In December 2017 the ATO  published a draft taxation ruling outlining the various consequences that may arise out of the vesting of a trust.

Taxation Ruling 2017/D10

On 13 December 2017 the Commissioner of Taxation released a draft taxation ruling on trust vesting referred to as TR 2017/D10. The ruling specifically relates to the amending of vesting dates (termination dates), and consequences of a trust vesting. TR 2017/D10 allows taxpayers to rely on the preliminary views held within it. TR 2017/D10 discusses: amending a trust’s vesting date, consequences of a trust vesting, capital gains tax (CGT) consequences of trust vesting, and taxation of trust net income after the vesting date.

Amending a Trust’s Vesting Date

Provided that the rule against perpetuities is not violated, the Commissioner acknowledges that it may be possible for a trustee or court to alter the vesting date of a trust. However, it is not possible to extend the vesting date once such date has passed. TR 2017/D10 states that ‘once the trust has vested, the interests in the trust property become fixed at law’[1].

Consequences of a Trust Vesting

Interests in the property of a trust become vested in interest and possession on a trust’s vesting date. In relation to discretionary trusts, from the time of a trust’s vesting date, a trustee must hold trust property for the absolute benefit of the beneficiaries (also referred to as takers on vesting). From this date, the trustee loses any discretionary power to appoint the income or capital of the trust. Although the nature of the trust relationship between trustees and beneficiaries does change upon the date of trust vesting, when a trustee continues to hold property, the underlying trust relationship continues.

Capital Gains Tax Consequences of Trust Vesting

TR 2017/D10 outlines the potential capital gains tax (CGT) consequences that may arise due to the vesting of a trust. These are referred to in TR 2017/D10 as CGT event E1: creation of a new trust; and CGT event E5: beneficiary becoming absolutely entitled.

CGT event E1 – creation of a new trust

The mere vesting of a trust does not generally cause the creation of a new trust to occur. Rather, the creation of a new trust is caused by the subsequent actions of parties to a trust relationship that results in a new trust being created by declaration or settlement. If CGT event E1 occurs: ‘a trust is created over the assets, the trustee of the new trust is taken to acquire each asset when the trust is created and the first element of each asset’s cost base is its market value[2]’.

Example of CGT event E1

After the vesting date has already passed, a trustee continues to manage the trust as if the trust had not vested. Any following deed of extension is void. Given this, if a new trust over the assets is established by declaration or settlement upon the agreement of all the beneficiaries that the trust assets continue to be held on a new trust on the same terms as the original, then CGT event E1 would happen in relation to the trust assets.

CGT event E5 – beneficiary becoming absolutely entitled

Beneficiaries may become absolutely entitled as against the trustee to CGT assets of the trust, upon the vesting of a trust. The Commissioner’s view on this issue are explained in TR 2004/D25.

In TR 2004/D25 the Commissioner expressed the view that follows the rule established in Saunders v Vautier[3]. That is, a beneficiary who has a vested and indefeasible interest in an entire trust asset has absolute entitlement to the asset, and may call for the asset to be transferred to them or to be transferred at their discretion. However, it is the general rule that unless the assets in a trust are fungible (interchangeable with one another), if there are multiple beneficiaries to a trust, an individual beneficiary cannot become absolutely entitled to a trust.

Taxation of Trust Net Income After the Vesting Date

Different beneficiaries may be presently entitled to income of the trust, prior to the vesting date in the year in which vesting occurs. For example, with a discretionary trust a trustee may appoint pre-vesting income among those entitled to benefit under the trust. Allocation of income of the trust estate into pre-vesting and post-vesting income of the trust in the year in which vesting occurs will be accepted by the Commissioner if it is done having regard to all of the relevant circumstances on a basis that is fair and reasonable.

Rejection of Alternative Views

The Commissioner in TR 2017/D10 rejects the alternative view that continued behaviour that is consistent with the terms of the trust prior to the vesting date, by both the trustee and beneficiary, is sufficient to extend the trust’s vesting date. The Commissioner is equally clear that neither a mistaken assumption or ignorance of the vesting date can alter the legal and equitable rights of parties that are established by the terms of the trust. TR 2017/D10 stresses the importance for both trustees and beneficiaries to be conscious of the vesting date of the trust, given the CGT consequences of such an event occurring.

[1] Australian Taxation Office, Draft Taxation Ruling TR 2004/D25, Taxation Determination (2017).

[2] Ibid.

[3] Saunders v Vautier (1841) 49 ER 282.