The ATO has issued a long-awaited ruling which sets out its views about the vesting of a trust, changing the trust's vesting date and the income tax consequences of vesting (Draft Taxation Ruling TR 2017/D10). 

A trust's "vesting date" is the day on which the beneficiaries' interests in the trust property become "vested in interest and possession". The trust deed will 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. In particular, the underlying trust relationship will continue while the trustee holds property for the takers on vesting.

The key points made in the draft ruling are that:
  • before 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);
  • 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); and
  • continuing to administer a trust in a way that is inconsistent with the vesting terms can have significant tax consequences (eg potentially, CGT event E1, creation of a new trust).

Capital gains tax consequences of trust vesting

The draft ruling considers whether various CGT events may occur on vesting or after vesting, noting that the terms of the trust deed are particularly relevant. The ATO says the following:

  • CGT event E1 (creation of a new trust) "need not happen merely because a trust has vested", as vesting does not, of itself, cause the trust to come to an end and settle property on the terms of a new trust. However, 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 the example below).
  • CGT event E5 (beneficiary becoming absolutely entitled) may occur if the vesting results in the takers becoming absolutely entitled as against the trustee to CGT assets of the trust.
  • CGT event E7 (disposal to a beneficiary to end a capital interest) may happen on actual distribution of CGT assets to beneficiaries, but it 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 draft 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, prior to vesting, exercise a discretion to appoint pre-vesting income among those entitled to benefit under the trust. By contrast, the takers, on vesting, will be presently entitled to post-vesting income (usually in proportion to their vested interests in the trust property). In this situation, the ATO will accept a "fair and reasonable" allocation of trust income into pre-vesting and post-vesting trust income.

The draft ruling also states that:

  • in the income year after vesting, all of the trust income will flow 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 will be void if it is not consistent with the vested beneficiaries' fixed interests, and the deemed present entitlement rules in ss 101 and 95A(1) of the Income Tax Assessment Act 1936 (ITAA 1936) will not apply.

Example

A discretionary trust holding several rental properties had a vesting date of 30 September 2016.

On 1 June 2017, the trustee became aware that the vesting date had passed and, with the acquiescence of the takers on vesting, continued to manage the trust as if the trust had not vested.

On 29 June 2017, the trustee executed a deed of extension that purported to extend the trust's vesting date to 30 September 2057.

This subsequent execution of a deed of extension is void and ineffective to change a vesting date that has already passed. Any power of the trustee to extend the vesting date ceased on 30 September 2016.

If, once it is realised that the deed of extension is ineffective to change 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 is effective to create such a new trust over the assets by declaration or settlement, CGT event E1 would happen in relation to trust assets.