Trust vesting: draft ATO Ruling on trust vesting

The Commissioner issued Draft Taxation Ruling TR 2017/D10 “Income Tax: Trust Vesting – amending the vesting date and consequences of a trust vesting” on 13 December 2017. The ATO has invited comment on TR 2007/D10 with comments due by 16 February 2018.

The views in TR 2017/D10 are not materially different from those expressed at recent public forums, although TR 2017/D10 states those views in an administratively binding form and provides further detail (including several examples).

The views in TR 2017/D10 on vesting

In summary, the views in TR 2017/D10 on vesting are that:

  • Prior to a trust's vesting, it may be possible for the trustee or a Court to postpone the vesting of the trust by nominating a later vesting date. While TR 2017/D10 does not explicitly say so (although Example 3 in TR 2017/D20 implies this), an extension of the vesting date must not breach the rule against perpetuities. For most States, excluding South Australia, this means a period not exceeding 80 years.
  • Once the vesting date has passed, the trust has vested, and it is no longer possible to extend the vesting date. Specifically, once the trust has vested, the interests in the trust property become fixed.
  • The Commissioner does not accept the view that continued behaviour by both the trustee and beneficiaries of a trust, in a way that is consistent with the terms of the trust as they existed prior to its vesting date, may be sufficient to extend the trust's vesting date.

Consequences of a trust vesting

The Commissioner’s view is that on a trust's vesting date, the interests in the property of the trust become vested in interest and possession. In the case of a discretionary trust, from the time the trust vests a trustee no longer has any discretionary power to appoint the income or capital of the trust, rather the trustee holds the trust property for the absolute benefit of those beneficiaries specified as the takers on vesting. 

CGT consequences of a trust vesting

TR 2017/D10 considers the application of CGT events E1 (creation of a trust) and E5 (beneficiary becoming absolutely entitled to a trust asset). There are several other CGT events (for example, CGT events A1, E4, E6, E7 and E8) that may happen on the transfer, disposal, and distribution of property from a trust that has vested. However, if more than one CGT event happens, the taxpayer uses the most specific CGT event.

CGT event E1

  • TR 2017/D10 states that trust vesting of itself does not ordinarily cause CGT event E1 to happen, however, circumstances might occur where the parties in a trust relationship act in a manner that may result in a new trust by declaration or settlement and cause CGT event E1 to happen.
  • Example 4 in TR 2017/D10 considers a circumstance where the trustee is aware that the vesting date has passed and continues to manage the trust as if it had not vested. If all of the takers on vesting agree that the trust assets should continue to be held on a new trust on the same terms as the original trust, and this was effective to create such a new trust over the assets by declaration or settlement, CGT event E1 would happen.

CGT event E5

The Commissioner in TR 2017/D10 does not discuss CGT event E5 in detail. Instead, the Commissioner refers to his view in Draft Taxation Ruling TR 2004/D25Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997”. Importantly, the Commissioner’s view in TR 2004/D25 is that:

  • the existence of a trustee's right of indemnity against a trust asset will not prevent a beneficiary being absolutely entitled to the asset (although this view is inconsistent with the view of Edmonds J in Oswal v FCT [2013] FCA 745); and
  • the requirements for absolute entitlement within the context of the CGT provisions cannot be satisfied if there are multiple beneficiaries in respect of a single asset (although the Commissioner provides an exception for fungible assets such as shares). 

The Commissioner in TR 2017/D10 states that the vesting of a trust may result in the takers on vesting becoming absolutely entitled as against the trustee to CGT assets of the trust, depending on what those CGT assets are and the interests of the takers on vesting. Overlaying the Commissioner’s views in TR 2004/D25, if there are multiple takers on vesting in relation to non-fungible trust assets, then CGT event E5 would not happen. If there is a single taker on vesting, or the assets are fungible such as a parcel of shares, then CGT event E5 could occur.

 Taxation of trust net income after the vesting date

In the year in which vesting occurs, different beneficiaries may be presently entitled to income of the trust estate derived before, as opposed to after, the vesting date. For example, in the case of a discretionary trust, a trustee may, pre-vesting, exercise its discretion to appoint income of the trust derived before the vesting date among the beneficiaries. By contrast, the takers on vesting hold the present entitlement to the income of the trust estate derived post-vesting.

The Commissioner in TR 2017/D10 states that he will accept an allocation of income of the trust estate into pre-vesting and post-vesting income of the trust estate in the year in which vesting occurs that is done on a fair and reasonable basis.  Example 5 of TR 2017/D10 considers this issue.

Practical issues

Trustees and advisors need to be aware of the vesting date (before it passes). Ahead of the vesting date the trustee can consider extending the date (subject to the rule against perpetuities) and distributing income to the beneficiaries it chooses (as the beneficiaries pre-vesting may be different to the takers on vesting). In addition, the trustee can ascertain whether CGT event E5 will happen on vesting (see above) or prevent any other CGT event inadvertently happening due to actions by the trustee and beneficiaries.

We recommend that planning for the vesting of a trust begin several years prior to the vesting date and suitable advice obtained as part of that planning process.

Sladen Legal is highly experienced in reviewing and advising in relation to trust deeds including planning for and the consequences of vesting.

To discuss this further or for more information please contact:

Neil Brydges
Special Counsel | Accredited specialist in Tax Law
Sladen Legal
M +61 407 821 157 | T +61 3 9611 0176
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia

Sam Campbell
Associate / Business Law
Sladen Legal
M +61 423 515 454 | T +61 3 9611 0135
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia