Vesting dates of discretionary trusts allowed to be changed to avoid potential tax costs

The Supreme Court of Queensland has allowed 2 discretionary trusts to amend the vesting dates to expire 80 years from the settlement date of the trust deed.

Background

Trustees of 2 discretionary trusts sought orders, pursuant to section 94 of the Trusts Act 1973 (Qld), to amend the vesting date of each trust to a later date. Each trust had a vesting date of 16 February 2017. The trustees sought the change as there would be substantial tax consequences if the vesting date remained and the trust property was distributed.

The 2 trusts in question each hold portfolios of industrial and commercial real estate with a total value of over $15 million. If the vesting date remained as 16 February 2017, there would be almost $2 million in CGT and stamp duty to be paid on the distribution of the real property assets. The trusts also had unpaid entitlements owing to beneficiaries.

The trustees also said that in order to maintain the same property portfolios within the 2 branches of the families involved, monies would have be borrowed to meet the tax and stamp duty that would be payable and this would result in extra costs and a substantial burden on each trust. All the primary and contingent beneficiaries had consented to the amendment.

The trustees submitted that the beneficiaries wanted to avoid the substantial financial costs that would result if the current vesting date stood. It was submitted that the common intention of all concerned was that the trusts be the commercial vehicle for substantial investment in continuing income streams to those concerned and that this should continue as long as possible.

The objective sought was to extend the vesting date of each trust to the maximum perpetuity period permitted by law for one of the trusts, which would be 80 years from 16 February 1977. For the other trust, the amendment sought would extend the vesting day to 80 years from 16 February 1977, with the proviso that the trustee might, subject to the relevant law of perpetuities, appoint an earlier or later date as the vesting day.

Issues

The issues arose of whether:

• an amendment to the vesting date was a "transaction" within the meaning of section 94 of the Trusts Act;
• the vesting date could be amended under section 94.

The Court observed that, under section 94, "the jurisdiction exists only where the court's assistance is necessary or desirable in order to facilitate some transaction with trust property".

The Court's decision

The Court examined the relevant provisions and case law, and noted there was no proposed transaction in the sense of dealing with another person but rather, a desire to avoid the need to deal with the trust property upon the vesting date. The Court was of the view however, that the amendment of the trust deed to change the vesting date "could be fairly be characterised as a transaction".

The Court concluded that there was a discretion to make the orders sought, taking into account the substantial impact of taxes and duties on the trust funds, and the unanimous approval of all classes of beneficiaries. The Court therefore made the orders sought by the trustees under section 94 of the Trusts Act.

Source: This case summary was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please:

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Maddocks comment

This case acts as a reminder to customers that:

• all discretionary trusts have a vesting date;
• many discretionary trusts were established during the 1970s, and not all of them have an 80 year term; and
• trustees and their advisers should be mindful of when a trust is going to vest.

When a vesting date looms, generally a trustee will exercise its discretion to make income and capital distributions to eligible beneficiaries. If a vesting date occurs without the trustee exercising its discretion, then most deeds provide that distributions of income and capital are made automatically to 'default', or 'primary', beneficiaries.

As the trustee's submissions indicated, there can be expensive consequences in either scenario. From a tax perspective, the main consideration is that vesting of the trust results in CGT events (depending on the nature of the trust property). From a revenue perspective, stamp duty is usually chargeable on transfers, and certain other transactions, relating to dutiable property. This includes duty on transactions which result in a change in legal or beneficial ownership, which would be triggered by the transfer of assets from the trustee to beneficiaries.

Vesting dates can be extended if the trust deed contains the requisite power, otherwise the Supreme Court in most states have the power to vary trusts under their respective trusts legislation.

This case highlights that the courts may consider that relief from impending tax liability is a legitimate reason to amend the trust vesting date, however the case only considered this issue in relation to section 94 of the Trusts Act in Queensland.

Prudent trustees and practitioners should check vesting dates to avoid any potential issues, and seek professional advice if a vesting date is approaching.

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