Often when advisors and clients are reviewing trust deeds a critical issue can overlooked – the vesting date of the trust.
The ATO has recently issued a Draft Ruling setting out some key tax considerations around trust vesting which our Tax team discussed earlier this year. Where the vesting date is fast approaching, there are a number of steps that can be taken to try to extend the vesting date and avoid the potential tax and duty implications that can arise on vesting.
What is the vesting date?
The vesting date is the date defined in the trust deed as the date when the trust will ‘officially end’. Once that date is reached, nothing can be done to extend the date.
The trustee is required to wind up the trust in its original form on the vesting date, and distribute or hold trust assets as set out in the vesting provisions of the trust deed. This may, depending on the trust terms, result in significant capital gains tax and duty liabilities.
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Why amend the vesting date?
Many modern trust deeds have a standard vesting period of 80 years from the date of establishment. However, there are many older trust deeds from the 1970’s and 1980’s which have vesting periods of only 40 or 50 years from the date of establishment. This means that you may encounter a trust deed which is either close to expiration or has already expired.
Where the trust is approaching its vesting date, extending the vesting date of the deed will allow the trustees to postpone any consequences that could arise on vesting, which could include both tax and non tax consequences, and also allow continued flexibility for distributions. From a tax planning perspective, it is critical to know the vesting dates of your clients’ trusts. It cannot be assumed that they will all be 80 years after settlement. The moral of the story – read the deed!
It is also a useful exercise to set up a table of key provisions and dates for each trust to spot any issues (not only with vesting dates, but also with death or incapacity of appointors and guardians, and also key clauses such as income definitions and streaming provisions).
What happens if the vesting date is fast approaching?
There are two main ways for the vesting date of a trust to be extended:
Extending the vesting date – power under the deed
The vesting date of a trust can be amended where it is permitted under the terms of the trust deed and does not breach the rule against perpetuities.1 The ATO helpfully confirmed they agreed with this position in TR 2017/D10 (which is consistent with their earlier views in TD 2012/21). This can often be done using a specific power (where it exists), or a variation power (provided there are no limitations on the variation power).
Supreme Court application
If there is no power provided under the trust deed all is not lost.
In Victoria, section 63A of the Trustee Act 1958 allows the Supreme Court to approve arrangements varying or revoking the trusts or enlarging the powers of the trustee, where there is no variation power, or if the variation power is limited. The key consideration for the Court is ensuring the variation is for the benefit of the beneficiaries of the trust. Many other jurisdictions have similar powers.
In the case of Re Plator Nominees2, the trustee of a discretionary trust sought an order from the Court to extend the vesting date. The trust was established with a vesting date of 40 years. The Court noted it ‘must consider the benefits and disadvantages of the proposed variation overall, taking into account the purpose of the trust and the settlor’s intention in establishing the trust’, and agreed to extend the vesting date as it was the settlor’s intention to benefit his family for the long term.
Andtrust v Giovanni Andreatta3 also confirmed that where a variation power permits, it can be used to extend the vesting date of the trust. This case also emphasises the importance of carefully reviewing the terms of the variation power, as not all variation powers will allow the vesting date to be extended.
Given the impact of a trust vesting, making sure you understand how the vesting date provisions operate is key. If it vests earlier than the usual 80 year period, it is worthwhile investigating if the vesting date can be extended.
Completing an audit of all trust deeds helps to identify any potential issues and nasty surprises, and also gives you time to plan for the vesting of any trusts in the nearer future.