The recent AAT decision in the case of Bendel and Commissioner of Taxation  AATA 3074 is in stark contrast to the ATOs longstanding position that an unpaid present entitlement of a corporate beneficiary constitutes the ‘provision of financial accommodation’ by the company to the distributing trust. […]
Does my Trust Have to Die?
Acis, current as of: 6 August 2015.
One of the very first principles you encounter with trusts is the rule against perpetuities. This rule goes back some 500 years to a string of English cases that concluded it was a bad idea to allow land to be tied up in the same ownership in perpetuity. It was believed that “evil” land owners would potentially lock up the whole country forever.
In the modern world, given there are far more land owners than in medieval England, many people are left wondering why we are still stuck with this rule. And given the tax revenues governments reap from land transactions, there are very few that have it high on their agenda to fix.
How the perpetuity rule operates in Australia
All Australian States (except lucky South Australia) have a statutory perpetuity period of 80 years, which means all trusts must vest and terminate after 80 years. It’s only a problem if at that point the trust is holding CGT or dutiable assets or has carry forward losses.
On vesting, the trust’s assets must be distributed to beneficiaries, in accordance with the trust deed. This triggers potential capital gains tax and/or stamp duty, and means carry forward losses are no longer available.
Now, the one lucky State that has moved on this is South Australia, which has effectively abolished the rule against perpetuities. This means trusts in SA don’t need to terminate at 80 years.
The relevant legislation in SA removes the invalidity problem where the trust might, otherwise, breach the perpetuity rule. Rather than the trust automatically vesting at 80 years, the legislation permits a trust to operate for a longer time.
So what we now see is a mad rush to set up trusts in SA, or to change the applicable law of existing trusts to SA.
South Australia may not be the lucky charm
Hang on, though. It can’t be as simple as that, can it? Before diving in, we’re warning you SA might not be the pot of gold everyone seems to expect.
Our starting point…
Most modern trust deeds elect to adopt the laws of a specified State as the jurisdiction for the trust i.e. the laws of that State will govern the trust. A choice, however, of governing law will not always be binding or determinative.
By way of example, think about why you would establish a trust in say, Sydney, and choose its governing law to be that of Outer Mongolia. Extreme example, perhaps, but it illustrates the point. And be aware that our courts will generally ignore a choice of law if the choice appears to have been made for ulterior motives e.g. to avoid the application of a law which might otherwise have applied.
Usually, the courts tend to apply the law with which the trust has its closest and most substantial connection and, in doing so, will look at things like:
- Where trust assets are located;
- Where the trustee lives or carries on business; and/or
- Where the trust’s management is located.
It seems these factors, from the courts’ point of view, are more relevant in some cases than the specific choice of law or where the trust deed might be executed. That’s not to say that the courts will not enforce a choice of law, but the reality is that choosing SA may not actually work.
No certainty around the “South Australia option”
Here’s some other things to think about:
- Even though SA has “abolished” the perpetuity rule, a trust can still be made to vest at 80 years on application by an interested party (the trustee, a beneficiary, the attorney general etc). In other words, if the trustee or a beneficiary who wants to gain access to the trust assets, decides to go down that route, they can seek a court order to wind up the trust at 80 years.
- Where, for example, you have a fixed asset like real property in, say, Victoria, it’s possible that the Victorian perpetuity rules will apply to it. This is regardless of where the trust is established.
It may be, in time, that other jurisdictions will abolish the 80 year rule but, until that happens, there is no certainty that you can expect an SA trust holding assets in other jurisdictions will work for those assets.
For more information please contact Legal Services on 1800 773 477.