Special Disability Trusts (SDTs) were introduced in 2006 to assist families and carers make private financial provisions for the current and future care and accommodation needs of a family member with a severe disability. They provide the donor and SDT beneficiary with Social Security concessions under the gifting and deeming rules.
This Fastfact outlines the Social Security concessions and requirements as well as the taxation implications applicable to SDTs. While financial advisers may identify the suitability of an SDT for a client, the services of a legal professional will be required to establish the trust and make amendments to the trust as required.
Social Security concessions
Broadly, the Social Security concessions include:
- Gifts of up to $500,000 combined by immediate family members are excluded from deprivation rules and asset testing.
- SDT assets valued at up to $669,7501 are exempt from the Social Security assets test for the beneficiary.
- Income from the SDT is excluded from the income test, and deeming does not apply to the assets within the SDT.
- The beneficiary’s home, if held in the SDT, will be excluded from means testing.
Special Disability Trusts – Social Security requirements
In order to access the Social Security concessions, the SDT must meet a number of requirements including:
- The primary purpose of the trust must be to meet reasonable care and accommodation needs of the beneficiary. See What are reasonable care and accommodation needs? for further details.
- The trust may have other purposes that are both ancillary to the primary purpose or necessary or desirable to achieve that purpose, or primarily for the benefit of the beneficiary. See Discretionary spending for further details.
- The trust must have only one beneficiary (technically referred to as the principal beneficiary).
- Where the beneficiary is 16 years or over they must:
- have an impairment that would qualify the person for a disability support pension or DVA equivalent
- meet certain care conditions
- be unable to work for more than seven hours per week for a wage that is at or above the relevant minimum, or be working for wages set as part of the Government’s Supported Wage System2
- Where the beneficiary is under the age of 16, among other key conditions, a treating health professional must certify that the beneficiary will need personal care for six months or more and that a similar or increased level of care will be required in the future.
- Further requirements apply to the trust deed, trustees, trust property and reporting. For more information on these requirements, those listed above and those not covered in this flyer, please click here.
What are reasonable care and accommodation needs?
A care need is a reasonable care need if it:
- arises as a result of the beneficiary’s disability, and
- relates to beneficiary’s medical and dental costs, including health insurance and medical practitioner services, or
- relates to daily care fees and certain other fees charged by an approved care provider
An accommodation need is a reasonable accommodation need if it:
- arises as a result of the beneficiary’s disability, or
- relates to the lease or purchase of a property for the beneficiary’s accommodation needs, or
- is for the payment of rates, taxes or maintenance of property that is owned by the SDT and used for the beneficiary’s accommodation, or leased at market value and the rent is used for the beneficiary’s benefit
The SDT cannot be used to pay an immediate family member for providing care to the beneficiary or to purchase or lease property from an immediate family member.
The SDT can spend up to $12,0001 per financial year on discretionary items not related to the beneficiary’s care and accommodation needs, provided it is for the benefit of the beneficiary. Discretionary spending can include items relating to the beneficiary’s health, wellbeing, recreation, independence and social inclusion.
Are there any asset limits?
Technically there is no limit on the value of assets that can be held by an SDT. However in practice the primary purpose requirements (outlined previously) may limit access to funds within the SDT.
To avoid these types of access issues a separate trust (eg discretionary trust) may be established for the funds above the asset test exemption limit (currently $669,750).
- Only ‘immediate family members’ can make use of the gifting concessions. Immediate family members include parents (including adoptive and step parents), legal guardians, grandparents and brothers and sisters (including adoptive, step and half siblings).
- The beneficiary or their partner can only make use of the gifting concessions under limited circumstances, such as where the gifted asset is received under a Will.
- The $500,000 limit applies to all immediate family members combined.
- The gifting concessions only apply to immediate family members who are of Age Pension age or Service Pension age and receiving a social security pension or service pension or veterans’ income support supplement. The concession does not apply to a person receiving certain other income support payments such as Newstart Allowance.
- Capital gains or losses arising from assets gifted directly to an SDT for no consideration are disregarded for tax purposes. The exemption also applies to assets passing from a deceased estate to an SDT.
Taxation of SDTs
SDTs are largely taxed in the same manner as other types of trusts, such as family trusts. There is however a significant point of difference in that any unexpended income is taxed at the beneficiary’s marginal tax rate (MTR), rather than at the highest MTR.
SDT’s are also able to access the capital gains tax (CGT) main residence exemption where the beneficiary’s home is held within the trustee. This exemption applies in certain circumstances where the SDT beneficiary passes away and the property is subsequently disposed of within two years of the beneficiary’s death.