Straight to content

Carers should consider Special Disability Trusts

Back to front page

Special Disability Trusts (SDT) are established primarily by parents and immediate family members (including natural parents, legal guardians, adoptive parents, step parents, grandparents and siblings) to assist with the current and future care and accommodation needs of a person with a severe disability or medical condition. SDT can also be set up through your Will.
 
SDT offers certain tax and Centrelink concessions in recognition of the financial difficulties faced not only by someone with a severe disability, but also by the immediate family members who care for them. 
 
A trust will not be a SDT unless the legislative requirements are met. To be eligible to be a beneficiary of a SDT, the disabled person must meet the definition of severe disability of the Social Security Act 1991. In this regard, assessment of the beneficiary should take place before the preparation of the trust otherwise there is a risk that the person with a disability may be assessed as not being an eligible primary beneficiary for a SDT and the trust will be assessed under normal trust rules.
 
Despite this technicality, a SDT offers many benefits. 
 
For eligible family members of the principal beneficiary, a combined concession of up to $500,000 can be gifted without affecting Centrelink payments. This is significant because gifting commonly impacts social security payments. 
 
An assets test exemption of up to $609,500 (current as at 1 July 2013 and indexed annually) is available to the principal beneficiary without these assets impacting on the primary beneficiary’s income support payment such as the Disability Support Pension. Where the assessable assets of the trust exceed the exempt asset limit, the excess is classified as assessable assets for the primary beneficiary. Where immediate family members contributing to the trust are in receipt of a social security entitlement payment and are within five years of Age Pension age or older, they may be eligible to receive a concession from the usual social security rules relating to making gifts (disposal of assets).
 
The Government has broadened the range of eligible expenses for a SDT, allowing trustees the flexibility to pay for the beneficiary’s additional costs relating to the health, wellbeing, recreation, independence and social inclusion for the beneficiary up to $10,750 per financial year (current as at 1 July 2013). An example of this discretionary spending includes recreation and leisure activities, clothing / footwear and holidays. In addition, beneficiaries were also granted the ability to work up to seven weeks per year in the open labour market.
 
Due to the restrictions on how SDT income can be spent, it is not uncommon for some unexpended income to remain in the trust. In these cases, the net income of a SDT is taxed at the beneficiary’s personal income tax rate rather than the highest marginal tax rate (46.5%), as is the case for standard trust income to which no beneficiary is presently entitled. Please note: net income of a SDT is
the total assessable income of the trust, less any allowable deductions (as per ordinary meaning).
 
Other tax benefits of a SDT include capital gains tax exemptions: 
  1. For any assets donated into a SDT.
  2. Main residence exemption for the SDT.
  3. For the recipient of the beneficiary’s main residence, if disposed of within two years of the beneficiary’s death. 
It is also worth noting that a minor who is a principal beneficiary of a SDT is treated as an excepted person and in turn gains access to adult tax rates.
 
From Centrelink’s perspective, income from the assets of a SDT will not be counted for the application of the income test to the beneficiary of the trust. The use of the money from the trust to pay for care, accommodation, maintenance of trust assets and discretionary spending for the person with a severe disability will not be counted as that person’s income for income support purposes. 
 
If a person with a severe disability is the beneficiary of a SDT, the assessable assets of that trust will be disregarded for the application of the assets test (within the asset test exemption limit). This means that it will not affect the income support entitlements of the person with a severe disability. 
 
The trust deed for a SDT will need to contain clauses which are essential for a trust to comply with the requirements of the SDT legislation. From a reporting and auditing perspective, the trustee is required to provide financial statements as at 30 June of the applicable financial year. They must include, for example, a profit and loss statement, balance sheet, depreciation schedule and lodge an income tax return. The financial statements must be prepared and include the required information as outlined in the Social Security (Special Disability Trust – Trust Deed, Reporting and Audit Requirement (FaCSIA) Determination 2011). In addition, there is a yearly reporting requirement to Centrelink. 
 
Families should consult a financial advisor before establishing a SDT.
 
 
Sylvia Lianng, Financial Services Director 

Back to front page