Edited version of your written advice

Authorisation Number: 1012836983074

Date of advice: 14 July 2015

Ruling

Subject: CGT

Questions

1. For CGT purposes, did the trustee of the deceased estate acquire an interest in the properties previously held by the deceased and their spouse in joint tenancy on the date the deceased died?

Answer:

Yes

2. Can any capital gain made by the trustee of the deceased estate from the disposal of their interest in these properties be disregarded as compensation for damages or personal injury pursuant to section 118-37 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

This ruling applies for the following periods:

Income Year ending 30 June 2014

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

3. The deceased was murdered.

4. The offence was committed in an Australian State.

5. In their will, they left all of their assets (including jointly-held property assets) to their family.

6. As the properties were held as joint tenants, the deceased's interest in the properties would normally pass to the surviving joint tenant on their date of death, however the deceased was murdered by the joint tenant.

7. The trustee of / executor for the estate took legal action to prevent the joint tenant from inheriting the deceased's share of these joint assets.

8. The Court ordered and declared, in part, that the joint tenancy of the properties was severed and the property was to be held as tenants in common between the estate and the surviving joint tenant.

9. It was further ordered that the properties be sold, with the sale to be '…conducted by a licensed real estate agent and auctioneer…' by public auction at a '…reserve price to be fixed by the Plaintiff and Defendant in consultation with the licensed real estate agent and auctioneer appointed to conduct the sale.'

10. However, the properties were not sold immediately following this order as the surviving joint tenant would not co-operate in the sale.

11. The properties were subsequently sold with all proceeds being held in trust by the Court pending further legal action by the surviving joint tenant.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Sub-section 108-5(2)

Income Tax Assessment Act 1997 Subsection 118-37(1)

Income Tax Assessment Act 1997 Subsection 128-15(1)

Income Tax Assessment Act 1997 Paragraph 128-15(1)(a).

Income Tax Assessment Act 1997 Subsection 128-15(2)

Income Tax Assessment Act 1997 Subsection 128-20(1):

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Capital gains

12. A liability to capital gains tax can only arise where a CGT event occurs in relation to a CGT asset.

13. CGT event A1 happened pursuant to section 104-10 of the ITAA 1997 on the date of contract for the disposal of the X properties.

14. Pursuant to subsection 108-5(1) of the ITAA 1997:

A CGT asset is:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

15. Pursuant to subsection 108-5(2) of the ITAA 1997, a CGT asset includes '…part of, or an interest in, an asset referred to in subsection (1)'.

16. 'Interest' is not defined for the purposes of the ITAA 1997 and thus '…takes its ordinary meaning in the context in which it appears in the legislation' (ATOID 2010/45).

17. ATOID 2010/45 states that:

Where the legal and equitable ownership of property is severed so that it does not vest in only one person, the equitable interest is separately recognised to confer on the equitable owner the protection of equitable principles.

18. This can occur, for example, where the legal owner of property holds all or part of the equitable interest in this property on trust for the benefit of another. This equitable interest has commonly been held to equate to a beneficial interest or beneficial ownership.

19. Thus, it is necessary to consider if the trustee of the deceased's estate held an 'interest' in the properties at any time following the deceased's death.

Forfeiture rule

20. As the properties held prior to their death as joint tenants, the surviving joint tenant would normally have acquired the deceased's interest in each of these properties (both legal and equitable) on their death.

21. As per the reasoning of Jacobs JA at 651-52 in the appeal in Rasmanis & Jurewitsch [1970] 1 NSWR 650 (Rasmanis & Jurewitsch), the legal interest in each of these properties devolved to the surviving joint tenant immediately following the death of the deceased.

22. However, as stated by Ken Mackie in 'The Forfeiture Rule: the Destination of Property Interests on Homicide':

It is a well-established principle that if a person is criminally responsible for the death of another, and that death is a material fact in the vesting of property in favour of that person, then the interest in that property is forfeited.

