Your client’s discretionary trust was set up in 1985. The vesting date arrives. Nobody notices. The trust does not end. But the trustee’s discretionary powers do. Income splitting - gone. Tax structuring - gone. And if the trust holds real property in NSW, Victoria or Tasmania, ad valorem stamp duty may have just been triggered by the mere passing of time.
Note added on republication
Two points to read alongside this note. First, on the duty question: section 57 of the Duties Act 1997 (NSW) charges $100 on a conforming transfer of trust property to a beneficiary, so whether a second ad valorem impost arises on the transfer out turns on whether that section is satisfied. Second, Baxter concerned a deed of variation. Whether vesting by effluxion of time is itself a dutiable transaction has not been decided and CPN 025 does not address vesting.
The scenario
Thousands of discretionary trusts from the 1980s and 1990s are approaching their vesting dates. Many have already vested without anyone realising. In Clay v James, the trust vested in 1974 and the trustees had no idea: they kept running it as a discretionary trust for another 20 years. On vesting, the trust becomes fixed. As the Court put it in Hancock v Rinehart: the broad discretionary powers are gone. The trustee can no longer distribute income or capital unequally. The trust relationship changes from discretionary to fixed. And with that comes a cascade of tax consequences most advisers are not planning for.
Three tax consequences
One: Income tax. The day before vesting, the trustee can still split income among discretionary beneficiaries. The day after, entitlements are fixed. No more discretionary distributions. No more income splitting. The ability to stream capital gains and franked distributions to specific beneficiaries is also lost. For trusts holding investment portfolios or business assets, this removes the most important tool in the tax planning toolkit.
Two: CGT. Vesting alone should not trigger CGT event A1 or E1: no disposal, no new trust. The real risk is E5 (beneficiary becoming absolutely entitled). But the trustee’s right of indemnity and power of sale generally prevent absolute entitlement. The actual CGT hit comes on transfer out, typically event E7, capital gain at market value less cost base. For trusts holding assets that have appreciated since the 1980s, the exposure on exit can be enormous.
Three: Duty. Duty is the least anticipated consequence. Baxter held that converting a discretionary trust into a fixed trust is a change in equitable interests in dutiable property. Revenue NSW’s CPN 025 agrees. If vesting by effluxion of time triggers this, ad valorem duty is payable on the full value of the trust’s dutiable property. Not because anyone did anything. Because the calendar moved. Then when property is transferred out to beneficiaries, duty is payable again. Double duty.
Why this matters
The orthodox course: dispose of all dutiable property before vesting. Avoids double duty and lets the trustee use its remaining discretionary powers for a tax-effective wind-down. But this assumes you actually know when your trust vests. Perpetuity periods vary by jurisdiction and have changed over time. Queensland rewrote its law on 1 August 2025. If you do not know which perpetuity law applies, you cannot know whether it has already vested.
General information only. This note was accurate when written. The law may have changed since and the note is not updated. It is not legal or tax advice, does not take account of your circumstances and must not be relied upon as a substitute for advice on your own matter. If the issue is live for you or your client, email arda@nortonquaytaxlaw.com.au for advice on the current position.