularly want to continue to live in unit 63 and 64. She referred to her feelings of sadness now that her late husband, who had lived there with her, was no longer there. She said that she would like to purchase a house, have a garden and a dog, and would like to continue to live on the lower North Shore. She had been looking at houses in the Mosman area but had noticed that even the cost of smaller homes in good condition were escalating in price beyond one million dollars. I do not understand that evidence to have been challenged. 40 In my view, the fact that the deceased thought that unit 63 alone was sufficient provision for his widow's residence requirements does not carry overwhelming weight. His attitude to the home, in which he had lived much longer than her, was different to the Court's understanding of her attitude to the home. Likewise, I think it is appropriate that the Court has regard to the unchallenged evidence of the appellant as to her wishes in the matter of residence. 41 It was established that unit 64 was sold in 1998 for $615,000. Unit 63 had been purchased at a lower sum than unit 64. It is true that the evidence shows that up to $300,000 odd was spent on unit 63. But some of that was obviously spent in reconverting the unit from its role as a guest annex into its function as a self-standing independent unit. There is no evidence as to the value of unit 63 at the time of death or at the time of trial. The block of units was, we were informed without objection, constructed in the early 1980s. 42 I think it is also appropriate to have regard to the fact that during their joint lives unit 63 and 64 had become the home of Mr and Mrs Gregory. That is not determinative, but it is part of the style to which the widow had become accustomed, which is a relevant factor in the Luciano v Rosenblum calculus. I think that the fact that the widow has continued to live in unit 63 does not really indicate that it is necessarily adequate to her proper needs when her unchallenged evidence at blue appeal book 152 is borne in mind. It is also relevant that she has found it necessary to purchase, out of her own funds, an additional garage to provide further storage space. 43 The appellant's evidence makes it plain that she sees a residence as a means of providing, not only for her own continuing needs, but also as enabling her to continue to provide accommodation for her adult son and accommodation, as needed, for her relatives visiting from Japan from time to time. I do not think it is appropriate that a Court should sit too heavily in judgment upon this matter when one reminds oneself of the size of the estate. In my view, I see no reason why proper provision from an estate of this size for this widow should not enable her to have the freedom to choose if she wishes to acquire a house in the Mosman area; and I am certainly unaware of any evidence that would cast any doubt upon her statement that even small homes in that area cannot be obtained for under one million dollars. 44 I think his Honour, when he expressed his reasons for stating that unit 63 in fee simple was adequate provision for this aspect of her needs, took into account an inappropriate factor when he said that although the proceeds of $650,000 will not obtain a house on the harbour foreshores there would be many houses within twenty kilometres of Sydney which could be acquired for that sort of sum. I am not saying that she is necessary entitled to an alternative house on the harbour foreshores, whatever that expression means, but I do not see why she should be limited in the way that his Honour would have limited her to a house within that radius. 45 Accordingly, I would uphold the appeal, including the additional provision indicated by Handley JA. But I would also propose that the provision in relation to residence be varied by substituting (if the appellant so indicates within a period of time, say six months from today) a provision that she receive one million dollars in lieu of the provision of unit 63. 46 COLE AJA: I agree with the reasons for judgment given by Handley JA. I would add only two things. 47 The evidence discloses that the appellant, Mrs Gregory, resided in Australia between January 1991 and January 1993, prior to her marriage to the deceased in 1994. For the two years that she resided here she lived in a unit, number 47 Century Plaza. During that time her son, when he was in Australia, stayed with her. There is no evidence as to the nature of unit 47. However, it does indicate that at that time, whilst she was a highly paid employee she found a single unit adequate for her purposes and apparently was content to live in such a unit. That seems to me to reinforce the view that unit 63 is an appropriate unit for her accommodation. 48 The second matter I would refer to is the evidence in the inventory of property in the probate of the deceased which indicates that whilst unit 64 had a value at date of death of $620,000 and we were told was subsequently sold for $615,000, unit 63 had, no doubt after renovations, cost a total of $854,000 with an additional sum of $22,000 having been paid for a garage. Accordingly the cost to the deceased of the unit which he has bestowed for life and which the Court has conveyed to her in fee, is in the order of $876,000. This seems to me to reinforce the appropriateness of the order made in respect of unit 63. 49 I would agree with the reasons delivered by Handley JA. 50 MASON P: The formal orders are the respondents are directed to file and serve their proposed short minutes by 15 June. The appellant is directed to file and serve her proposed short minutes by noon on 22nd. The matter is listed before Handley JA at 9.30am on Wednesday 23 June. The short minutes are to be filed in the submission box, rather than the registry.

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