Pre-2010 trust deeds: the hidden risks in your client’s structure

If your client’s trust deed was established before 2010 and has never been amended, it almost certainly contains at least one, and likely all three, of the following problems. An inadequate income definition that does not allow effective streaming of capital gains or franked dividends (the Bamford issue). No foreign persons exclusion clause, exposing the trust to surcharge duty and land tax if it holds or acquires residential property. And vesting provisions nobody has examined, which fix the beneficial interests on the vesting date and may have CGT consequences depending on the deed.

The income definition issue affects every trust that distributes capital gains or franked dividends. The High Court’s 2010 Bamford decision fundamentally changed how trust income is calculated and distributed. Pre-Bamford deeds typically define income in a narrow, accounting sense that does not give the trustee power to characterise capital gains as income for distribution purposes. The result: distributions that the accountant treats as capital gains on the tax return may not be valid capital gains under the trust deed, leading to unintended tax outcomes for beneficiaries.

The foreign persons exclusion issue affects every trust that holds or could hold residential property in any Australian state. New South Wales, Victoria, Queensland, South Australia, Western Australia and Tasmania impose surcharge duty on foreign acquisitions of residential land (up to 9%), and New South Wales, Victoria, Queensland, Tasmania and the ACT impose a foreign land tax surcharge (up to 5%) on trusts that are treated as foreign. In several states, notably New South Wales and Victoria, a discretionary trust is treated as foreign if a foreign person is within its class of potential beneficiaries, so most family trusts without an exclusion clause are at risk. The test differs in other states.

In N & G Grima Family Trust Pty Ltd v Chief Commissioner of State Revenue [2025] NSWCATAD 149, the NSW Civil and Administrative Tribunal held that an exclusion which only operated while the trust held land failed the NSW no-amendment requirement. For NSW purposes the exclusion must be permanent and irrevocable. Many trusts that were varied before this decision using off-the-shelf template clauses may need to be re-varied to comply with current requirements.

The vesting date issue is less urgent but harder to fix late. Vesting is widely described as ending the trust and triggering a deemed disposal of everything at market value, and that overstates it: the Commissioner’s view in TR 2018/6 is that vesting does not of itself end the trust, compel a transfer of the property, or automatically trigger a CGT event. What it does is fix the beneficial interests, so the trustee can no longer distribute among the wider class, and whether a CGT event happens depends on the deed and the interests it creates on vesting. The practical problem is timing: a vesting date cannot be extended once it has passed. For trusts established in the 1970s or 1980s with an 80-year period, the date falls between 2050 and 2070, within the lifetime of most clients. For trusts with royal lives clauses it may be sooner and genuinely difficult to determine.

The compounding risk is that these three issues interact. A trust with an inadequate income definition may be distributing incorrectly year after year. A trust without a foreign persons exclusion may be accumulating surcharge liabilities without knowing it. A trust approaching its vesting date may face CGT consequences on assets that have been held for decades, depending on the deed. Any one of these issues can result in significant financial exposure for the trustee and beneficiaries.

We recommend a systematic review of every pre-2010 trust deed in your practice. The review should confirm: how ‘income’ is defined, whether the trustee has power to characterise capital gains and franked distributions as income, whether foreign persons are excluded from the class of beneficiaries (and if so, whether the exclusion meets current requirements in the relevant state), and what the vesting date is.

At CoSec Partners, we can review any trust deed and identify all three risk areas in a single engagement, then prepare the necessary amendments, a Bamford clause, a foreign persons exclusion, and a vesting date extension where the variation power permits, as a coordinated package. Every deed review and amendment is drafted and signed off by Key Legal, an independent external law firm, which holds its own professional indemnity insurance, subject to its policy terms. CoSec Partners is not a law firm and does not give legal advice. The tax and duty consequences of any amendment are advice we do not give; those sit with the client’s tax adviser or with Key Legal, and we will coordinate with either. Contact us to arrange a review.