When Mr. Tan Kok Lee had passed away (hereinafter “the Deceased”), he died intestate, specifically he did not allocate the successors of the interest of five of his properties. The Deceased’s wife, Ms. Lee Koy Eng (“the Wife”) and his two children (“the Children”) had executed a Deed of Family Arrangement (“the Deed”) to allow the said five properties of the Deceased to be legally under the Wife’s name alone.
The Deed was a mechanism used by the Children to renounce their entitlements under the Distribution Act 1958 (“DA”), specifically under section 6(1)(e) where the Wife and the Children are entitled to one-third of the Deceased’s five properties.
After obtaining a Vesting Order from the High Court, both the Wife and the Deceased’s son (“the Son”) executed five Form 14As (“Executed Forms”) where the transfer of the Deceased’s interest in those five properties would be in favour of the Wife.
The Wife took the stance that the Executed Forms were a form of conveyance or a transfer which was not otherwise specifically charged with duty and therefore the Executed Forms should be assessed in accordance with Item 32(i) of the First Schedule of the Stamp Act 1949 (“SA”), amounting to a stamp duty of RM 10 only.
However, the authorities at the Inland Revenue Board of Malaysia (“IRB”) sought to impose ad valorem stamp duty on the Executed Forms as a renunciation of an interest in a property (as a gift or otherwise) in line with Item 66(c) of the First Schedule of the SA.
The Wife and the Son appealed the decision of the IRB to the High Court. Wong Kian Kheong J (“His Lordship”), in arriving at His Lordship’s decision, had interpreted three items of the 1st Schedule to the Stamp Act 1949, specifically items 32(i), 46 and 66 of the SA. His Lordship held that the Executed Forms were a conveyance or transfer not specifically charged with duty and therefore, not liable to ad valorem stamp duty.
Analysis of the Decision
The foundation of the His Lordship’s decision can be deduced to be grounded from one simple legal principle: the Children had a mere entitlement in the property as opposed to a proprietary interest.
The provisions of items 46 and 66 of the SA were not applicable as the Children did not have a proprietary interest that would have allowed them to gift (per item 46 of the SA) or to convey/transfer (per item 66 of the SA).
As the Deceased had died intestate, this vacuum regarding the transfer of ownership of the five properties had attracted the application of the DA. By stating who is entitled to the interest of a property, the DA acts as a mechanism to remove the vacuum and to smooth out the estate administration process.
While the Children had an entitlement to the five properties, the law could not force someone to assume proprietary interest against their will. Furthermore, as the administration of the estate had not been completed at the time of the execution of the Executed Forms, the entitlement under the DA had not been converted into a proprietary interest in the five properties.
It was viewed that the Deed was a device that allowed the Children to renounce or “dissent” to the law that gave them the entitlement to the five properties. It was also decided that if one does not have a proprietary interest in the property, one cannot gift it to another. This principle was previously established in the Federal Court case of Chor Phaik Har v Farlim Properties Sdn Bhd  MLJ 188 and applied to the case of Ch’ng Cheng Siew (suing as administrator of estate of Wong See Yang, deceased) v Pemungut Duti Setem  7 MLJ 758 (“Ch’ng Cheng Siew”), where the facts were similar to the present case.
Thus, the Executed Forms were solely to give effect to renouncement of entitlements of the Children’s interest under the DA. The Deceased’s death had attracted the application of the DA, making it an entitlement given by law. The Deed and the Vesting Order simply gave effect to the renunciation as the Executed Forms were performed pursuant to the Deed and the Vesting Order.
This case would serve as an important precedent for families interested in renouncing their entitlements under the DA. However, there are some key elements that one needs to be aware of before drafting an instrument akin to the Deed.
Firstly, the Children renounced their entitlements under the Deceased’s estate in favour of the Wife, who was also a beneficiary under the DA. Given a different scenario where the Children choose to renounce their entitlements to the said five properties in favour of a third party who is not a beneficiary under the Deceased’s estate pursuant to the DA, our view is that they would not be able to do so for two reasons as follows:
the Children’s entitlements to the said five properties under the Deceased’s estate cannot be equated to proprietary rights of the same unless and until the completion of the administration and distribution of the Deceased’s estate. Hence, the Children who so wish to renounce their entitlements would not have the right or choice to transfer the said five properties to another party who is not a beneficiary under the Deceased's estate as they do not have the proprietary rights to the said five properties; and
the effect of the Children’s renunciation of their entitlements to the said five properties under the Deceased’s estate (“Renounced Entitlements”) is that the Renounced Entitlements will still remain as a part of the Deceased’s estate to be passed on to the other beneficiaries in accordance with the DA by operation of law.
Similarly, a beneficiary under a will cannot be forced to take or accept his inheritance, as espoused in Ch’ng Cheng Siew. Such beneficiary would not be able to “transfer” the entitlements in favour of a third party who is not a beneficiary under the same will as he or she does not have a proprietary right at the time of renunciation and the beneficiary’s entitlement would by operation of law form part of the residuary asset and/or flow to the remaining beneficiary under the will upon renunciation.
Finally, timing plays an important role in such matters. If the entitlement had been converted into a proprietary interest after the completion of the administration of the estate, IRB may have had their day, and the Wife and the Children would have had to pay ad valorem stamp duty for the renunciation of their interest in the property.