All our 3-Generation Testamentary Trust Wills contain Special Disability Trusts
Special Disability Trusts – useful for only one thing
Special Disability Trusts allows families to give private financial help to a disabled family member. This is for their care and accommodation. The family member must have a ‘severe’ disability.
But you could always give money to another person. There is no ‘gift’ tax in Australia.
Q: Why bother to set up an expensive and difficult to use SDT?
A: Both the donor and disabled person avoid the Centrelink ‘deprivation’ rules.
Legal Consolidated Barristers & Solicitors works with financial planners, lawyers and accountants to establish an ATO and Centrelink compliant trust structure and trust deed. We also provide the covering letter for the due diligence file and Minutes.
A ‘trust’ is a legal relationship between a trustee and a beneficiary. The trustee looks after the trust property for the disabled person. The trustee is often a parent or a family member. The beneficiary is their disabled relative, often a child or sibling.
For example, the beneficiary is the disabled son Tom, the trustee is his mother, Anne. Anne looks after the trust property for Tom. Anne is the ‘legal’ owner. Tom is the ‘beneficial’ owner.
When they started in 2006 you could gift up to $500,000 into the SDT. Since then this figure of $500,000 has increased each year by inflation. Anything over the current amount is, of course, subject to the Centrelink Deprivation gifting rules.
Family members are excluded from Centrelink’s deprivation rules and asset testing. This is when they put money into a Special Disability Trust. But what are the Deprivation gifting rules? And why do they matter?
Deprivation Rules for Special Disability Trusts
Let’s say that Anne (mum) wants to get Centrelink benefits. And let’s say the Centrelink’s benefits are means-tested. (E.g. if she has too much money she cannot get the pension.)
Let’s say that Anne has to ‘get rid of’, say, $700k before she is eligible for the pension. Let’s say she hands $700k to one of her children. ALERT: she is still taken to have that $700k in her name. This is for the next 3 years. This is called the Centrelink deprivation gifting rules. In other words, it is 3 years before Anne is eligible to get the pension.
The gifting rules do not prevent Anne from making a gift to another person. And there is no tax on gifts. Rather, the deprivation rules cap the amount that a gift reduces Anne’s assessable assets for means-testing.
There are two gifting limits applying to a single person (or to the combined amounts gifted by a couple):
- Up to $10,000 each financial year; and
- A limit of $30,000 over a five financial year rolling period.
The $10k and $30k limits apply together. That is, although Anne can continue to gift assets of up to $10k per financial year without penalty, she needs to take care not to exceed the gifting free limit of $30k over a rolling five-year period. Again, she can gift more money. But under the deprivation rules, she is deemed to still have that money for the next 3 years.
Special Disability Trusts escape the Centrelink Deprivation rules
Instead, pensioner Anne gifts the $700k into an SDT for her severely disabled son Tom. She:
- is deemed IMMEDIATELY to no longer have the money (no waiting 3 years)
- does not have to wait 3 years and be treated as still having the money
- also, Tom is also NOT means-tested for Social Security for the assets in the SDT.
Also, income from the SDT is excluded from the Centrelink income test. Also, deeming does not apply to the assets within the SDT.
Tom’s home, if held in the SDT, is excluded from means-testing.
Obviously, Anne cannot gift the money directly to Tom. The money must go into the Special Disability Trust. This is to avoid the Centrelink Deprivation giving rules.
Free training video on protecting vulnerable children
Social Security requirements to avoid deprivation rules – using Special Disability Trusts
A Special Disability Trust is a waste of time. This is unless the donor or disabled person escapes the deprivation rules. You often hear that the SDT provides ‘peace of mind’ and other meaningless cliches. No Centrelink deprivation advantage? Then there are cheaper, better, less restrictive, trusts to achieve ‘peace of mind’ for a disabled person.
To avoid the Social Security deprivation rules using SDTs:
- The primary purpose of the SDT is ‘reasonable care and accommodation’ of the disabled person.
- SDT may have other purposes. But they are minor (e.g. ancillary) to the primary purpose.
- SDT has only one person – being the disabled person (principal beneficiary).
- Section 1209M Social Security Act 1991 (Cth) ‘severe disability’:
- 16 or over:
- suffers an impairment that qualifies the disabled person for a disability support pension or equivalent
- meets the care conditions
- unable to work for more than seven hours per week for the minimum wage
- under 16:
- doctor certifies that the disabled person requires personal care for six months or more. And that a similar or increased level of care is required in the future.
- 16 or over:
- A special type of ATO and Centrelink complying trust deed (a ‘normal’ trust deed doesn’t work).
- Independent trustee or more than one trustee.
- Investment Restrictions.
- Annual financial statements.
- Independent audits, if required.
Special Disability Trusts require a doctor’s report
In our experience, to assess a person’s eligibility for Disability Support Pension, Centrelink requires a report. This is from the person’s doctor or specialist about their disability, injury or illness. Centrelink may also require the person to undergo a Job Capacity Assessment. Can the person work? How much work can they do? How much help is needed to find and keep a job?
Centrelink does not make it easy for you, the Donor, or your disabled family member. Is it worth the effort? Rarely.
Assets test assessment vs Special Disability Trusts
For a special disability trust, the disabled person is the only ‘attributed stakeholder’.
For the disabled person, all assessable trust assets up to the concessional asset value limit are exempt from the social security assets test. The concessional asset value limit was initially set at $500,000 on 20 September 2006. It is indexed on 1 July each year to the Consumer Price Index (CPI).
Any limit on the amount in an SDT?
There is no limit on the value of assets in a special disability trust.
1. But, any money donated over the ‘concessional asset value limit’ suffers the deprivation rules for the person making the gift into the SDT.
