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Edited version of your written advice
Authorisation Number: 1012719219831
Ruling
Subject: Mistaken transfer of trust property to the executor personally
Question
Was the Rulee liable for capital gains on the sale of the Property?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
The Rulee was the executor of a deceased estate, which held the pre-CGT Property. Due to a life interest, the property was held by the trust estate for many years.
When the property was subsequently sold after the death of the life tenant, despite the executor previously completing the relevant forms for the land titles office correctly, it was discovered the property was previously transferred into the personal name of the Rulee by the land titles office rather than in the name of the Rulee as executor.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 118-195
Income Tax Assessment Act 1997 Section 118-200
Reasons for decision
Section 118-195 of the ITAA 1997 is about dwellings acquired from deceased estates. When applying items 2(a) and 2(b) therein, section 118-195 provides a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:
(i) you are an individual and the interest passed to you as a beneficiary in a deceased estate or you owned it as the trustee of a deceased estate;
(ii) the deceased acquired the ownership interest before 20 September 1985; and
(iii) the dwelling was, from the deceased's death until your ownership interest ends, the main residence of the spouse of the deceased immediately before the death and/or an individual who had a right to occupy the dwelling under the deceased's will.
Note: A trustee would have no need to apply item 2(c) in the table in subsection 118-195(1) to a capital gain or loss that arises in respect of an ownership interest which passes to a beneficiary because it would be disregarded under Division 128 of the ITAA 1997, irrespective of who occupied the dwelling as their main residence from the date of the deceased's death (ATO ID 2006/34).
Where section 118-195 of the ITAA 1997 does not apply, section 118-200 may provide a partial exemption for a deceased estate dwelling if you are an individual and the interest passed to you as a beneficiary in a deceased estate or you owned it as the trustee of a deceased estate. You calculate your capital gain or capital loss using the formula:
capital gain or capital loss amount x Non-main residence days
Total days
where:
non-main residence days is… the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195.
total days is…if the deceased acquired the ownership interest before 20 September 1985 - the number of days in the period from the death until your ownership interest ends…
Constructive trusts arise where it would be inequitable for a legal owner to be permitted to keep property for their own benefit. Constructive trusts are created to satisfy the demands of justice and good conscience, irrespective of any intention of the parties. (This was stated by Glass JA in Allen v. Snyder (1979) FLC 90-656; (1977) FamLN N56; [1977] 2 NSWLR 685 at 690).
For example, the High Court in David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48 at 40; (1992) 175 CLR 353 at 374; (1992) 109 ALR 57 at 73-74 explained the grounds for restitution for mistake concentrate on the principle of unjust enrichment, which concerns whether it would be unjust for the recipient to retain the enrichment. It is prima facie unjust for the recipient to retain an enrichment conferred because of mistake, regardless of whether the mistake is a mistake of law or a mistake of fact (at CLR 376-377).
In your case, since the date of death of the deceased, the Property was always held by a trust estate and/or held by a constructive trust. (Here, it is not necessary for the Commissioner to rule whether a constructive trust arose or not.) It follows the Rulee is not taxable on the disposal of the Property in their personal capacity.