How to Extend the Vesting Date of a Family Trust in Australia
Most Australian trusts, at some point, must vest. The trust must end after 80 years. This is based on ancient English law. The government does not want a trust to go on forever. This is because it may end up that no one is looking after the assets in the trust. This is called the rule against perpetuities. The rule against perpetuities prevents a Trust from existing indefinitely.
Discretionary Trusts require an expiration date (except in South Australia)
A family or discretionary trust usually has a stated vesting date. This is when the trust’s assets must be distributed to the beneficiaries and the trust concludes. In most Australian jurisdictions, this date is often set at 80 years from the establishment of the trust to comply with the Rule Against Perpetuities.
Can I extend the end date of my family trust?
To extend the vesting date of a family trust, review the trust deed first. The deed may contain provisions allowing the trustee to extend the vesting date. If such provisions exist, the trustee can follow the outlined procedures to formally extend the date.
What if my Family Trust does not allow an extension?
If the trust deed does not allow for an extension, or if extending the vesting date would contravene state or territory laws, seek legal advice. In some cases, It might be possible to apply to a court for an order to vary the trust deed, but this is expensive and complex. It is dependent on the specific circumstances and legislation of the Family Trust’s jurisdiction.
Any tax or stamp duty issues when I extend the life of a Family Trust?
Consider the tax implications of extending a vesting date. For instance, triggering the vesting date can lead to a capital gains tax event, and extending it might affect the beneficiaries’ tax positions.
Can I change the jurisdiction of the Family Trust and then extend the vesting date?
Potentially, but you need to speak with your lawyer. Changing the jurisdiction may not help.
All States have the Rule against Perpetuities – it ends all Australian trusts
Therefore, in all States, after 80 years your trust must ‘vest’. The trust must end. (South Australia is exempt from the law against perpetuities.) See for example Perpetuities Act 1984 (NSW). The 80-year’ perpetuity rule’ applies to:
- 3-Generation Testamentary Trusts (but the 80 years only starts at your death)
- Superannuation Proceeds Trusts (this reduces the 32% payable on your super at death)
- Superannuation Testamentary Trusts (stops 32% tax at death)
- Unit Trust
- Family Trust
- Bare Trusts
- Acknowledgement of Trust Deed – ‘AFTER the Trustee buys’
- Declaration of Trust BEFORE you buy – ‘secretly buy’
The vesting date is the date defined in the trust deed. This is the date when the trust comes to an end. The trustee winds up the trust on the vesting date. This is by distributing all of the trust assets to the beneficiaries. Whether the trustee does this or not the trust still ‘vests’. It comes to an end.
Self-managed superannuation funds have no perpetuity period. SMSF can live forever
An SMSF is a trust. So you would expect it to die after 80 years like all other trusts. However, the SMSF is a statutory trust. While it continues to have living members then it keeps on going – forever. Your SMSF can be handed down from generation to generation. The SMSF trust deed does need regular updates.
What is the ‘rule against perpetuities’?
You cannot have an asset sitting around with ‘no owner’ forever. When the English Lords went to fight in the crusades they would leave their castles in trust. But if they died then there was no owner of the castle. So the King established the rule against a trust going on forever. The rule against perpetuities ensures property interests settle (vest) within a fixed time frame.
How does the ‘rule against perpetuities’ operate for a discretionary Trust?
The rule determines a maximum time within which property interests need to be finalised. If these interests do not settle within this period, the trust cannot continue.
Does South Australia have a forced ending date for a Family Trust?
Legal Consolidated Family Trust Deeds and updates contain provisions so that there is no requirement to have an ending date. So, if a state or territory has no requirement for a vesting date then a vesting date is not enforceable. For example, in South Australia, the vesting rule no longer applies. Therefore, the Legal Consolidated Family Trust deed and updates can go forever in that state. However, in other Australian states, the rule is still in effect, though sometimes in a modified form. If the state or territory no longer requires a vesting date then the Legal Consolidated Famiy Trust deed and Updates automatically remove the vesting date requirement.
So, for example, if the massive Westfield Shopping Centre trust structures can put pressure on the Labor and Liberal Party to remove the vesting dates for trusts in NSW and Victoria then Legal Consolidated Family Trust and Trust updates automatically remove the forced 80-year vesting date.
