Legal Insights

What is your trust’s vesting date and why should you know it?

By Bridie O'Shannessy

• 14 February 2018 • 4 min read
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Missing your trust's vesting date can have serious tax and trust law implications

Missing the vesting date of your trust can have serious tax and trust law implications – it is not a date to be overlooked.

The Australian Tax Office (ATO) recently released a draft tax ruling on the tax implications of a trust vesting, which provides a timely reminder of the importance of paying attention to a trust’s vesting date.

What is the vesting date?

The vesting date (or termination date) is the date upon which the trust will end, and in almost all cases this date is specified in the trust deed.

You cannot change the vesting date of a trust after that date has passed. Generally the vesting date can be extended prior to it being reached without adverse consequences, however:

  1. it cannot be extended to a date that is more than 80 years from the date the trust commenced
  2. the trust deed must allow the extension: you must ensure the terms of the trust deed are complied with in the event you change the vesting date (whether by an express power to bring forward the vesting date where the default vesting date is 80 years, or by varying the deed)
  3. the vesting date may be an essential feature of the trust, in which case varying it should be carefully considered in case doing so will give rise to ‘resettlement’ issues.

What happens on the vesting date?

On the vesting of a trust the relevant beneficiaries (who are entitled under the terms of the trust deed) become absolutely entitled to the property of the trust: that is, the interests in the trust property become fixed and vested in the relevant beneficiaries.

The powers of the trustee change when the trust vests. For instance, in the case of discretionary trusts the trustee loses its discretion to distribute income or capital of the trust and the relevant beneficiary can call for its fixed entitlement to be paid.

Why does the vesting date matter?

Vesting of a trust may create capital gains tax (CGT) and income tax obligations. You should read the ATO draft tax ruling to understand the types of CGT events that may occur and income tax implications that may arise, these include:

  1. if the trustee and the relevant beneficiaries (who on vesting have a fixed interest) agree that the trust assets will be managed as if the trust has not vested, then this may amount to CGT event E1, whereby a new trust is created over the trust assets starting from the vesting date
  2. if the assets vest in a single beneficiary on the vesting date, then CGT event E5 happens when the beneficiary becomes absolutely entitled to the trust asset as against the trustee.

Alternatively, seek advice from your accountant on whether the vesting of your trust will have CGT or income tax consequences. The tax implications will depend on the terms of your trust deed.

If the vesting date is in 80 years, isn’t this only an issue for the next generation of beneficiaries?

This is true to an extent, in that family trusts (and other private trusts such as unit trusts) only really became commonplace in the 1970s and 1980s. However sometimes by design, and sometimes by error, deeds do include vesting dates of much less than 80 years.

For instance, Maddocks has advised a client on the extension of a vesting date for a trust which held more than $40 million of Australian property from 2020, to a date 80 years from the trust’s creation (2050). Because the potential CGT and duty consequences of any change to the trust deed which amounted to a creation of a new trust (or ‘resettlement’) were so substantial, rulings were obtained from the ATO and Victorian SRO prior to execution of the deed of variation.

What do I need to do?

You should take this opportunity to check the vesting date of your trust deed and carefully read the terms of the trust vesting so that you do not risk the trust being administered incorrectly after the vesting date and face tax and trust law consequences for doing so.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

Want more information on managing your trust?

Contact the Financial Services team.

By Bridie O'Shannessy

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