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Factsheet IS163 - Special Disability Trust

Purpose

This Factsheet explains what a special disability trust (SDT) is and the rules for setting up such a trust.  We recommend that you consult with your financial advisor and/or solicitor prior to establishing a trust and take into account both long term and short term considerations as applicable to your personal circumstances and those of the intended beneficiary.

What is an SDT and what are the main characteristics?

An SDT is a trust that may be set up to assist families to make private financial provision for the current and future care and accommodation needs of a family member with severe disabilities.

The purpose of the trust is to protect the interests of the person with disabilities.  Trust expenditure is restricted to what can be considered reasonable and related to the care and accommodation needs of the person with severe disabilities, costs associated with administration of the trust and payments primarily for the benefit of the person.

The trust cannot be used to meet the costs of care, accommodation or services provided by the trustee, partner, parent, or an immediate family member.

What are the main benefits of an SDT?

The asset value limit of $681,750 (indexed annually on 1 July) and income from the trust may be disregarded for the purposes of the principal beneficiary’s income support payment.  Assets above that limit are added to the assessable assets of the principal beneficiary.  The principal home of the principal beneficiary, if owned by the special disability trust, is not an assessable asset and is not included in the asset value limit.

Gifts made by immediate family members to a complying SDT may be disregarded for the purposes of the donor’s income support payment.

What are the Requirements of a complying SDT?

In order to be a complying SDT the trust must:

  • have only one principal beneficiary, who must be severely disabled;
  • provide primarily for the accommodation and care needs of the principal beneficiary;
  • have a trust deed that contains the clauses set out in the model trust deed, which can be found at: http://clik.dva.gov.au/system/files/media/sdt_model_trust_deed_december2012_v1.0.pdf
  • have an independent trustee, or have more than one trustee (e.g. two or more family members);
  • comply with the investment restrictions;
  • comply with the expenditure restrictions for purposes other than the primary purpose;
  • provide annual financial statements;
  • conduct independent audits when required; and
  • ensure that no immediate family member of the principal beneficiary is paid by the trust to care for the principal beneficiary.

Who is an immediate family member?

For the purpose of an SDT, an immediate family member of the principal beneficiary includes:

  • natural, adoptive or step parents;
  • legal guardians (a person who is, or was, the legal guardian of the person with a severe disability while that person was under the age of 18 years);
  • grandparents; and
  • siblings.

There are means- test concessions that apply to gifts by immediate family members to an SDT.  It is also important to note that there are restrictions on trust payments to an immediate family member.

Who can be the principal beneficiary?

The principal beneficiary of a trust must be a person with a severe disability.

A principal beneficiary who has reached 16 years of age must:

  • have a level of impairment that meets the criteria for a disability support pension, invalidity service pension, or income support supplement, on the grounds of permanent incapacity;
  • have care needs that would qualify a sole carer for carer payment or carer allowance, or be living in an accomodation service for people with severe disabilities, which is funded wholly or partly by an agreement between the Commonwealth and the States and Territories; and
  • not be working, or have any likelihood of working, in employment at or above the relevant minimum wage for more than seven hours a week, or be participating in the supported wage system.

For a principal beneficiary under 16 years of age, the criteria are that because of the severe disability or a severe medical condition:

  • the person’s carer is qualified under the Disability Care Load Assessment (Child) Determination with a rating of intense;
  • a treating health professional has certified that because of the disability or condition they will need personal care for 6 months or more and the personal care is required to be provided by a specified number of persons; and
  • the carer has certified in writing that the principal beneficiary will require the same care or an increased level or care to be provided in the future.

Allowable care and accommodation costs

The primary purpose of an SDT is to meet the reasonable care and accommodation needs of the principal beneficiary.

A care need is considered reasonable if:

  • the need arises as a direct result of the disability; or
  • the need is for any medical or dental related costs of the principal beneficiary; or
  • the need is to pay fees in an approved residential care service, or an institution, hostel, or group home operating under a specified Commonwealth agreement: and
  • the need is met in Australia.

The trust cannot be used to meet the costs of care provided by the trustee, partner, parent or an immediate family member.

An accommodation need is considered reasonable if the need arises as a direct result of the disability of the principal beneficiary.

Reasonable accommodation needs include:

  • payment for the purchase, or rental of a residence (or interest in a property) for the principal beneficiary’s accommodation
  • payment of rates, taxes on the property and for its maintenance.

The purchase and maintenance of an investment property, or an interest in an investment property, is also considered a reasonable care and accommodation cost where:

  • the investment property is rented at market value; and
  • the income from the rent is used for the benefit of the principal beneficiary.

Expenditure restrictions for other purposes

In addition to meeting the reasonable care and accommodation needs, a trust may have discretionary spending for other purposes that are for the health, well-being, recreation, independence and social inclusion of the principal beneficiary.

The maximum value of income and assets that can be applied for other purposes is $12,250 for the 2019-20 financial year and $12,000 in the 2018-19 financial year.  This amount may be varied by legislative instruments from time to time.

The limit does not include expenditure on the maintenance and the practical administration of the trust.

Contributions to an SDT

While anyone can make a gift to an SDT, there are restrictions on the payments that can be made by the principal beneficiary (or their partner) into an SDT.

Compensation payments made to the person with severe disabilities cannot be paid into an SDT.  The trust is intended only for succession planning by parents and immediate family members.

