Welcome to the first article in our series on Special Disability Trusts (SDTs), where we hope to demystify particular aspects of these trusts, and highlight the benefits, eligibility requirements and restrictions to look out for.
Planning for a loved one
When planning or advising about how to secure the financial security of a loved one with a disability, two prominent goals stand out:
- Protecting the person from poor decision making and exploitation from others; and
- Preserving the person’s receipt of the Disability Support Pension (DSP).
In providing protection, it is common to use trusts, where assets will be managed for the person’s benefit by a trustee (look out for a future article on choosing a trustee).
To ensure that there is minimal impact on the person’s DSP when providing financial support, an understanding is needed about how Centrelink go about assessing the income and capital of a person receiving the DSP. The tables below set out the most common tests that apply when Centrelink is making these assessments.
These tables show the standard tests, and can be affected by factors such as the age of the person, if they are getting rent assistance, have children, are permanently blind or living outside of Australia.
Centrelink – Pension Assets Test from 1 July 2020
Full pensions reduce when the assets are more than the limit for the person’s situation:
Part pensions cancel when the assets are over the cut off point for the person’s situation:
The assets that Centrelink will take into account include the value of things like:
- Bank accounts and cash
- Financial investments, such as shares, managed investments, money loaned to others
- Home contents, personal belongings, vehicles
- Real estate (other than the person’s main residence)
- Annuities and other income streams and superannuation pensions
- Businesses, partnerships, private trusts and private companies.
The “attribution rules” introduced into the Social Security Act 1991 (Cth) in 2002, provided the ability for Centrelink to attribute a percentage of the value of the assets and income of a designated private trust or a designated private company for the purpose of means testing a particular individual. This attribution applies if Centrelink determines that the person can receive a distribution of income or capital from the trust or company.
However, where the trust is an SDT, the attribution rules do not apply in respect of the allowable concessional amount of capital and any right or interest the SDT has in the principal beneficiary’s main residence. The allowable concessional amount available to the principal beneficiary as at 1 July 2020 is $694,000.
Centrelink – Income Test from 1 July 2020
The standard income test for assessing someone in relation to a DSP is:
However, income generated from the investment of assets in an SDT is excluded from the income test assessment of the principal beneficiary.
For income tax purposes, all income generated in the SDT, including unexpended income is taxed at the principal beneficiary’s marginal rate, rather than the highest marginal rate