What is a special disability trust?

Under the Social Security Act 1991 (Act), a trust can be established with assets up to $657,250 (as at 1 July 2017, indexed annually), for a severely disabled person (Principal Beneficiary) without affecting their social security benefits. Further, if the SDT holds a property used as the main residence of the Principal Beneficiary, the value of that property is excluded from assets and income test requirements.

There are a number of regulations in relation to Special Disability Trusts (SDT), which are outlined below.

Threshold issues

SDT’s have the sole purpose of providing for the care and accommodation of a Principal Beneficiary. There are a number of factors to be satisfied for a trust to be considered a SDT, including:

a. where the Principal Beneficiary is 16 years or older:

i. the Principal Beneficiary must:

(A) have an impairment that would qualify them for the disability support pension or

(B) be receiving an invalidity service pension or

(C) be receiving an income support supplement due to permanent incapacity and

ii. the Principal Beneficiary must:

(A) have a disability that, if the person had a sole carer, would qualify the carer for carer payment or carer allowance or

(B) lives in an institution, hostel or group home that provides care for people with a disability and

iii. the Principal Beneficiary must have a disability as a result of which they either:

(A) are not working or unlikely to work for more than seven hours per week for a wage at or above the relevant minimum wage or

(B) are working for wages set in accordance with the Commonwealth supported wage system.

b. The trust deed must include specific terms from a model trust deed provided by the Department of Families, Community Services and Indigenous Affairs.

Use of Funds

Funds held in a SDT can only be used for the ‘care and accommodation’ of the Principal Beneficiary. There are restrictions on certain payments, and payments cannot be made to immediate family members (such as parents or brothers and sisters) for care and maintenance.

Recent amendments have relaxed the requirements, and now allow:

• up to $11,750 per year (as at 1 July 2017, indexed annually) to be spent on ‘discretionary items’ for the Principal Beneficiary
• funds to be used to pay for medical and dental expenses of the Principal Beneficiary, including membership costs for private health funds and
• the Principal Beneficiary to work up to seven hours per week.

Concessional treatment

There are two main concessional benefits:

1. for the Principal Beneficiary: assets up to $657,250 (as at 1 July 2017, indexed annually) can be held in the SDT, without affecting social security payments to the Primary Beneficiary (amounts in excess of the threshold can be contributed, but are counted as assessable assets and assessed against relevant assets test thresholds) and
2. for immediate family members, an amount of $500,000 per SDT can be gifted by those immediate family members of the Principal Beneficiary without affecting the individuals existing social security benefits or triggering gifting provisions (under the deprivation rules) if they are within five years of obtaining social security benefits.

Taxation

Recent amendments now mean that income from a SDT, whether expended or unexpended, is taxed at the Principal Beneficiary’s marginal tax rate.

Recent amendments have also extended the CGT main residence exemption to include a property owned by the trustee of the SDT that is used by the beneficiary as their main residence.

Assets which are gifted into a SDT will not cause the donor of the asset to be subject to CGT.

If the Principal Beneficiary dies and the main residence property passes from a SDT to another person, that person can sell the property at any time within two years of the purchase and be exempt from GST.

Gifting provisions and eligible contributors

Anyone can contribute to the SDT, however, rules apply to certain people:

a. the Principal Beneficiary or their partner can only give to the SDT where the gift is funded by:

i. assets the Principal Beneficiary received under a Will or

ii. superannuation death benefit received by the Principal Beneficiary and

b. where immediate family members (such as natural, adoptive or step parents, legal guardians, siblings and grandparents) contribute:

i. and they receive a social security or veterans’ entitlement payment or

ii. are within five years of Age Pension age, the immediate family members may be eligible for concessions from the usual gifting provisions. These concessions allow immediate family members to give up to a combined value up to $500,000 per SDT (made up of multiple or single gifts), without triggering gifting provisions that may affect their own social security benefits.

Restricted gifts

Two types of assets cannot be gifted to the SDT:

1. compensation received by the Principal Beneficiary (i.e. damages from a motor vehicle accident)
2. property contributed by the Principal Beneficiary or their spouse (except as described above).

Model trust deed

The Department of Families, Community Services and Indigenous Affairs provides a model trust deed (Model Trust Deed) that complies with the Act. Some of the terms of the Model Trust Deed are compulsory, and others optional.

Trustees

The trustee can be one or more individuals or a company, provided they meet the requirements under the Act. The Act requires, for example, that a trustee is not a person convicted of any offence involving dishonesty or disqualified from managing corporations.

When a SDT ends

A SDT ends when the Primary Beneficiary dies, or where provisions are breached. The SDT trust deed can:

1. provide for the return of property to those who gifted assets to the SDT
2. distribute assets of the SDT in accordance with a relevant Will or
3. distribute assets of the SDT according to a nomination within the SDT.

Reporting requirements

The trustee of the SDT is required to provide Centrelink with financial statements of the SDT before 31 March each year (for the financial year ending 30 June of the previous year).

The trustee can be requested by Centrelink to carry out an audit of the SDT.

Further information

More information can be located on the Department of Human Services website.