On Wed 15.8.18, the ATO issued Taxation Ruling TR 2018/6, in final form, on the tax consequences of vesting a trust. These views are the same as those contained in Draft TR 2017/D10, although the final ruling includes some fine-tuning.
Overview of vesting
A trust’s “vesting” or “termination” date, can be the same date but they are different functions.
- The ‘Vesting Date’ is the date on which the beneficiaries’ interests, in the trust fund, become “vested in interest’, which is to say, the the date when contingent interests either become absolute or disappear (in favour of those that become absolute). If the trust has contingent interests, then the trust will say when they end, and if it doesn’t it will be in breach of the ‘rule against perpetuities’ / the ‘rule against indestructible trusts’ / the ‘rule agains remoteness of vesting’ which are all the same thing. The trust must provide for those contingent interests to end within a perpetuity period’ (a life in being or the statutory maximum period of 80 years, in Victoria, for instance). And if the deed doesn’t require those interests to become absolute, within such a period, then there is a statutory ‘wait and see’ rule, so the trust is not struck down as invalid, from the outset.
- The ‘Termination Date’ is the date that the Trust is actually to be would up, and the trust assets ‘vest’ in (are transferred to) the beneficiaries. This is when interests that are ‘vested in interest’ also ‘vest in possession’. Of course, if all beneficiaries agree, the trust could be run on for the agreed period.
It is easy to see how these two dates get confused. Often a trust terminates on the day the contingencies resolve, but it doesn’t have to. Also, the transfer of legal title to the beneficiaries, is also called ‘vesting’.
What the ruling says
The ATO notes that vesting does not, of itself, ordinarily cause the trust to come to an end or cause a new trust to arise. If the trustee continues to hold property for the takers on vesting, the property will be held on the same trust (although the nature of the trust relationship will change).
The key points made in TR 2018/6 are that:
- prior to vesting, it may be possible to extend the vesting date (by applying to a court or by the trustee exercising a power to nominate a new vesting date). A proposed alteration by a trustee without court intervention will be subject to any specific requirements in the trust deed about how and when any alteration to the vesting date can occur;
- it is too late to change the vesting date once it has passed and the ATO says it is unlikely that a court would agree to do so due to the interests in the trust property becoming fixed at law;
- CGT event E1 (creation of a new trust) “need not happen merely because a trust has vested”. This is because vesting does not, of itself, ordinarily cause a trust to come to an end and its property to settle on the terms of a new trust. However, CGT event E1 may occur if the parties to a trust relationship subsequently act in a manner that results in a new trust being created by declaration or settlement (see Example 4 of TR 2018/6);
- CGT event E5 (beneficiary becoming absolutely entitled) may occur if the takers, on vesting, become absolutely entitled to particular trust assets, as against the trustee; and
- CGT event E7 (disposal to a beneficiary to end a capital interest) may happen on actual distribution of CGT assets, to beneficiaries, but will not occur to the extent that the beneficiaries are already absolutely entitled to the CGT assets.
The ruling notes that, a vesting mid way through an income year, might involve the discretionary beneficiaries having pre-vesting income appointed to them, and the balance of the income might then might then accrue to the beneficiaries on vesting. In this situation, the Commissioner will accept a “fair and reasonable” allocation of trust income into pre- and post-vesting trust income.
My own views about this are, however,
- That it is almost inconceivable that the Trust Deed would allow a trustee to distribute the net [trust law] income of the trust, for a part period, without taking accounts, so that it knew how much it had to distribute.
- A trustee could, of course, appoint particular amounts, to discretionary beneficiaries, prior to vesting. But the trust would then strike accounts, at the end of the year (post-vesting) and the particular amounts (appointed to the discretionary beneficiaries, whilst the trustee still had that power) would simply part of that years net income, distributed in that particular beneficiary(ies).
- Absent any pre-vesting appointment of income to the discretionary beneficiaries, all the distributable (trust law) ‘net income’ of the trust, would accrue to post vesting beneficiaries (even the pre-vesting portion of that net income).
DATE OF EFFECT: TR 2018/6 applies retrospectively.
[LTN 156, 15/8/18; Tax Month – August 2018]
Comprehension questions (answers available)
- Is this ruling about the tax consequences of a trust vesting?
- Can the vesting date of a trust be extended, before the vesting date?
- Can the vesting date be extended after the vesting date has passed?
- Does the vesting of a trust (contingencies resolved) create a new trust (and therefore create a E1 Event);
- Does the vesting of a trust (contingencies resolved) give beneficiaries an absolute interest to particular assets of the trust, as against the trustee, such that an E5 event would occur?