Contributions by the principal beneficiary (and their partner), including any property, will, unless a waiver notice has been given to the trustees, only be allowed when funded by a bequest or superannuation death benefit within three years of receipt of the bequest or superannuation death benefit.

There are gifting concessions for immediate family members who contribute to an SDT.  Before you contribute to an SDT, you should carefully consider the effect it may have on your financial security and any adverse effect on your Department of Veterans’ Affairs (DVA) income support payment.

Gifting concessions

Usually, gifting is restricted to $10,000 per year and $30,000 over a rolling five year period.  Gifts above these values are classified as deprived assets and will impact on your pension assessment.  However, immediate family members who are receiving a pension and who are of veteran pension age for veterans and war widow(er)s and age pension age for other pensioners, can gift their assets to a complying SDT, up to the value of $500,000 in total, without incurring any adverse effect on their DVA income support payment.

Contributions can come from different sources within the family.  Members of the immediate family of the person with a severe disability may gift prior to reaching veteran pension age, but will only gain the concession when they attain pension age, providing that the $500,000 limit has not been reached.

Should an SDT cease to exist or cease to be a special disability trust, the assets revert to the donors in the proportion they were given.  The value of any assets that cannot be returned, because they have been expended by the trust, are then regarded as deprived assets if less than 5 years has passed since the assets were gifted to the trust.

Example:  A grandfather has gifted $300,000 to an SDT.  The principal beneficiary dies three years later.  Only $225,000 remains which is returned to the grandfather.  The grandfather is then taken to have gifted $75,000 so $65,000 is assessed as a deprived asset for the remaining two years.

Trustee requirements

A trustee for the SDT can be either an individual or a corporation.  An individual, or a director of a trustee corporation, must:

  • be an Australian resident;
  • not have been disqualified at any time from managing corporations under the Corporations Act 2001;
  • not have been convicted of an offence or dishonest conduct against a law of the Commonwealth, State, Territory or a foreign country; and
  • not have been convicted of an offence under the Social Security Act 1991, or the Social Security (Administration) Act 1999, or the Veterans’ Entitlements Act 1986.

A statutory declaration to this effect is required from each of the trustees or directors of the trustee company.

Ending a Trust

If the principal beneficiary dies the trust will terminate and the trust’s assets will be distributed to the residual beneficiaries as per the trust deed. If a donor contributes to the trust and they receive a social security or veterans affairs’ payment under the gifting concession, there may be an impact on their income support payment if the trust ceases to be a special disability trust less than five years after the gift is made.

Events that will result in the trust ceasing to be a special disability trust include:

  • death of the principal beneficiary;
  • winding up of the trust; and
  • a breach of the special disability trust requirements.

Taxation

There are several benefits available for income derived from a Special Disability Trust:

  • unexpended income of a Special Disability Trust is taxed at the beneficiary’s personal income tax rate, rather than the highest marginal tax rate; and
  • disposal of a dwelling owned by this type of trust and used by the beneficiary as their main residence is included under the Capital Gains Tax main residence exemption rules.

In addition to the reporting and audit requirements as set out in the trust deed, it is recommended you talk with the Australian Taxation Office first to find out what your tax liability will be.

Obligations

You are required to tell us within 14 days (28 days if you receive remote area allowance) of changes to your circumstances that might affect the rate of income support pension you receive or your eligibility to receive that pension.  In relation to special disability trusts, you need to tell us if:

  • further gifts are made to the trust;
  • an event occurs that may cause the trust to become non-complying;
  • the trustee changes;
  • the beneficiary commences paid employment; or
  • the beneficiary dies.

Financial reporting

The trustee must provide the financial statements of the trust as at 30 June of each relevant financial year.  The financial statements must include information which complies with the Australian Accounting Standards, including;

  • Profit and loss statement for the relevant financial year;
  • Balance sheet with applicable notes for the relevant financial year; and
  • Depreciation schedule for each class of assets for the relevant financial year (where applicable).

A copy of the trust tax return for each relevant financial year must also be provided.

A statutory declaration must be included that confirms that:

  • expenditure for the relevant financial year (apart from reasonable trust costs and taxes) was spent on care and accommodation costs of the principal beneficiary;
  • expenditure for the relevant financial year was not spent on the day to day living expenses of the principal beneficiary or payments to any immediate family member; and
  • the trustee has declared that the information provided therein is all true and correct.

The financial statements and statutory declaration must be provided on or before 31 March each year for the previous complete financial year.

When you have finalised your financial statements for the year you should forward a copy to DVA within 14 days (28 days if you live overseas or receive remote area allowance).

More Information

DVA General Enquiries

Phone: 1800 555 254 *

Email: GeneralEnquiries@dva.gov.au

DVA Website: www.dva.gov.au

Factsheet Website: www.dva.gov.au/factsheets

* Calls from mobile phones and pay phones may incur additional charges.

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Disclaimer

The information contained in this Factsheet is general in nature and does not take into account individual circumstances. You should not make important decisions, such as those that affect your financial or lifestyle position on the basis of information contained in this Factsheet. Where you are required to lodge a written claim for a benefit, you must take full responsibility for your decisions prior to the written claim being determined. You should seek confirmation in writing of any oral advice you receive from DVA.

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1 July 2019