What happens if the ‘rule against perpetuities’ is broken?
If a property interest does not finalise within the (usual 80-year) time limit, it becomes void. This means it cannot be enforced.
When it becomes void, the property typically reverts to the person who created the trust, or if they are no longer alive, to their heirs or estate.
What is the reason behind the ‘rule against perpetuities’? The Crusades
The purpose of the ‘rule against perpetuities’ is to prevent situations where property is left without a clear owner for generations. It ensures the property is managed effectively and eventually becomes fully owned by someone. During the 12th and 13th centuries, many English lords and knights departed their homes to fight in the Holy Lands. This era was marked by the prolonged absences of landowners, which led to uncertainties and disputes over land succession. This necessitated a systematic approach to managing estates, especially since many crusaders did not return.
King Henry III and the Legal Evolution of the forced vesting of trusts
King Henry III, who ruled from 1216 to 1272, was pivotal during the latter Crusades. Under his reign, English common law started to evolve more robust rules regarding property rights and inheritance to address these absentee landowner issues.
To formally address this problem, England eventually enacted the Statute of Uses (27 Hen. 8. c. 10 — enacted in 1536) to enforce a time restriction on trusts. This limit was set to no more than 21 years following the death of an individual alive when the trust was first established. This limitation led to the creation of the ‘rule against remoteness of vesting’, which defined the maximum duration of a trust as the ‘perpetuity period’.
The Story of Lord William of Pembroke and the vesting of a trust
Lord William of Pembroke, who participated in the Fifth Crusade in the early 1220s, set up an estate plan for his young son before departing. He stipulated that if his son died without heirs, the land would transfer to a distant relative after a certain period. As years passed and Lord William was reported killed, his now adult but childless son faced health challenges, stirring concerns that the estate might be indefinitely tied up, especially if the son outlived the distant relative without producing heirs.
Development of the Rule Against Perpetuities for Family Trusts
These situations highlight the need for what would become known as the rule against perpetuities. Although not formally codified during the Crusades, these legal challenges influenced its eventual formulation. The rule was established to prevent long-term, uncertain conditions on property interests by requiring that the trust vest within a specified period, usually within the lifetime of someone alive when the interest was created, plus twenty-one years. However, to simply that most states and territories make it a simple 80 years.
The rule against perpetuities was shaped by the complexities faced during the Crusades, leading to more stable and clear regulations on land ownership and inheritance in subsequent centuries. This rule ensures that property is effectively managed and eventually becomes fully owned, avoiding indefinite uncertainties in land succession.
Legislation and common law to stop Australian trusts from going on forever
The common law rule against perpetuities has been abolished in South Australia (section 61, Law of Property Act 1936 (SA), and modified by legislation in the other States and Territories.
- New South Wales: section 8 Perpetuities Act 1984 (NSW)
- Victoria: section 6 Perpetuities and Accumulations Act (Vic)
- Queensland: section 210, Property Law Act 1974 (Qld)
- South Australia: abolished, section 61, Law of Property Act 1936 (SA)
- Western Australia: section 103, Property Law Act 1969 (WA)
- Tasmania: section 9, Perpetuities and Accumulations Act 1992 (Tas)
- Northern Territory: section 190, Law of Property Act 2000 (NT)
- Australian Capital Territory: section 9, Perpetuities and Accumulations Act 1985 (ACT)
What happens when my trust ‘vests’? Does the death of a trust trigger taxes and problems?
In Australia, most states adhere to a statutory perpetuity period of 80 years, except for South Australia, which stands out as the exception. South Australia has taken a bold step by effectively doing away with the rule against perpetuities, allowing trusts in the state to operate beyond the traditional 80-year limit.
Under the usual setup in the other states, trusts must vest and terminate after 80 years, potentially triggering capital gains tax and stamp duty implications, especially if the trust holds assets subject to these taxes or has carried forward losses.
Upon vesting, the trust’s assets are distributed to beneficiaries as outlined in the trust deed. However, this also marks the end of any available carry-forward losses.
In contrast, South Australia’s legislation removes the constraints of the perpetuity rule. Trusts in SA can continue beyond the 80-year mark without facing the risk of invalidity due to perpetuity breaches. This flexibility has sparked significant interest, leading to a rush to establish trusts in South Australia or to amend existing trusts to fall under South Australian law. For ethical reasons, Legal Consolidated refuses to advise on this.
