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Trust vesting ‘rearing its ugly head’

caution tape 391
Miranda Brownlee
04 March 2018 — 2 minute read

With the vesting dates for a large number of family trusts established in the 70s and early 80s set to expire soon, beneficiaries of these trusts could soon be facing significant CGT and stamp duty liabilities, warns an industry lawyer.

Speaking at a seminar in Sydney, Townsends special counsel of superannuation and estate planning Brian Hor said the issue of trust vesting has become particularly important recently and some clients with family trusts may need to look at whether they can avoid it or buy more time in order to prepare.

“A lot of trusts were set up in the 70s and early 80s prior to CGT, and were set up with fairly short vesting dates of 40 or 50 years which means they’re all vesting right about now,” explained Mr Hor.


“The ATO are worried about that and have put out some guidance notes about it too. So it is rearing its ugly head right now and it’s a very important thing to look at,” he said.

Mr Hor explained that when a trust vests, this essentially means that the trust obligations come to an end, and the trustee has to distribute the assets to whoever is meant to receive the trust assets, as set out in the terms of the trust deed.

“Back before capital gains tax, trusts were actually set up as very tailored documents and were very much purpose built documents. Often they were set up because the parents didn’t trust their kids with the assets so they wanted an arrangement where basically their kids would be looked after from the income generated by the assets and the grandchildren would get the assets,” he said.

“So the trust would be set up with a maximum life span that would ensure that the next generation of kids or maybe the next generation after that would actually get their hands on the assets and that's why we have those 40 or 50 year timeframes.”

Following the introduction of CGT, however, Mr Hor said clients might want to avoid the trust reaching its vesting date.

“In 1985, the government brought in capital gains tax, and because of that, if the trust does vest then you’ll have a situation where assets are being distributed out of the trust which means they’re being disposed of to beneficiaries. If they’re being disposed of then that means a CGT event which gives rise to capital gains tax,” he warned.

“The problem with that is that the assets haven't actually been sold, so there's no money coming in from anywhere so you end up in a situation where all these CGT events arise, but there's no money to pay them, plus stamp duty as well.”

Clients may also want to delay the trust vesting if the trust has carried forward losses that they want to take advantage of.

“The other reason may be for estate planning purposes. So if you think about a family trust holding a whole lot of assets and let's say it distributes the assets out in-specie to the various beneficiaries of the trust, well that means those beneficiaries hold all these assets, so what will that mean if they go into business or get sued or get divorced?” he questioned.

“Those assets are now directly exposed to the vagaries of the lives of the beneficiaries.”

Miranda Brownlee

Miranda Brownlee

Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.

Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on: [email protected]momentummedia.com.au
Trust vesting ‘rearing its ugly head’
caution tape 391
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