23. As per the decision of Gillard J in Estate of Soukup, it is the common law view in an Australian state that the forfeiture rule '…applies in murder cases and manslaughter cases.' Thus, the forfeiture rule would apply to prevent the surviving joint tenant from benefiting from the interests in the properties held by the deceased immediately prior to their death.

24. Depending on which view is taken of the operation of the 'Forfeiture Rule', either:

(a) both the legal and equitable interests in the properties originally held by the deceased and the surviving joint tenant were severed pursuant to the Court Order and the trustee of the deceased estate acquired a 50% legal and equitable interest in each of the properties the deceased previously held jointly with the surviving joint tenant; or

(b) (i) a constructive trust was created at the deceased's date of death, through which the surviving joint tenant retained the legal interest in the properties, but half the equitable interest in the properties previously held by the deceased and the surviving joint tenant as joint tenants was held on trust for the benefit of the deceased estate; and

(ii) the trustee of the deceased estate acquired both the 50% legal and equitable interest as tenant in common in each of those properties pursuant to the Court Order which severed the joint tenancy in the properties previously held by the deceased and the surviving joint tenant.

25. Thus, whether through the Court Order or through the creation of the constructive trust, the estate acquired an 'interest' in these properties for capital gains tax purposes.

Date of acquisition for CGT purposes

26. Subsection 128-15(1) of the ITAA 1997 states that:

This section sets out what happens if a CGT asset you owned just before dying:

(a) devolves to your legal personal representative; or

(b) passes to a beneficiary in your estate.

27. Pursuant to s subsection 995-1(1) of the ITAA 1997, the term 'legal personal representative' includes 'an executor or administrator of an estate of an individual who has died…'

28. Further, pursuant to subsection 128-20(1) of the ITAA 1997:

A CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset:

(a) under your will, or that will as varied by a court order; or

(b) by operation of an intestacy law, or such a law as varied by a court order; or

(c) because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or

(d) under a deed of arrangement if:

(i) the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and

(ii) any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other *CGT assets that formed part of your estate.

29. In this current case, the deceased's interest in the assets did not 'pass' to a beneficiary of their estate in accordance with subsection 128-20(1) of the ITAA 1997. Rather, the CGT assets were disposed of by the trustee, being the deceased's 'legal personal representative' following the Court Order.

30. Thus, as paragraph 128-15(1)(b) of the ITAA 1997 does not apply, it is only necessary to consider if the assets devolved to the trustee pursuant to paragraph 128-15(1)(a) of the ITAA 1997.

'Devolves'

31. The word 'devolves' is not defined in the ITAA 1997. According to the Oxford Dictionary, the meaning of 'devolve' includes:

Law (Of property) be transferred from one owner to (another), especially by inheritance.

32. Similarly, the Macquarie Dictionary defines 'devolve' as:

2. Law to pass by inheritance or legal succession.

5.  to be transferred or passed on from one to another.

33. There are currently no statutory provisions which deal with the devolution of property where the forfeiture rule applies.

34. However, the meaning of 'devolves' can be understood in the context of section 8 of the New Zealand Succession (Homicide) Act 2007, where it is stated that:

….property that is owned in joint tenancy by the victim, the victim's killer, and any other person (if any) devolves at the death of the victim as if the property were owned by each of them as tenants in common in equal shares. (emphasis added)

35. Similarly, in his judgment in Rasmanis v Jurewitsch [1968] 2 N.S.W.R 166 (Rasmanis), Street J referred at 169 to the creation of a trust in favour of the felon and the legal representatives of his victim as being: 'In Point of devolution of ultimate beneficial interest.'

36. Based on the Court Order, the severance occurred in relation to the joint tenancy immediately prior to the date of death. It was not the surviving joint tenant full ownership interest (subject to forfeiture) immediately following the death of the deceased that was severed.

37. Further, there is no suggestion that these assets were acquired by the trustee by any other means, such as purchase or gift.

