30/09/2010

A special Disability Trust (SDT) is a trust established for the reasonable care and accommodation needs of a person with severe disability by the parents or immediate family members of the disabled person who is the principal beneficiary of the SDT.

SDT Advantages

A SDT set up in accordance with the Social Security Act provides significant social security advantages to the principal beneficiary and the family member who establishes the SDT.  These include:

• For the purpose of the social security assets test, the assets of a SDS are not included in the assets of the principal beneficiary of the trust up to the assets value limit.  The assets value limit as at 1 July 2010 is $563,250 (indexed annually to CPI).

• The income of the SDT is not counted as income of the principal beneficiary for the purpose of the social security income test.  This will not affect the principal beneficiary’s disability support pension benefits.

• The amount gifted by the family member to the SDT is not treated as a deprived asset under the social security rules.  A gifting concession of up to $500,000 combined is available for eligible family members of the principal beneficiary.
  

Removal of barrier to SDT

SDTS used to be taxed in accordance with the general rules for the taxation of trusts in Division 6 of the Income Tax Assessment Act 1936.  Where the income of the SDT is not fully spent on the care and accommodation of the principal beneficiary, the unexpended income was retained in the trust and assessed to the trustee of the trust at a penalty rate of tax (45% plus medicare levy) under section 99A.  This provided significant barrier to the SDT.

This barrier has been removed with the introduction of Tax Laws Amendment (2010 measures No 3) Bill that allowed unexpended income of a SDT to be taxed at the principal beneficiary’s personal income tax rate rather than the top marginal tax rate.  The Amendment Legislation has become effective and applies retrospectively to the net income of SDTs from 2008-2009 year of income.

From 1 July 2009, the CGT main residence exemption also applies to include residence owned by the SDT and used by the principal beneficiary as the main residence.

Testamentary SDT

In some cases, family members or parents of severely disabled persons may wish to retain control of their assets in their lifetime and make provision for the disabled child through their will.  It is possible to utilise the SDT as an estate planning tool.  Provisions can be made in the Will for a SDT to be set up out of the assets of the deceased estate. 

The Trust Deed

The trust deed of a SDT must meet the model trust deed requirements set out by FaCSIA.  In addition, the trustee of a SDT must be an Australian resident.  The trustee can be a corporate trustee or at least two individual trustees..

Other requirements of the SDT

A SDT must meet these other requirements:

• Be ‘protective’ in nature
• Have only one principal beneficiary (that is the person for whom the trust is established)
• The principal beneficiary must meet the eligibility criteria that meet the severe disability definition
• Established to provide for the accommodation and care needs of the principal beneficiary
• Comply with the investment restrictions
• Provide annual financial statements and
• Conduct independent audits when required.
  

Definition of severe disability

A person with a severe disability is someone aged 16 or over who:

• Has an impairment that would qualify a person for the social security disability support pension and
• As a result of the disability, the beneficiary is not working and has no likelihood of working for a wage at or above the relevant minimum age and who
• Either lives in a care institution, hostel or group home in which care is provided for people with disabilities or if a person has a sole carer, the carer qualifies for the carer payment or carer allowance.
  

If a person is under the age of 16, the beneficiary must qualify as a “profoundly disabled child” under the Social Security Act. .

Budget Measures

As part of the 2010-11 Federal Budget, the Government has announced additional measures in relation to SDTs.  From 1 January 2011:

• people with disability who are the beneficiaries of a trust will be able to work up to seven hours a week in the open labour market and still qualify;
• the Trust will be able to pay for the beneficiary’s medical expenses, including membership costs for private health funds, and the maintenance expenses of the Trust’s assets and properties; and
• the Trust will be able to spend up to $10,000 in a financial year on discretionary items not related to the care and accommodation needs of the beneficiary of the trust.
  

TOWNSENDS BUSINESS & CORPORATE LAWYERS provide comprehensive estate planning services and can assist with the preparation of SDT deeds and testamentary SDTs.  Please contact us on (02) 8296 6222 for more information.