Tax practitioners have spent much time this year reviewing their clients’ trust deeds to make sure the trustee has appropriate powers and their distribution resolutions are correct. We discussed some of these issues in our Taxation Update of 3 May 2012. In some cases, the review of the trust deed has stopped once the relevant powers have been identified. There is a critical issue that is often overlooked– the vesting date of the trust. Missing the vesting of a trust can have significant tax consequences. In many cases, a shorter than usual vesting date can be extended to avoid vesting a trust, and the CGT and revenue implications that go with it.
Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust. More unusual vesting periods include the death of a particular family member, or 21 years after the death of the last living descendant of King George V alive at the time the trust was established. We recently received a deed from a client that had a vesting period of 40 years. The client was in a panic as this had been overlooked and the trust had already vested. What could be done? Unfortunately the horse had already bolted.
The trust has vested – practical implications
Trust deeds generally have a default distribution mechanism to distribute the trust fund on the vesting date where the trustee has not exercised its discretion to distribute. Where the vesting date has been overlooked, the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as ‘primary beneficiaries’).
The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base. The beneficiaries would acquire the trust property at the vesting date, with a cost base equal to its market value.
From a revenue perspective, stamp duty is usually chargeable in Victoria on transfers and certain other transactions relating to land, including transactions resulting in a change in beneficial ownership of land. Depending on the default distribution provisions in the trust deed, the vesting of a trust that results in a change in the interests in land could be a dutiable transaction in Victoria.
Can vesting be avoided?
Section 5 of the Perpetuities and Accumulations Act 1968 (Vic) requires trust property to vest within 80 years (most other States and Territories in Australia have a similar perpetuity period, however, South Australia has abolished the perpetuity period). If a trust deed has a shorter vesting date, such as 40 years, the vesting date can potentially be extended to avoid unwanted consequences.
Extending the vesting date – power under the trust deed
Some trust deeds give the trustee power to extend the vesting date. If the trustee exercises this power properly, and does not exceed the perpetuity period, the extension will be valid, and the trust can continue.
Extending the vesting date – no power under the trust deed
Some trust deeds do not contain a power to extend the vesting date. Fortunately, this does not mean all is lost. The Supreme Court in most States has the power to vary trusts under their respective trust legislation. 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 it is for the benefit of the beneficiaries of the trust.
In the recent case of Re Plator Nominees  VSC 284, the trustee of a discretionary trust sought an order from the Victorian Supreme 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.
Resettlement of the trust should also be considered when extending the vesting date. With the withdrawal of the Commissioners ‘Creation of a new trust – Statement of Principles August 2001’, draft TD 2012/D4 provides the only current guidance on the Commissioner’s view on the creation of a new trust over CGT assets. Unlike the Statement of Principles, the draft TD does not specifically discuss extending the vesting date of a trust.
In light of FCT v Clark & Anor  FCAFC 5, and the Commissioner’s comments in the draft TD, where the trustee exercises a valid power to extend the vesting date, there should not be a resettlement.
If there is no power, consideration should be given to the substratum of the trust and the settlor’s intention at the time the trust was established (this was also noted by the Court in Re Plator Nominees). If there is a clear reason why a shorter vesting period was nominated, caution should be exercised before any attempt is made to extend the vesting period.
In many cases, the vesting of a trust can be avoided where there is an unusual vesting date. Prudent tax practitioners should check the vesting date of their clients’ trust deeds to avoid any potential issues, and seek advice if a vesting date is approaching.