38. Thus, it is considered that, through the Court Order, the deceased's interest in each of the joint tenancy properties at the date of death devolved to the personal legal representative as if the deceased and the surviving joint tenant had owned the property as tenants in common.

39. It is also considered that an equitable/beneficial interest in these properties devolved to the legal personal representative at the date of death through the creation of a constructive trust.

Date of acquisition:

40. Where a CGT assets devolves to a legal personal representative, subsection 128-15(2) of the ITAA 1997 states that:

The legal personal representative…is taken to have acquired the asset of the day you died.

41. Thus, regardless of whether the interests were acquired by the trustee at the date of death or at any later time, the interests can only be 'taken to have [been] acquired…' for capital gains tax purposes on the date of death of the deceased.

Cost base

42. Further, on the assumption that all properties were acquired after 19 September 1985, and were not subject to Items 2, 3, 3A or 3B of subsection 128-15(4), the cost base or reduced cost base of the CGT assets '…in the hands of the legal personal representative…' pursuant to Item 1 of subsection 128-15(4) is the cost base or reduced cost base of the CGT asset on the date of death of the deceased.

43. Thus, the capital gain or loss from the disposal of these interests cannot be calculated based on the market value of the properties either at the deceased's date of death or at date of the Court Order, but can only be calculated using the cost base or reduced cost base at the date of death of the deceased.

44. However, it should be noted that the calculation of the gain or loss on any particular CGT asset which devolves to a legal personal representative can be subject to other provisions contained in Division 128 of the ITAA 1997. For example, we have no evidence whether any of the properties were acquired before 20 September 1985.

Personal injury

45. Pursuant to subsection 118-37(1) of the ITAA 1997:

A *capital gain or *capital loss you make from a *CGT event relating directly to any of these is disregarded:

46. Based on paragraphs 297 and 298 of Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts, the exemption in section 118-37 could apply, for example, to an amount awarded for pain and suffering under the NSW Victims Compensation Act 1987.

Application to trustee's circumstances

47. It is acknowledged that the acquisition of an interest in the joint tenancy properties by the trustee of the deceased estate was a result of a wrong done to the deceased. It is thus arguable that there was a wrong which the beneficiary's relative (the deceased) suffered personally, and which thus falls within the meaning of subparagraph 118-37(1)(b)(ii).

48. However, the purpose of the common law forfeiture rule is not specifically to compensate any individual (including any trust beneficiary) for their personal suffering or for the suffering of another. Rather, it represents an operation of equity, which is intended to ensure that wrongdoers do not personally benefit from the wrong they have committed. In relation to the forfeiture of property by a felon, Street J stated in Rasmanis at 168 that: 'Public policy requires deprivation of the felon; it does not require compensation to the victim.' Street J further suggested at 169 that:

I reject any notion of this result being produced by way of compensation to the victim's estate….The result is due to equity acting in personam so as to preclude the felon's unconscientious action gaining him this benefit. A home for the benefit must be found and the estate of his victim is the only available destination.

49. Thus, it is considered that the transfer to the trustee of the interest in the joint tenancy properties, and consequent disposal proceeds do not constitute compensation or damages received by the trustee or the beneficiary of the deceased estate for a wrong suffered personally by the deceased as required by section 118-37.

50. Thus, the capital gain made from the disposal of the joint tenancy properties will not be disregarded pursuant to section 118-37.

Conclusion

51. The interest in the joint tenancy properties which devolved to the trustee as a tenant in common is taken to have been acquired by the trustee for CGT purposes on the date of death of the deceased.

52. The cost base or reduced cost base of these CGT assets will be the cost base or reduced cost base to the deceased at the deceased's date of death, subject to the operation of the other provisions of Division 128 of the ITAA 1997.

53. Any capital gain made from the disposal of these properties cannot be disregarded pursuant to section 118-37 of the ITAA 1997.