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Trusts: Can you amend the vesting date?

Newsletter 12 May 2015

"Trusts under the Perpetuities Act 1984 (NSW), potentially can last up to 80 years.  Many old trust deeds established before the introduction of CGT in 1985 did not have to consider the vesting date as important and often made the trust a 30/40/50 year project.   This earlier than available wind up date will potentially crystallise an enormous tax and stamp duty bill when the trust ends much earlier than it needs to.  Extending the vesting date by amending the trust deed, if available, or by Court approval if not, can defer the imposts for many years. Making sure that your trust deed gives you every available tax benefit is as simple as having the deed properly reviewed and action taken to deal with the problem.  This article deals with this common problem and the approach of the Courts to the approval process.  Rectification of the Deed is also possible where typographical errors have been made such as typing 2022 rather than 2082 in a deed that was established in 2002.  Finding these problems and fixing them in a timely fashion can save money and trauma.”

Michael Henley, Partner and Team Leader

Amendments to your discretionary trust deed may be required at different points during the life of a trust.  For example, an amendment might be necessary to add a new beneficiary, extend the trustee powers where your bank requires such an extension or to extend the vesting date where the trust is due to vest before the expiry of the perpetuity period.  Extending the vesting date of a trust was recently considered by the Supreme Court of New South Wales in Andtrust v Giovanni Andreatta [2015] NSWSC 38.

What is the vesting date?

The vesting date is the date defined in the trust deed as the date when the trust will conclude. The trustee is required to wind up the trust on the vesting date by distributing all of the trust assets to the beneficiaries.

Why amend the vesting date?

It is not uncommon for the life of an older trust (e.g. a trust settled in the 1980s or earlier) to be for a period of 40 to 50 years.  The vesting date of such a trust is fast approaching.  Amending (i.e. postponing) the vesting date of such a trust allows the trustees to postpone capital gains tax and stamp duty consequences that may arise if the trust were to vest on the original vesting date.

Additionally, tax effective distributions of trust income may become more manageable later in the life of the trust. This might be because of an increase in the number of beneficiaries to which distributions can be made or a change in the circumstances of existing beneficiaries.

When can you amend the vesting date?

The vesting date of a trust can be amended where it is permitted under the terms of the trust deed and does not breach the rule against perpetuities. This was confirmed in Andtrust v Giovanni Andreatta.

The vesting date of a trust may also be amended where the trustee makes an application to the court and the court finds that amending the vesting date is in the best interests of the potential beneficiaries (e.g. to delay adverse tax and stamp duty implications of distributing or otherwise transferring the trust assets or to delay the date for payment of any unpaid present entitlements). This was confirmed by the Supreme Court of Queensland, in Re Arthur Brady Family Trust [2014] QSC 244.  However, the Supreme Court of New South Wales refused to make such orders in Paloto Pty Limited v Herro [2015] NSWSC 445.

Andtrust v Giovanni Andreatta

In Andtrust v Giovanni Andreatta, the trustee sought a declaration that the power of variation conferred on it by the trust deed empowered the trustee to extend the vesting date of the trust, but not so as to infringe the rule against perpetuities.  The variation power was contained in clause 10 of the trust deed which provided:

‘10. At any time prior to the vesting day the trustee may by deed under his hand (or if a company under its common seal) vary any of the trusts, powers discretions or duties herein set forth in any manner whatever including but without in any way limiting the generality of the foregoing, enlarging any category of eligible beneficiaries so far as this power shall not infringe the rule against perpetuities.’

The Court decided that:

  • where a trust deed contains a wide variation power (like the power in this case), the power can be used by the trustee to extend the vesting date of the trust;
  • the vesting date could only be varied where it would not infringe the rule against perpetuities.

Re Arthur Brady Family Trust

In Re Arthur Brady Family Trust the trustee sought an order under the Trusts Act 1973 (Qld) for the extension of the vesting date of two discretionary trusts where the trust deeds did not contain a variation power. The applicant’s reason for seeking the extension of the vesting date was to defer stamp duty and land tax liabilities that would significantly reduce the assets of the trusts.

The Court took the following factors into consideration in reaching their decision:

  • the substantial impact on the trust of capital gains tax exceeding $1,000,000 and stamp duty exceeding $700,000 that would be payable if the trust reached the vesting date and was wound up;
  • the eligible beneficiaries’ unanimous support of the application of the trustee.

The Court decided that the trustees were authorised to amend the vesting date of the trust as changing the vesting date was a transaction that, considering the above factors, was in the best interests of all of the members of the class of potential beneficiaries.

Paloto Pty Limited v Herro

In Paloto Pty Limited v Herro, the trustee sought authorisation from the Court to vary the vesting date of the trust so as to avoid incurring CGT and stamp duty liabilities. The trust deed contained a variation power allowing the settlor to vary the trust, however as the settlor had died this power was no longer available.

The Court considered the following factors in reaching its decision:

  • the Settlor had exercised their power of variation earlier in the life of the trust to change the class of beneficiaries and add a definition of ‘vesting day’ to the trust deed. At this time capital gains tax legislation had not been introduced.
  • the Settlor could have altered the definition of ‘vesting day’ after capital gains tax was introduced but chose not to alter the trust deed in this way.

The Court denied the trustee’s claim, deciding that granting relief to the trustee to amend the vesting date of the trust would be equivalent to the creation of a new trust and that no emergency had arisen that required the Court to exercise its inherent power to preserve the trust property.

Consider the terms of your Trust Deed

It is important to note that some trust deeds:

  • do not contain a variation or amendment power;
  • contain a limited variation power that may not be used to extend the vesting date;
  • require the consent of a particular individual (e.g. an appointor) to exercise the variation power.

If the trust deed does not contain a variation power or the variation power is limited, the trustee can apply to the Supreme Court to extend the vesting date of the trust.

Taxation Determination (TD) 2012/21

In TD 2012/21 the Commissioner of Taxation explains that CGT events E1 and E2 in sections 104-55 and 104-60 of the Income Tax Assessment Act 1997 (Cth) will not happen if the terms of a trust are varied pursuant to a valid exercise of a power contained within the trust deed unless:

  • the changes cause the existing trust to terminate and a new trust to arise for trust law purposes;
  • the effect of the changes are such as to lead a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust,

that is, there is a resettlement of the trust.

Whilst TD 2012/21 does not specifically refer to extending the vesting date of a trust, in our view the decision in Andtrust v Giovanni Andreatta provides support for the conclusion that extending the vesting date pursuant to a power in the trust deed will not generally give rise to a resettlement or capital gains tax consequences for the trust.

What points should we take away from these cases?

We have the following take away points from the cases referred to in this article:

  1. Check the vesting date in your trust deed.
  2. If the vesting date of your trust is approaching, or you have any other trust queries, seek legal advice.
  3. Before you amend your trust deed, seek legal advice to ensure you avoid any adverse capital gains tax and stamp duty consequences.
  4. It is important that the terms of the variation power are carefully reviewed as each trust deed is worded differently and what is permitted in one trust deed may not be permitted in another.
  5. A court may extend the vesting date in your trust deed, but such orders are not guaranteed. Adverse tax and stamp duty consequences of not extending the vesting date may not, of themselves, be sufficient reasons for a court to determine to extend the vesting date of a trust. We recommend that you seek legal advice to determine your prospects of success.

Matthew Payne, Partner
Sydney

Newsletter 12 May 2015
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