One question which often arises when a trust is coming to an end is how to best approach any potential tax implications which will occur when the trust is wound-up. In order to be in the best position when your trust comes to an end, it is important to know when your trust will vest and the effect of that vesting date.
What is the vesting date of a trust?
The vesting date of a trust is the point at which beneficiaries become absolutely entitled to the trust’s assets. At this date, the trust will typically come to an end and the trustee will ordinarily need to distribute the trust property to income to the beneficiaries.
Why should I be aware of the vesting date?
There are several Capital Gains Tax and income tax events which can be triggered when beneficiaries become absolutely entitled to trust assets and when assets are distributed to beneficiaries. For more information about these tax implications you can read ATO Draft Taxation ruling 2017/D10. The specific consequences will depend on the wording of the trust deed and for this reason it is advisable to seek the advice of an accountant before establishing a trust.
How do I know the vesting date of my trust?
Most trust deeds will have a defined term which clearly states the vesting date of the trust. It may also be referred to as the ‘perpetuity date’ or the ‘termination date’.
Can I change the vesting date?
The Perpetuities Act 1984 No 43 (NSW) states that the perpetuity date, also known as the vesting date, of all interests created by a settlement must be within 80 years from the date on which the settlement takes effect. Most other Australian states, with the exception of South Australia, have a similar rule against perpetuities.
For this this reason the vesting date of the Deed cannot be amended to a period greater than 80 years. If the vesting date of your trust is currently less than 80 years, the vesting date can potentially be extended to a later date depending on the powers the trust deed grants to the trustee. It is important to note that you cannot change the vesting date after that date has passed.
- While there is no way to extend the vesting date of the trust beyond 80 years, it may possible to temporarily delay potential tax implications associated with the vesting date depending on the wording of the trust deed.
- As mentioned above, on the vesting date the beneficiaries become absolutely entitled to the trust assets. This means that after the vesting date, the trustee can no longer add new beneficiaries to the trust or change the way the assets of the trust are to be distributed. This power of the trustee ends on the vesting date.
- However, Taxation Ruling TR2018/6 issued by the Australian Taxation Office in 2018 states that the Trustee may continue to hold the trust property on trust for the beneficiaries after the vesting date. This means that while the trustee can no longer change the way the trust assets are to be distributed, they may delay distribution of the assets. This will not avoid tax consequences associated with the vesting of the trust, but it may allow the trustee to delay these tax implications.
What do I need to do?
If the vesting date of your trust is approaching, you should take the time to carefully read the terms of your trust deed to ensure you know what steps nee to be taken to administer the estate. Incorrectly administering a trust can have significant trust and tax law consequences.
If the vesting date of your trust is less than 80 years from the date the trust was established, you may be able to extend the vesting date. The process for extending the vesting date of your trust will depend on the terms of your trust deed so it is important to understand these terms before taking any steps to extend the vesting date.
Our lawyers have considerable experience creating and providing advice in relation to trust deeds. Please contact Ian Miller or Shannon Walsh on +61 2 9804 5700 to discuss any questions you have.
Article prepared by: Shannon Walsh, Graduate
