Can I extend the vesting date of my trust?
Based on old English law the government does not want a trust to go on forever. This is because it may end up that no one is looking after the assets in the trust.
Therefore, in all States, other than South Australia, after 80 years your trust must ‘vest’. See for example Perpetuities Act 1984 (NSW).
The vesting date is the date defined in the trust deed as the date when the trust comes to an end. The trustee winds up the trust on the vesting date by distributing all of the trust assets to the beneficiaries. Whether the trustee does this or not the trust still ‘vests’. It comes to an end.
This means all the assets are deemed to have come out of your trust. This triggers:
1. Capital Gains Tax
2. Stamp Duty
3. ownership issues
4. asset protection
5. loss of licences
6. land tax
7. family law disputes
Before the start of CGT in 1985 many trusts often had a vesting date of less than 80 years. A vesting date of 21 years was not uncommon. Until recently the ATO took the view that you could not amend your trust deed to extend the vesting date to the maximum of 80 years.
The ATO changes its mind – you can now postpone the vesting date
Taxation Ruling TR 2018/6, issued on 15 August 2018, finalises the Commissioner’s views on the income tax consequences of a trust vesting. These views are the same as those contained in the draft (TR 2017/D10), although the final ruling includes some fine-tuning.
A trust’s “vesting” or “termination” date is the day on which the beneficiaries’ interests in the property of the trust become “vested in interest and possession”. The trust deed should specify the vesting date and the consequences of that date being reached (eg that the trust property will be held from that date for the takers on vesting in equal shares absolutely). The ATO notes that vesting does not, of itself, ordinarily cause the trust to come to an end or cause a new trust to arise. If the trustee continues to hold property for the takers on vesting, the property will be held on the same trust (although the nature of the trust relationship will change).
The ATO now believes that if you have a trust with a vesting date of less than 80 years then:
- provided you do it before the vesting date, you may extend the vesting date. But the maximum period is still 80 years (except South Australia).
- if the vesting date has passed, you are too late. The trust has already vested. The trust has ended. Extending the trust is no longer possible. Even all the beneficiaries coming together cannot change this.
- you need a Deed of Variation (or a Court order) to extend the vesting date to 80 years. This can’t be implied. The vesting date cannot be extended by implication – such as the trustee and beneficiaries acting in a certain way.
The ATO can change its mind again. Let us update the vesting date whil you still legally can.
The key points in TR 2018/16:
- prior to vesting, it may be possible to extend the vesting date (by applying to a court or by the trustee exercising a power to nominate a new vesting date). A proposed alteration by a trustee without court intervention is subject to any specific requirements in the trust deed about how and when any alteration to the vesting date can occur;
- it is too late to change the vesting date once it has passed and the ATO says it is unlikely that a court would agree to do so due to the interests in the trust property becoming fixed at law; and
- continuing to administer the trust in a way that is inconsistent with the vesting terms can have significant tax consequences (eg potentially CGT event E1).
CGT consequences of trust vesting
TR 2018/6 considers whether various CGT events may occur on vesting or post-vesting, noting that the terms of the trust deed are particularly relevant. The ATO says that:
- CGT event E1 (creation of a new trust) “need not happen merely because a trust has vested”. This is because vesting does not, of itself, ordinarily cause a trust to come to an end and its property to settle on the terms of a new trust. However, CGT event E1 may occur if the parties to a trust relationship subsequently act in a manner that results in a new trust being created by declaration or settlement;
- CGT event E5 (beneficiary becoming absolutely entitled) may occur if the takers on vesting becoming absolutely entitled as against the trustee to CGT assets of the trust; and
- CGT event E7 (disposal to a beneficiary to end a capital interest) may happen on actual distribution of CGT assets to beneficiaries, but will not occur to the extent that the beneficiaries are already absolutely entitled to the CGT assets as against the trustee.
Taxation of trust net income after the vesting date
The ruling notes that, in the income year of vesting, different beneficiaries may be presently entitled to trust income derived before and after the vesting date. For example, the trustee of a discretionary trust may, before vesting, exercise a discretion to appoint pre-vesting income among those entitled to benefit under the trust. By contrast, the takers on vesting are presently entitled to post-vesting income (usually in proportion to their vested interests in the trust property). In this situation, the ATO accepts a “fair and reasonable” allocation of trust income into pre- and post-vesting trust income.
TR 2018/6 also provides that:
- in the income years after vesting, all of the trust income flows to the takers on vesting according to their entitlements, so the trustee will not be assessed on any net income; and
- a post-vesting payment or other purported distribution by the trustee is in breach of trust and void if it is inconsistent with the vested beneficiaries’ fixed interests, and the deemed present entitlement rules in sections 101 and 95A(1) ITAA 1936 don’t apply.
