Trusts: Hidden Tax Implications when Purchasing Property
Are you looking to purchase a property in the name of your family trust? There are some tax implications if you are not careful.
Prior to making any purchases in the name of your family trust you should find out the definition of the vesting date for your trust. This is the date when the trust will end. Many old trust deeds have a vesting date 21 years after the death of the last survivor of King George VI alive when the deed was signed or a certain number of years after the deed was signed.
If the vesting date of your trust is fast approaching, you should ask yourself the following:
- Does your trust have a broad amendment clause to allow an amendment to the vesting date; and
- Was your trust was created on or after 31 October 1984.
If the answer to both these questions is yes, then you may be able to amend the trust deed by changing the perpetuity period to the standard 80 years that now applies. This would allow you to purchase the property in the name of the trust without any major issues.
However, if your trust was created before 31 October 1984 the old rule against perpetuities still applies – a life in being when the trust was created, plus 21 years. Under this rule, a trust deed specifying a vesting date 80 years in the future would be considered void.
If such an amendment was carried out after you the purchased property, the trust would immediately be considered to have vested and all the beneficiaries would become absolutely entitled. This would trigger CGT event E5 as the beneficiaries would become absolutely entitled to a CGT asset. Both the trustee and the beneficiary would be taken to have made a capital gain in those circumstances. Furthermore, the net capital gains received by the beneficiaries may be included in their assessable income.
Therefore, it is crucial to not only ensure that the vesting period of your trust is not too soon, but also that any amendments will not result in the trust becoming void.
If you require any further information or assistance in purchasing a property in the name of your family trust, contact our team of lawyers at The Quinn Group on (02) 9223 9166 or submit an online enquiry.