5.2 Extending the term (duration) of the trust

The trusts under consideration will be established for a defined period, either because of rules against remoteness of vesting or the wishes of the settlor. This statement only covers valid changes to the term of a trust, and not situations where it may purport to continue (perhaps through an oversight) after the date for its termination.

When the term of a trust is extended (say, by exercise of a trustee's discretion or through agreement of the beneficiaries), the ATO needs to consider whether a new trust arises and if so, whether it commences when the variation takes effect or alternatively on the previous termination date. The uncertainty of the law here and the scope for conflicting views is illustrated by the discussion by members of the House of Lords in Re Holmden's Settlement Trusts [1968] 1 All ER 148.

Given this absence of clear judicial guidance, the ATO will accept that in most circumstances the mere extension of the term of a trust is consistent with a continuing trust estate. The ATO will reach this conclusion when:

  • the trust deed confers an express power to alter the termination date
  • the deed and the surrounding circumstances do not indicate that a particular trust period was a fundamental feature of the particular trust relationship
  • other accompanying circumstances do not indicate a fundamental change to the trust.

In some trusts, the specified term may be an essential feature whose variation could be a factor pointing towards the creation of a new trust. In these situations the subject matter of the trust can be most accurately described as the income and other benefits arising from the trust property over a particular period.

Example 5.2.1

A trustee holds Blackacre under a trust set up for a ten year term. The beneficiaries of the trust are entitled to the rents of Blackacre over that period. On consideration of the overall circumstances it is clear that it was those ten years' rents, and not just the rents in general or Blackacre itself, that the trust was established to deal with.

Example 5.2.2

A trust is set up specifically as a vehicle for a particular project or to hold an asset of intrinsically limited duration.

If the trusts referred to in Examples 5.2.1 and 5.2.2 were extended, particularly if there were other changes such as the introduction of new investments or activities, it is likely that a new trust would be formed in respect of the new subject matter.

When extending the term of a trust, even in situations when no new trust estate arises, it will be essential to consider the tax consequences for the parties whose interests would have vested in possession on the now varied termination date. The extension of the term could amount to a disposal of these reversionary interests. Furthermore, and particularly in situations where the extension is at the behest of the beneficiaries, consideration will need to be given to the potential application of section 160ZX of the 1936 Act and CGT event E5 under the Income Tax Assessment Act 1997.

    Last modified: 20 Apr 2012QC 16266