The ruling includes 6 examples, covering effective and ineffective extensions of the vesting date, the consequences of ignoring the vesting date and the entitlements of beneficiaries. The following example (Example 4 of TR 2018/6) involves the purported extension of the vesting date after a discretionary trust has vested.
If a deed of extension is ineffective to change the trust’s vesting date, all of the takers on vesting agree that the trust assets should continue to be held on a new trust on the same terms as the original trust, and this was effective to create a new trust over the assets by declaration or settlement, CGT event E1 happens for the trust assets.
What if you are too late to extend to 80 years?
It may be argued that the trust does not come to an end. However, we do not believe that is the case. On the vesting date, we believe that a new trust is created. The ATO Ruling has no clear view. The ATO states that the underlying trust relationship continues. But the nature of the trust has changed.
For a Family Trust on the vesting date (whether at the end of 80 years or an earlier date if so stated in the Deed):
1. The Appointor directs the Trustee to distribute the capital and any income to beneficiaries of its choosing
2. However, if the Appointor and Trustee forget to so distribute then the trust vests to the Residuary Beneficiaries (also called ‘takers in default’ or ‘Primary Beneficiaries’)
We believe that the ATO is correct but CGT may not be triggered. (The ATO disagrees with us on this point). We suggest that the ATO re-read:
Full Federal Court in Oswal v FCT  FCA 725
Chief Commissioner of Stamp Duties v Buckle (1995) 38 NSWLR 574
Andtrust v Giovanni Andreatta  NSWSC 38
Re Arthur Brady Family Trust  QSC 244 (Court amended the trust deed)
Supreme Court of New South Wales Paloto Pty Limited v Herro  NSWSC 445 (Court refused to extend the vesting date)
But the wrong vesting date went in
Rectification of the Deed is also possible. This where typographical errors are made such as typing 2031 rather than 2012.
The ATO is happy to talk with you – BUT DON’T
After the ruling the ATO then released details of its administrative approach on trusts vesting. The ATO encourages taxpayers to contact it before they lodge their return if they have any concerns whether their trust may have vested or is about to vest. “We will work with you to get it right.” But don’t take the ATO’s bait.
Never contact the ATO. Always get your accountant or adviser to contact the ATO. This is if it is ever required.
The ATO notes that amending the vesting date with a valid exercise of power in a trust deed or the approval of a relevant court prior to the trust vesting, will not cause CGT event E1 to happen or create a new trust.
The ATO states that it will not apply penalties that trustees or beneficiaries may be liable to pay where the parties engage with the ATO and “have a compliance history that shows they have been generally compliant with their tax obligations”. The ATO will also not assess interest “where it can be established, or the Commissioner can reasonably be satisfied, that income tax has been paid on the net income of the trust that is consistent with what we consider to be correctly payable”.
The ATO suggests that you:
- Carefully check the trust deed to determine the vesting date and what action the trustee must take on vesting. The ATO recommends that taxpayers regularly review their trust deed. This is particularly important if there has been, or is proposed to be, a change in trustee or any other amendments to the trust deed.
- Understand their obligations on vesting as the trustee. Ignoring or being unaware of the trust vesting date can have significant tax and trust law implications for both trustees and beneficiaries. The ATO says the best way to prevent any issues arising is to check the vesting date and vesting clause in the trust deed. This will allow taxpayers time to seek professional advice if the requirements are not clear, and make preparations or amendments to the trust deed as required.
- If the vesting date for a trust has already passed, the taxpayer may want to seek professional advice about the legal implications of trust vesting.
- Taxpayers need to consider taking further action if they become of aware of any issues. This may include:
- amending any relevant assessments that are within the period of review (the amendment request should include the name of the trust that has vested);
- contacting the ATO for advice if taxpayers have questions or concerns about the tax consequences of their trust vesting.
What to do now
1. Check all your clients with Family Trusts, Unit Trusts and other trust deeds.
2. Email us the Deeds that have a vesting date of less than 80 years.
3. We prepare and email back a “Deed of Vesting Extension”, Minutes and the covering letter to confirm there is no resettlement or other taxation issues. (If the Deed does not allow an extension to the vesting date, then we amend the deed accordingly, first.)
There is currently an opportunity to extend vesting dates to 80 years. This window may close as quickly as it opened. Therefore, don’t wait. Extend the vesting date.
Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National tax and trust partner
39 Stirling Highway, Nedlands, WA
Mobile: 0477 796 959
Direct: 08 6389 0400
National: 1800 141 612
Reception: 08 6389 0100
Email: [email protected]
Update the Family Trust for Bamford streaming only:
Or, update Bamford streaming PLUS update the rest of the Deed:
Or update for Bamford streaming PLUS the Deed PLUS update the Appointor & Trustee:
Update the Trustee only:
Update the Appointor only:
To deal with Division 7A (loan or UPE from your company to the Family Trust):
Forgive the ‘loan account’ and UPEs (loans from humans to Family Trust):