The NSW Supreme Court has declined to allow the variation of a trust vesting date in order that tax liabilities could be avoided.
The plaintiff is the trustee of a trust that was created by a Deed of Settlement made on 8 June 1965. The Trustee was required to hold the settled property on trust for the beneficiary. The Deed was later varied and changes were made to the terms of the trust, including a new clause as to the vesting day. The vesting day is the day on which the period of 50 years after the execution of the Deed of Settlement expires ie 8 June 2015. The plaintiff is concerned that if there is a vesting of the trust property on that date, there will be consequences adverse to the beneficiaries, in particular the incurring of CGT and stamp duty liabilities.
The Settlor died in 1991 so the power of variation contained in the Deed is no longer available. The Deed contains no other power of variation. Accordingly, the plaintiff sought relief to enable it as Trustee to vary the vesting date to any day not later than 7 June 2045.
The Court said the only assets of the trust were 100 ordinary shares and 20 redeemable preference shares in a private company, Khalil Investments Pty Limited, which apparently had assets with a net market value of in excess of id=”mce_marker”6m. The Court said there was also evidence that if there were a vesting of the trust property in June 2015, there would be a net capital gain (allowing for the 50% discount) of id=”mce_marker”,365,302 and thus a total CGT liability (assuming a marginal tax rate of 49%) of $668,998. According to the second defendant, there may also be a liability for stamp duty totaling an amount estimated to be greater than $38,000. It was claimed that if the vesting took place in June 2015, it would be necessary for assets to be sold to meet the tax liabilities.
After reviewing the matter, the Court found this was not a case where it would be justified in sanctioning a variation of the terms of the trust to provide for a later vesting day. The Court did not think it was correct to characterise the circumstances of the present case as involving an emergency that had arisen in the course of administration of the estate, which needs to be resolved in the interests of preserving the trust property.
(Paloto Pty Limited v Herro [2015] NSWSC 445, NSW Supreme Court, Darke J, 10 April 2015.)
[FJM Note: I’m not sure this is the required test: an ‘emergency’.]
[LTN 77, 24/7/15]