WHAT IS SPECIAL DISABILITY TRUST
The special disability trust (SDT) regime was inserted into the Social Security Act 1991 (Cth) (SSA) in September 2006 “to assist parents and immediate family members wishing to make private financial provision for the current or future accommodation and care of a family member with a severe disability”.
By way of a combination of the requirements of Part 3.18A and the Regulations, for a trust to qualify as an SDT it must satisfy specific rules in respect of:
- Beneficiary requirements - the primary beneficiary of the trust being an individual who satisfies a severe disability test (sec.1209M SSA);
- Purpose requirements - the purpose of the trust being to make provision for that primary beneficiary of the SDT (sec.1209N SSA);
- Trust deed requirements - the trust deed provisions being in compliance with a model deed issued by the Department (sec.1209P SSA);
- Trustee requirements - the trustee/s of the SDT meeting the requirements specified (sec.1209Q SSA);
- Trust property requirements - the trust property being of particular specified types and not of precluded types (sec.1209R SSA);
- Trust expenditure requirements – the income and capital of the SDT only being used in accordance with strict and limited purposes (sec.1209RA SSA);
- Reporting requirements – specified reports being supplied to the Department by 31 March each year (sec.1209S SSA); and
- Audit requirements – the trustee must have the trust audited in certain circumstances (sec.1209T SSA).
The major benefit of the SDT regime is that the assets in the SDT up to an indexed limit ($500,000 in 2006/07 and now $609,500 for 2013/14) are excluded from the pension asset test, and all income earned by the SDT is excluded from the pension income test. Effectively this enables a family to provide approximately $600,000 of accommodation and income earning assets for their special needs beneficiary whilst ensuring they remain eligible for a full pension.
The SDT regime contains a requirement for the special needs beneficiary to satisfy the definition of ‘severe’ disability. Where they do, there are then quite detailed restrictions on what purposes the income (and capital) of the SDT can be used for with only $10,250 per year (currently) available for discretionary items not related to the care and accommodation needs of the beneficiary. There are also detailed restrictions upon what investments can be held by the trustees of an SDT.
Asset protection / bankruptcy risk attaching to SDTs
It is important to ensure that clients clearly understand that gifting assets into an SDT has no protection from clawback under the relevant provisions of the Bankruptcy Act 1966 (Cth). Accordingly, there remains a risk that a trustee-in-bankruptcy will seek to access assets or wealth gifted to an SDT where the giftor subsequently becomes bankrupt within 5&1/2 years of making the gift.
The income of an SDT is simply treated as (and taxed as) income of the special needs beneficiary which, in addition to their pension income, is taxable at normal marginal rates. Similarly, capital gains made by the SDT are included in the special needs beneficiary’s income in the usual manner. CGT exemptions and rollovers specifically available for SDT’s were also enacted for where a family member gifts a CGT asset to the SDT and for where the SDT sells a property which has been used by the special needs beneficiary as their main residence whilst it has been owned by the SDT.
WHY NOT USE TESTAMENTARY DISCRETIONARY TRUSTS?
Broadly speaking, TDTs are seen as having two major benefits, being:
- Minor children having access the adult marginal tax rates (as opposed to the $416 tax free cap for minor beneficiaries of inter vivos trusts); and
- Asset protection for the adult children for whom the TDTs are usually established.
However, TDTs are subject to the specific risk that, because they are created using estate assets as part of the administration of the deceased’s will, whether any or all of the assets remain available for the TDT to come into existence is subject to any family provision application made against the estate.