Vesting of trusts and tax consequences related to such events are complex issues which may end up costing the trust and beneficiaries needless headaches and hip pocket pain. The ATO has recently released a long awaited draft ruling which seeks to clarify some of the issues surrounding deferring vesting dates and consequences of vesting.
Have you looked at your trust deed recently? If you have a trust, chances are it was set up by your accountant or solicitor, and you didn’t have to do too much of the legwork. Look closely at your deed and you’ll notice that it will specify a date on which the interests in the trust vest and contain a clause which specifies the consequences of that date being reached.
Put simply, on the vesting date of a trust, the interests in the trust property become vested interest and possession; the beneficiaries become takers who hold a fixed interest in the capital and income of the trust property. This will have CGT and tax consequences for the trust and the beneficiaries.
The ATO has recently released a long awaited draft ruling to clarify when the vesting date can be changed and the consequences of trusts vesting.
Broadly, the draft ruling states that prior to the vesting date, it may be possible for the trustee or a Court to postpone the vesting of the trust by nominating a later date. Once the vesting date has passed, it is not possible to change the vesting date as the trust has vested. According to the ATO, the consequences of vesting cannot be avoided by the parties continuing to carry on as though the trust had not vested or by an exercise of power to vary the deed.
Once the trust vests, depending on the clauses contained in the deed, there could be no CGT consequences, the creation of a new trust could occur, or a situation could arise where a beneficiary becomes absolutely entitled to the assets of the trust. The outcome depends entirely on the clauses contained in the deed and differs in each individual circumstance as each trust deed may be different.
The income of trust after vesting is also taxed differently. Prior to vesting the trustee had discretionary power to distribute the income or capital of the trust to certain beneficiaries entitled under the trust. However, after the vesting of the trust, the takers (beneficiaries) hold the present entitlement of the trust in proportion to their vested interests in the property of the trust and are assessed on the portion.
An example to illustrate this concept would be, prior to the vesting of the ABC Trust, the trustee determined that all the income would go to beneficiary X. At the vesting date, the trust deed specified that trustee was to hold the trust property in equal shares for beneficiary X, Y and Z. Therefore, for the income year that the trust vests, beneficiaries X, Y and Z are assessable on 1/3 of the share of the net income that relates to their share in the total income of the trust estate.
Vesting of a trust is a very complex matter and needs to be treated very carefully. The tax consequences stemming from a trust vesting could be very significant on both the trust and beneficiaries, and it cannot be undone by either the trustee or the courts. Therefore, understanding your own trust deed and forward planning is advisable to ensure that the purpose of the trust is met and maintained.
Confused about all the potential CGT and income tax consequences for your trust? Or do you just want to make sure that plans are in place to protect your trust from falling afoul of the vesting rules? Talk to us today.