By Evan Brownsmith, Evan BrownsmithDirector
4 October 2021
Failing to recognise the vesting date of your trust can result in serious tax and legal consequences. Your planning opportunities are limited if this date is overlooked.
What is the vesting date?
The vesting date is the date upon which the existing trust relationship ends. This date is typically specified in the trust deed.
While you cannot change the vesting date after it has passed, most deeds will permit the trustee to extend the term of the trust prior to vesting. However, the law against perpetuities will prevent a trust from being extended to a date that is more than 80 years from settlement.
What happens on the vesting date?
The ATO position on trust vesting is summarised in TR 2018/6:
- All of the interests as to income and capital become vested in interest and possession.
- The beneficiaries, known as “takers on vesting”, become absolutely entitled to the property of the trust, and the trust becomes fixed.
- Where there is more than one such beneficiary the property is held as tenants in common.
- This is not a new trust, just a change in the relationship between the trustee and the The ATO do not require that the trust obtain a new TFN.
- The trustee and the beneficiaries are still bound by the same deed, even though the deed may be silent on the powers of the trustee in this new phase of administration.
Failure by a trustee to recognise the vesting date, causing income to be mistakenly appointed in a manner inconsistent with the fixed interests of the takers on vesting, should cause amended tax assessments and likely result in an arrears of income tax. Further, any payments made in satisfaction of such appointments of income would be unauthorised and could be in breach of trust.
CGT Event E5
The vesting itself may constitute a CGT event E5, depending on the circumstances.
E5 occurs when a beneficiary becomes absolutely entitled to a CGT asset as against the trustee, and has taxing consequences on both the trustee and the beneficiary.
The concept of absolute entitlement is not settled at law. Some case law indicates that it is difficult to establish absolute entitlement due to the trustee's right of indemnity for trust liabilities. Further, the ATO have expressed doubt as to whether absolute entitlement arises where more than one potential beneficiary exists.
If this CGT event does occur, the trustee is assessed on any gain arising on the CGT assets at their current market values, which becomes the cost base for the beneficiary. This gives the beneficiary what accountants commonly refer to as a market value uplift.
Once again, it is important for the trustee to have knowledge of the vesting date so that taxing consequences can be planned and managed.
What do I need to do?
All trustees should take an opportunity read their trust deed and check the vesting date of your trust. They should also carefully read what the deed dictates shall occur on vesting. Trustees are exposed to a range of punitive tax and legal consequences if the trust is not administered correctly after the vesting date.