Thinking | 24 February 2015
Trusts: varying the vesting date
A fast approaching vesting date of a trust is becoming a more common issue for professional advisers and clients. If the vesting date is reached, the trust vests and significant capital gains tax and duty liabilities can arise.
The recent case of Andtrust v Giovanni Andreatta1 confirmed that where a variation power permits, it can be used to extend the vesting date of the trust. This case also confirms the importance of carefully reviewing the terms of the variation power, as not all variation powers will allow the vesting date to be extended.
The facts in Andtrust
This case involved a family discretionary trust with a broad range of potential discretionary beneficiaries. However, the terms of the trust provided that the trust was to vest on 23 June 2016, being 40 years from when the trust was established.
The trustee made an application to the Supreme Court to extend the vesting date, relying:
- firstly on the width of the variation power under clause 10 of the trust deed; and
- secondly and in the alternative, on the Court’s power to approve a variation of the trust deed.
The variation power
The variation power under clause 10 of the trust deed provided that:
‘At any time prior to the vesting day the trustee may by deed under his hand (or if a company under its common seal) vary any of the trusts, powers discretions or duties herein set forth in any manner whatever including but without in any way limiting the generality of the foregoing, enlarging any category of eligible beneficiaries so far as this power shall not infringe the rule against perpetuities.’
The Court took the view that the trustee could rely on the variation power to extend the vesting date of the trust, provided the new vesting date did not exceed the rule against perpetuities.
What can we learn from Andtrust?
Andtrust confirms that where there is a broad variation power, in this case to vary the ‘trusts, powers discretions or duties’, the power can be used to extend the vesting date.
However, it pays to give particular attention to the terms of a variation power. From our experience in reviewing and varying many thousands of trust deeds in recent years, many trust deeds will contain limitations or restrictions, including:
- the variation power cannot be used to extend the vesting date;
- the consent of an individual (such as a guardian or appointor) is required; or
- there is no variation power.
The use of the variation power will only be valid for trust law purposes if it is exercised subject to any limitations. Further, under TD 2012/21, the Commissioner of Taxation confirmed his view that capital gains tax will not apply to a variation of a trust provided the variation power is properly exercised.
And if there is no variation power…
All is not lost. If there is no variation power, or if the variation power is limited and cannot be used to extend the vesting date, the Supreme Court has power to approve an extension of the vesting date in certain circumstances.
Considering an extension of the vesting date?
Given the importance of making sure the variation power is properly exercised, seeking advice on whether a variation power allows the vesting date to be extended is critical. It will ensure the power can be properly used, and avoid duty and tax liabilities that could otherwise arise.
Hall & Wilcox has extensive experience on reviewing and advising clients regarding trust deeds, including the use of variation powers, varying trust deeds to insert income and streaming provisions, and extending the vesting date of trusts. We can assist in all of these areas.
<sup1 NSWSC 38
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