Lately, as accountants in Sydney, we have encountered a few situations where our clients’ trusts are approaching the vesting date. The vesting date of a trust is when the assets of a trust vest in the beneficiaries. On vesting, the beneficial interests in the assets become fixed.
The ATO issued a draft tax ruling (TR 2017/D10) late last year addressing the circumstances where a trust’s vesting date can be amended and the tax consequences of a trust vesting. The vital points in the draft ruling are that:
- Before vesting, it may be possible to extend the vesting date. The extended vesting date can’t breach the rule against perpetuities (which limits the trust life to 80 years in most states);
- At the vesting date, the interests in the trust property become fixed, and it is no longer possible to extend the vesting date; and
- Continuing to administer a trust as if it hadn’t vested can have significant tax consequences.
A trust’s vesting doesn’t always end the trust or create a new one. Suppose the trust deed allows the trustee to continue to hold the trust property for specified beneficiaries after the vesting date. In that case, the same underlying trust relationship continues after the vesting date, but the trustee’s duties will have changed. For a discretionary trust, for example, once the trust has vested, the trustee no longer has any discretionary power concerning income or capital but may continue to hold the trust property for the absolute benefit of specified beneficiaries.
Vesting of trust can trigger Capital Gains Tax, but this is not always the case.
To avoid unnecessary tax consequences, trustees must be aware of the trust’s vesting date. With planning in the few years leading up to the vesting date, advice can be sought, and action is taken to ensure that vesting is as tax effective as possible.
The ATO have a page on their website providing further details on trust vesting, including a link to the draft ruling and consultation process.
Kreston Stanley Williamson Team
*Correct as of July 2018
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