Taxation Ruling TR 2018/6 (Ruling), issued on 15 August 2018 alongside the Ruling Compendium TR 2018/6EC, sets out the ATO’s final views with respect to the immediate income tax consequences of a trust vesting having regard to the powers of a trustee under the deed including the ability to amend the vesting date.
The Ruling also discusses the tax implications arising where the trustee mistakenly purports to exercise their discretionary power of appointment after the vesting date is reached.
Specifically, the Ruling provides guidance in relation to the matters outlined below.
Amending a trust’s vesting date
- a trust deed typically specifies the date on which the interests in the trust vest and the consequence of that date being reached, as required by the rule against perpetuities (Vesting Date)
- prior to the Vesting Date and subject to the trust deed or court order, it may be possible for the trustee to postpone the vesting of the trust by nominating a later date (and doing so through a valid amendment prior to vesting should not give rise to CGT event E1)
- however, once the Vesting Date has passed, it is no longer possible for a trustee to change or postpone vesting with the result that the interests in the trust property become fixed at law and
- neither a mistaken assumption that discretionary powers of appointment continue to apply after the Vesting Date nor ignorance of the Vesting Date having been passed can alter the legal and equitable rights of parties that are established by the terms of the trust on vesting (which, from the moment of vesting, are fixed).
Trust law consequences of a trust vesting
- once the trust has vested, all of the interests in the trust as to income and capital become fixed beneficial interests of the residual beneficiaries specified in the trust deed
- if the trust is a discretionary trust, the trustee will no longer have any discretionary power to appoint the income or capital of the trust; rather, the trustee will hold the trust property for the absolute benefit of the residual beneficiaries
- vesting does not ordinarily cause the trust to come to an end nor cause a new trust to arise, nor is there a requirement that trust property be transferred to the residual beneficiaries on the Vesting Date and
- moreover, where the trustee continues to hold property, it is held pursuant to the same trust as existed prior to vesting (although the nature of the trust relationship will have changed).
Vesting Dates and CGT consequences
- broadly, whether a CGT event has occurred requires a close consideration of the relevant trust deed, and the subsequent conduct of the parties
- CGT event E1 may arise where the parties to a trust relationship subsequently act in a manner which creates a new trust e.g. declaration or settlement
- CGT event E5 may arise where the vesting of the trust results in the residual beneficiaries becoming absolutely entitled against the trustee to CGT assets of the trust and
- CGT event E7 may arise where CGT assets are distributed to beneficiaries post-vesting (but not to the extent to which beneficiaries are already absolutely entitled to those assets).