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Special disability trusts are like normal discretionary trusts but with strict rules around the payout of trust income and capital. They help parents and disabled children to qualify for age and disability support pensions.
Special Disability Trusts
What is a special disability trust? What can or can’t it do? And why would you set one up? These are some of the questions John Saunders of The Pittwater Partnership in Sydney covers in this episode. Here is what we learned but please listen in as John explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Special Disability Trusts
Both disability support pensions and age pensions are means tested. You need to pass both the Centrelink income and asset tests to qualify. So parents and disabled children often don’t qualify as such.
However, the Centrelink income and asset tests do not count the assets and income generated by a special disability trust. So while parents and child might not qualify for pensions without a special disability trust, they might with.
Normal Trust with Strings Attached
A special disability trust is like a normal discretionary trust – so the usual trust rules apply – but with additional strings attached.
A special disability trust can only make payments to cover reasonable care, accommodation needs and some specified discretionary expenditure for the nominated beneficiary.
The trust’s income and subsequent distributions to the principal beneficiary don’t go into Centrelink’s income test, but the income is still subject to income tax like any other trust income.
Gifting Concession
The Centrelink asset test includes any gifts made within the past 3 years and exceeding $10,000 per year or $30,000 over 5 years. Which just means that you need to wait 3 years after you made the gift before you can apply to Centrelink.
But there is an exception. Gifts from immediate family members are exempt if they meet two conditions. They must be of pension age and receive a social security pension (for example age pension, disability support pension etc).
First establish the trust, then make the gift.
Trust Deed
Special disability trusts have a trust deed like any other trust. But the trust deed must stipulate certain clauses. It must nominate the principal beneficiary as the only attributed stakeholder under the trust and company rules and govern what the trust can spend money on.
It must also nominate the residual beneficiaries who are to receive the trust assets when the principal beneficiary dies.
Concessional Limit
Trust assets are exempt from Centrelink’s asset and income tests, but only up to a certain limit – the so-called concessional asset value limit. This limit goes up on the 1st of July each year in line with the CPI index. It is currently below $700k.
Usually the the principal beneficiary’s asset test doesn’t include trust assets. But it will include any excess over the limit.
Purpose
The primary purpose of a special disability trust is to meet the reasonable care and accommodation needs as well as discretionary spending of the principal beneficiary.
The trust can’t spend more than what is reasonable for the principal beneficiary’s care and accommodation to accommodate their disability.
Somebody else can only benefit from the trust for the care and accommodation of the principal beneficiary where the benefit is ‘incidental’.
The trust cannot be used to meet the costs of care provided by the trustee, partner, parent or immediate family member for care provided (s1209N and s23 (1) SS Act).
The trustee cannot pay any immediate family member for providing care to the principal beneficiary. Any paid care must be provided by an arms-length employee of the special disability trust, e.g. nurse, physiotherapist, etc.
Reasonable Care
A care need is a reasonable care need if the need arises as a result of the principal beneficiary’s disability for medical and dental costs of the principal beneficiary and is met in Australia. A daily care fee and any additional itemised fees charged by an approved provider in relation to the principal beneficiary’s care and accommodation in a residential care service or in certain supported care accommodation also qualify.
Examples of reasonable care needs include, but are not limited to:
- professional care and case management;
- therapy approved, in writing, by a medical practitioner;
- specialised food specified by a medical practitioner;
- mobility aids, prostheses and positioning aids;
- sleeping and sensory aids;
- personal care aids ;
- pressure care aids
- continence aids;
- communication devices ;
- modified vehicle;
- modification to vehicle;
- transport;
- training for transitional or independent living skills of the beneficiary.
All these expenses must be required for, or are needed because of, the principal beneficiary’s disability.
Reasonable Accommodation
An accommodation need of the beneficiary is a reasonable accommodation need if the need arises as a result of the disability of the principal beneficiary. This includes the acquisition of the property itself as well as modifications and ongoing costs like rates and taxes and property maintenance.
If the accommodation is rented from a third party, then it includes the rent itself as well as rental bonds and other costs.
Discretionary Spending
From 1 January 2011, the trust can pay for discretionary spending. The discretionary spending must be for the benefit of the beneficiary and must not exceed the relevant limit. The limit as of 1 July 2019 was $12,500.
Examples of discretionary spending are food, household items, toiletries , motor vehicle expenses, recreation, computer, cleaning, clothing and footwear, life skills and social inclusion workshops.
Taxation
Trust income is taxed in the hands of the principal beneficiary at normal adult rates. Normal rules apply to capital gains tax and stamp duty.
Wind-up
The special disability trust will terminate and the trust’s assets will vest in the residual beneficiaries named in the trust deed, in the proportions specified in the trust deed, upon death of the principal beneficiary.
There may be gifting implications under the means test if a donor gifted to the trust within 5 years of the principal beneficiary’s death, refer to GSS 4.14.4.30.
Summary
The big advantage of a special disability trust is that gifts to the trust within limits is not a deprived asset for the donor. And Centrelink doesn’t include the trust’s income and assets in the principal beneficiary’s asset and income tests.
The disadvantage is that the trust is not completely ‘discretionary’. There are strict rules what it can pay or not. There is no tax concession – the trust income is taxed in the hand’s of the beneficiary like any other income. And there are compliance costs to manage the trust.
DSS Guides
The Department of Social Services (DSS) has published a number of guides that might be helpful. Here is a list:
Planning for the Future: People with Disability November 2014
Special Disability Trusts: Getting Things Sorted November 2014
Special Disability Trusts: Questions and Answers November 2014
A model trust deed is also available.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 15 March 2021
Tax Talks spoke to John Saunders - Principal at The Pittwater Partnership - for more details.