What happens to a trust when it vests and ends?
This means all the assets are deemed to have come out of your trust. This triggers:
- Capital Gains Tax
- Transfer (Stamp) Duty
- ownership issues
- asset protection
- loss of licenses
- land tax
- family law disputes
Before the start of CGT in 1985 many trusts often had a vesting date of less than 80 years. A vesting date of 21 years was not uncommon. Until recently the ATO took the view that you could not amend your trust deed to extend the vesting date to the maximum of 80 years.
The ATO has changed its mind – you can now postpone the vesting date
Taxation Ruling TR 2018/6, issued on 15 August 2018, finalises the Commissioner’s views on the income tax consequences of a trust vesting. These views are the same as those contained in the old draft (TR 2017/D10), although, in Legal Consolidated’s view. the final ruling includes some fine-tuning.
A trust’s “vesting” or “termination” date is the day on which the beneficiaries’ interests in the property of the trust become “vested in interest and possession”. The trust deed should specify the vesting date and the consequences of that date being reached (eg that the trust property will be held from that date for the takers on vesting in equal shares absolutely). 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 ATO now believes that if you have a trust with a vesting date of less than 80 years then:
- provided you do it before the vesting date, you may extend the vesting date. But the maximum period is still 80 years (except in South Australia).
- if the vesting date has passed, you are too late. The trust has already been vested. The trust has ended. Extending the trust is no longer possible. Even all the beneficiaries coming together cannot change this.
- you need a Deed of Variation (or a Court order) to extend the vesting date to 80 years. This can’t be implied. The vesting date cannot be extended by implication – such as the trustee and beneficiaries acting in a certain way.
The ATO can change its mind again. Update the vesting date while you still legally can.
TR 2018/16 – ATO allows trust vesting dates to be extended:
- before vesting, it may be possible to extend the vesting date (by applying to a court or by the trustee exercising the power to nominate a new vesting date) as set out in the Australian Tax Office Ruling 2018/16. A proposed alteration by a trustee without court intervention is 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; and
- continuing to administer the trust in a way that is inconsistent with the vesting terms can have significant tax consequences (eg potentially CGT event E1).
CGT when you end your trust
TR 2018/6 considers whether various CGT events may occur on vesting or post-vesting, noting that the terms of the trust deed are particularly relevant. The ATO says that:
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;
CGT event E5
(beneficiary becoming entitled) may occur if the takers on vesting become entitled as against the trustee to CGT assets of the trust; 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 as against the trustee.
Taxation of trust net income after the vesting date
The ruling notes that, in the income year of vesting, different beneficiaries may be presently entitled to trust income derived before and after the vesting date. For example, the trustee of a discretionary trust may, before vesting, exercise discretion to appoint pre-vesting income among those entitled to benefit under the trust. By contrast, the takers on vesting are presently entitled to post-vesting income (usually in proportion to their vested interests in the trust property). In this situation, the ATO may accept a “fair and reasonable” allocation of trust income into pre- and post-vesting trust income.
TR 2018/6 also provides that for trust vesting:
-
- in the income years after vesting, all of the trust income flows to the takers on vesting according to their entitlements, so the trustee will not be assessed on any net income; and
- a post-vesting payment or other purported distribution by the trustee is in breach of trust and void if it is inconsistent with the vested beneficiaries’ fixed interests, and the deemed present entitlement rules in sections 101 and 95A(1) ITAA 1936 do not apply.
The ruling includes 6 examples, covering effective and ineffective extensions of the vesting date, the consequences of ignoring the vesting date and the entitlements of beneficiaries. The following example (Example 4 of TR 2018/6) involves the purported extension of the vesting date after a discretionary trust has vested.
If a deed of extension is ineffective in changing the trust’s vesting date, 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 a new trust over the assets by declaration or settlement, CGT event E1 happens for the trust assets.
Is it too late to extend your trust to 80 years?
It may be argued that the trust does not come to an end. However, Legal Consolidated does not believe that is the case. On the vesting date, we believe that a new trust is created. The ATO Ruling has no clear view. The ATO states that the underlying trust relationship continues. However, the nature of the trust has so fundamentally changed that it is in a new trust – triggering taxes such as stamp duty and CGT.
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