2. And also when the SDT goes over the ‘concessional asset value limit’ the disabled person suffers Centrelink means testing (capital and income) on the excess amount.
So here is another reason why an SDT is often a waste of time:
- If the disabled person has, say, $2m in their SDT then they are probably over the limit for Centrelink benefits anyway.
- Or, if they have say $2m in assets outside of the SDT then they are not going to get Centrelink anyway. So what was the point?
What can Special Disability Trusts pay for?
In our view, the restrictions are draconian and unfair. The SDT can only pay for ‘reasonable care and accommodation’?
1. ‘Reasonable Care‘ in a Special Disability Trust:
- arises as a result of the beneficiary’s disability;
- medical and dental costs. (This includes private health fund membership, ambulance cover, medicines, surgery, specialist and GP services and daily care fees);
- expenses closely tied to their disability, including a modified car, sleeping and sensory aids and specialised food.
2. ‘Reasonable Accommodation‘ in a Special Disability Trust:
- arises as a result of the beneficiary’s disability, or
- the lease or purchase of a property for the beneficiary’s accommodation needs, or
- is for the payment of rates, taxes or maintenance of property that is owned by the SDT. But it is used for their accommodation, or leased at market value and the rent is used for their benefit
Sadly, the SDT cannot pay family members for giving care or to purchase or lease property from a family member.
3. Discretionary spending in a Special Disability Trust
There is a small concession to the terrible restrictive rules above. The SDT spends a small amount of money each financial year on discretionary items. These are not related to the beneficiary’s care and accommodation. This is provided it is for the benefit of the disabled person. Discretionary spending includes the disabled person’s health, well-being, recreation, independence and social inclusion.
Since 1 July 2011, the amount that can be spent in a financial year on discretionary items is indexed annually.
The amount of discretionary spending was initially set at $10,000 on 1 January 2011. It is indexed on 1 July each year to increases in the Consumer Price Index (CPI).
Benefits of a Special Disability Trust
- Future: Ensure that the ongoing needs of a disabled person continue, especially when the parents or a primary carer dies.
- Protects: The SDT’s trustee is legally obliged to safeguard and hold the assets for the benefit of the disabled person.
- Social security: A gifting concession up to the current indexed amount for:
- eligible family members of the disabled person; and
An assets test assessment exemption for the disabled person.
- Tax: SDT’s net income taxed at the disabled person’s tax rates and Capital Gains Tax exemptions.
However, points 1, 2 and 4 are not peculiar to an SDT. Cannot take advantage of point 3? Then there are better trusts to hold the money for the disabled person.
Alternatives structures to a Special Disability Trust
Special Disability Trusts are expensive and restrictive. They only serve one purpose to avoid the $10,000 annual gifting rules for Centrelink. Getting no benefit from the deprivation rules? Then talk with your accountant and financial adviser about a better structure. Consider:
- 3-Generation Testamentary Trust Will – flexible and tax-effective
- Family Trust – but you have to trust the Appointor
- Unit Trust – with the owner of the Units being a Family Trust
- Bare Trusts
- Loans to children
Donor in Special Disability Trust avoids Centrelink deprivation rules
Only ‘immediate family members’ avoid the gifting concessions. Immediate family members include:
- parents (including adoptive and step-parents)
- legal guardians
- brothers and sisters (including adoptive, step and half-siblings)
The disabled person or their partner can only make use of the gifting concessions under limited circumstances. This is where the gifted asset is received under a Will. Every 3-Generation Testamentary Trust Will that you build on our website automatically allows your executors to establish Special Disability Trusts if required. This is for your children, grandchildren and great-grandchildren.
Since 20 September 2006, families may establish a Special Disability Trust. It attracts social security means test concessions for both the disabled person and the donor. The $500,000 limit (as indexed since 2006) applies to all family members combined.
The gifting concessions only apply to ‘immediate’ family members. These are persons who are of Age Pension age or Service Pension age. Plus they receive a social security pension. (Or receive a pension after making the gift.) The concession does not apply to a person receiving certain other income support payments such as Newstart Allowance.
Capital gains or losses arising from assets gifted directly to an SDT for no consideration are disregarded for tax purposes. The exemption also applies to assets passing from a deceased estate to an SDT.
Capital Gains Tax in a Special Disability Trust
SDT’s get the capital gains tax (CGT) main residence exemption. This is when you hold the disabled person’s home in the SDT. The 2-year (often 3 years) after death exemption also applies.
Retain income in the SDT and just pay normal marginal tax?
SDTs are taxed like other Australian trusts, such as family trusts. But what if you don’t distribute all the income to the disabled person? What if you retain some of the income in the SDT? Unexpended income is taxed at the disabled person’s marginal tax rate. This is unusual and beneficial to the disabled person.
Normally undistributed income is taxed at the highest marginal tax rate. See 99A Income Tax Assessment Act 1936. In other words, normally, you must distribute all income out of your trust. Otherwise, the retained income is taxed at the highest marginal tax rate.
In the SDT you do not have to pay out the income. Instead, you can retain the income in the Special Disability Trust.
But if that is your only benefit for the SDT, is it worth the effort? Remember, the retained income is still taxable. The disabled person still puts the retained income onto their tax return. It is not ‘free’ money.
Setting up a Special Disability Trust in your will
A Special Disability Trust is available in your Will if you have a 3-Generation Testamentary Trust Will.
All Legal Consolidated 3-Generation Testamentary Trust Wills contain Special Disability Trusts. They sit in the Will dormant. After your death, they can be turned on and off as your beneficiaries, children, grandchildren and great-grandchildren require. However, they are only one of the many benefits of a 3-Generation Testamentary Trust Will.
Centrelink attacks grandparents mentioned in Family Trusts
See this article on Family Trusts vs Grandparents
Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
Australia wide law firm