Most trusts have a limited life. When a trust comes to an end, it is said that the trust vests. The Australian Taxation Office (‘ATO’) has recently stated its concern around trust vesting.
In particular, the ATO is concerned that some taxpayers may attempt to extend the vesting date of their trusts after they have vested and are not aware of the tax consequences of the trust vesting. It is now working in consultation with industry and aims to publish detailed information about the tax consequences of trusts vesting, including attempts to extend the vesting date after a trust has vested.
The requirement that trusts have a limited life can be traced back to the old British common law and this doctrine is commonly known as the ‘rule against perpetuity’. In all the Australian states (except South Australia), this rule is now legislated and trusts can only have a maximum life of 80 years from the time of their creation.
However, some trusts may have a shorter life depending on the terms of the Trust Deed. For example, a Trust Deed may state that the trust ends upon certain minor beneficiaries reaching the age of 25. In this case, it is possible to extend the life of the trust to a maximum of 80 years provided the terms of the Trust Deed allow this. However, to be effective, this must be done before the trust vesting date. Therefore, the trustee must always be aware of this important date and proper planning should be done prior to the date.
On the vesting date, the governing document of a trust (e.g. the Trust Deed) will usually dictate what the trustee is required to do with the assets of the trust and which beneficiaries are entitled to the assets of the trust. Further, where the beneficiaries become absolutely entitled to the assets of the trust and there are substantial unrealised capital gains on some of the more valuable assets of the trust (e.g. shares, real property, goodwill, etc), the trustee is taken to have crystallised the capital gains for tax purposes. In the case of unplanned trust vesting, the trustee may inadvertently be exposed to substantial Capital Gain Tax (‘CGT’) liability and may not have the cash to pay the tax debt without the forced sale of some of the assets.
Given the potential adverse taxation consequences of trust vesting and the ATO concern surrounding this, trustees should get the Trust Deed reviewed by the tax advisers and seek advice where required.
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