A trust may end for a variety of legitimate business reasons (e.g. the business activities of the trust may have come to an end or the business owners may no longer want to use a trust structure to run their business but rather convert to a corporate structure). Alternatively, the trust may end by a court order, a resettlement or when the term of the trust expires (because trusts generally have a limited life-span up to a maximum statutory period of 80 years1).
Although this vesting date is specified in the trust deed (usually in a vesting clause), it can easily be overlooked. Many people operating through trust structures are unaware of when their trust’s vesting date is.
Just imagine that after reading this article, you go and examine when the vesting date for your trust is. To your alarm you discover either that:
Most probably the following three questions will be popping up in your head:
This article provides answers to these pertinent questions.
When a trust vests, the interests of the beneficiaries in the trust property becomes fixed at law. This means that a trustee of a discretionary trusts will no longer have a discretionary power to decide which beneficiaries will be entitled to the income or capital of the trust. After vesting, trustees will hold the trust property for the absolute benefit of those beneficiaries specified as takers on vesting (as set out in the vesting clause).
In short, the vesting process is typically as follows:
Also, trust vesting may give rise to various tax (e.g. income tax, CGT, GST & Stamp Duty) and non-tax issues (e.g. trustee has different fiduciary duties when a trust ends).
The tax consequences arising when a trust vests depends on a variety of factors (e.g. the type of trust, the residence of the trust, the type of beneficiaries, the type of assets and the type of distributions).
Broadly, for income tax purposes there will be a final distribution of trust income. It is therefore important to ensure that valid trust resolutions are in place before the vesting date to ensure there is no trustee assessment of undistributed income3. Also, any unutilised trust losses will become unusable/lost.
The mere vesting of a trust will not necessarily give rise to CGT consequences. For example, if a trustee continues to hold trust assets for takers on vesting, the trust assets will be held on the same trust that existed pre vesting – only the nature of the trust relationship changes on vesting.
A capital gain/loss will only arise if there is a disposal or transfer of legal title of the trust assets. On such a transfer the beneficiary will usually receive an uplift of the cost base to the market value of the asset received, depending on the type of trust and how the assets are disposed of. However, there may be significant capital gains on such transfers.
The most important post vesting events that may lead to CGT consequences are4:
There are also GST issues (whether a cash distribution or an in specie distribution of assets is a taxable supply), which usually turns on whether the recipient is registered for GST. Stamp Duty issues (whether dutiable property is transferred) also arise when a trust comes to an end. Depending on the state/territory, exemptions are available, provided the movement of assets is structured correctly.
The trustee also has certain obligations to perform in order to pay the trust debts and distribute trust income and property (whether in cash or in specie) to beneficiaries – the steps that the trustee must follow are usually set out in the vesting clause of a trust deed.
Once this has been done, the trustee must generally complete all financial records, inform the beneficiaries in writing of the distributions and lodge final tax returns.
A word of caution for trustees: to avoid a potential liability, it is very important for the trustee to distribute trust property correctly when a trust ends.
The vesting date of a trust can be extended prior to vesting without triggering a resettlement or creating a new trust, provided5:
In such a case (i.e. where the trust is continued to be administered inconsistent with the vesting terms), there will be no automatic extension of the vesting date. Instead, a new trust would have been created because the nature of the trust has changed.
Because a new trust has been created:
This article briefly touched upon some consequences when the term of a trust expires and the trust relationship comes to an end.
It also stressed the importance of being aware of when a trust’s vesting date is, and taking appropriate strategies to extend the vesting date before the trust vests.
As with most things in life, it is a good idea to plan ahead so that you have systems and strategies in place to ensure you have the best chances of identifying the vesting date of a trust and to ensure the trustee fulfills its obligations when a trust ends.
Nexia Edwards Marshall has the necessary expertise and experience to assist you in setting up your systems and strategies to help you manage your different trust risks.
Because different States and Territories in Australia have different rules about the basic powers and responsibilities of trustees, please speak to your Nexia Edwards Marshall Adviser in your particular state so that we can help identify and deal with any issues to help you strengthen your business.
1 - This 80-year rule against perpetuities does not apply in South Australia.
2 - This must be done before the trust vests.
3 - Final distributions are taxed as per normal distributions (i.e. on a proportionate basis and depending on how the trust deed defines income, income may include capital gains)
4 - Taxation Ruling TR 2018/6
5 - Taxation Determination TD 2012/21
The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Advisor.