Australians love their trusts. In fact, the number of active trusts in Australia is coming up to 1 million (if not there already). We use so many trusts because they are so versatile. Trusts are good for operating an SME business or holding the wealth of a family group. Trusts are also good for the big-end of town, for example, to operate property syndicates and investment funds.
But one problem most trusts have is that they don’t last forever, they have an ‘expiry date’. When this happens, the Trust dies and its property must be distributed out to beneficiaries. At this time you need to consider who is entitled to the trust assets, and what tax and stamp duty liabilities may be triggered.
If you have a trust you should be aware of its ‘expiry date’, and if that date is fast approaching, you must plan for the end! Sometimes we find that a trust has already expired years ago, without anyone having noticed…
What is the ‘expiry date’ for my trust?
The rules of your trust are found in the ‘trust deed‘. To find the expiry date for your trust you need to locate what is called the ‘vesting date’ or ‘perpetuity date’. Every trust is different, and there are a lot of different terms for this date. Many trust deeds set out a mechanism to determine the expiry date. They may refer to a period of time from the date the trust was set up (e.g. 80 years), or they may refer to the time that is 21 years after when a certain person within a royal family dies.
The reason why trusts don’t last forever is because back in 1535 King Henry VIII was concerned that property would get locked up in trusts forever, and ultimately there would be no property left to buy or sell (or revert back to the King and give rise to royal taxes!). For this reason, he passed the Statute of Uses, which imposed a time limit on all trusts, being no longer than 21 years after the death of a person living at the time the trust was originally set up. This became known as the ‘rule against remoteness of vesting‘, and gave rise to the maximum life of a trust called the ‘perpetuity period‘.
All states in Australia still follow King Henry’s example (except South Australia!) and continue to impose a perpetuity period on trusts. (But note, just because SA does not require a perpetuity period within a trust doesn’t mean that your SA trust does not have a limited life. Most trusts in SA still impose a limited life because of the terms in the trust deed.)
What happens when the trust expires?
When the trust ends, everything it owns ‘transfers out’ or more accurately ‘vests’ in the beneficiaries. What this means is that the powers of the trustee over the property end, and the trustee must then simply hold the property for the final beneficiaries and transfer it to them at their direction. This is where the term ‘vested interest’ comes from.
The problem with a trust ending is that it can have significant implications, including:
- Changing who is entitled to the property (and any income from the property). This effectively brings the ‘asset protection‘ advantages of your trust to an end;
- Triggering significant CGT liabilities; and
- Giving rise to potential stamp duty liabilities.
When a trust ends, all of its property vests in the ‘final’ or ‘default’ capital beneficiaries. Some deeds allow the trustee (or someone else) to select who these people are. But other deeds set this in stone (e.g. many trusts created by a Will clearly define the final beneficiaries). Most trust deeds define these default beneficiaries by reference to some criteria (e.g. persons living who are in some way related to a nominated person), and for this reason it can be difficult to actually work out who these people are. Importantly, if the trust deed allows you to select these final beneficiaries, this selection MUST be made before the vesting date for the trust. It can’t be done after the event.
The next thing you need to consider is the tax impact of the trust vesting. This can be very major. If the trustee actually transfers an asset to a beneficiary at the time of vesting, then a CGT event is clearly triggered for the trustee (event E7). Furthermore, (and probably more relevant to when a vesting day rolls around), when a person becomes ‘absolutely entitled‘ to property of a trust this will trigger CGT event E5. At the time of the relevant CGT event the following occurs: If the trust property is pre-CGT, then it will become post-CGT. If the property was already post-CGT, then it will trigger a potential gain (or loss) to the trustee, equal to the difference between the current market value of the property and its original cost base to the trustee. So the outcome can be a significant CGT liability to the trustee on the vesting day. For trusts carrying on a business and owning revenue assets like plant and stock, the vesting of the trust can also trigger income tax issues.
The question of exactly when someone becomes ‘absolutely entitled’ to a trust asset for CGT purposes is itself a complex question. If the asset is actually transferred to the beneficiary, then this criteria will be met, and any CGT liability will be triggered. However, if your trust just ends, but legal title to the property remains held by the trustee for some period, the CGT event may or may not yet be triggered. The whole issue of ‘absolute entitlement’ is a complex question for another day. But be aware that just because you have reached the vesting date does not necessarily mean that you have automatically triggered a CGT event.
After CGT, stamp duty needs to be considered. Whether stamp duty will be triggered when a trust vests depends on a number of things, including what type of property the trust holds, what state the property is held in, the terms of the trust and the identity of the beneficiaries. Yes, all of those things… But just be aware that the vesting of the trust, or the transfer of trust property to a beneficiary, can give rise to a liability for duty.
Because of the CGT and stamp duty questions, it can often be worthwhile to see if you can delay the vesting of your trust.
So, your question is probably now:
Can I get an extension?
The general rule is that you can extend the life of your trust if there is still time before it reaches its maximum limit. In most Australian States this maximum limit will be 80 years from when the trust was first established. If your trust’s vesting date is something less, then you can likely extend its life.
If your trust is subject to South Australian law, then you can potentially extend the life of the trust indefinitely – because as noted above, the 80 year rule no longer applies in SA. The next question is then likely to be whether you can ‘move’ your trust to SA. This is a question for another time.
If you want to try and extend the life of your trust you will need to check if your trust deed gives you the power to do this. You will need to identify the amendment clause and determine if it gives you sufficiently wide powers to make this change. Sometimes an amendment clause specifically includes wording that prohibits an amendment to extend the life of the trust. If this is the case, the only way to amend is to apply to the Supreme Court. Unfortunately the cases indicate that the Court is unlikely to assist. So you could be stuck with the existing vesting date.
If your trust deed does include an amending power that is wide enough to extend the vesting date, then the good news is that the Tax Office will generally not consider the extension as triggering a CGT event. This is a change in position, based on the Commissioner losing a couple of cases. Historically, the Tax Office argued that an extension of the vesting date did trigger a taxable ‘resettlement’.
The question whether an extension triggers stamp duty is similar to the CGT question. As a general rule, the extension should not trigger a liability to duty, but you need to consider the full range of factors in the context of the applicable state law.
All this means if you extend the life of your trust, these tax bills can get pushed down the line.
A dollar saved today is always more valuable than a dollar in the future.
What do you need next?
So, is extending the life of your trust something you can do? To find out, we recommend you check your trust deed for these things:
- What is your trust’s current vesting date?
- How much time do you have left?
- What is the maximum possible life of your trust based on the applicable state law?
- Does your trust have an amendment clause, and what do you need to do to exercise this power?
- What is the governing law of your trust, and is it possible to change?
Trust deeds are often written in old-fashioned prose, and use strange terms. But, if you can find these basic things, you will have a good idea of what can be done. If you need help answering these questions, call us on 1300 654 590.