Special Disability Trusts

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Amendments were made to the Social Security Act 1991 (Cth) (“the Act”) in September 2006 to allow Special Disability Trusts to be created to assist families to provide for the future care, accommodation and medical needs of family members with severe disabilities.

Assets held in a Special Disability Trust, provided they are below the threshold ($609,500 as at 1 July 2013) will not count towards the beneficiary’s assessable assets (for the purpose of determining the beneficiary’s eligibility for a pension). Beneficiaries are able to retain up to 100% of their Disability Support pensions or other social security benefits, while still receiving support towards the costs of appropriate care, accommodation and medical treatment, which are often not fully covered by social security payments.

An immediate family member can also transfer assets into the Special Disability Trust, without having that transfer taken into account for the purpose of their own eligibility for a pension.

a.      What is a Special Disability Trust?

A Special Disability Trust is a trust established for the benefit of a severely disabled person.

A Special Disability Trust must be established for the sole purpose of meeting the reasonable care and accommodation needs of a beneficiary who has a severe disability.  The Trust can have ancillary purposes that are necessary or desirable to facilitate the achievement of the sole purpose.

A Special Disability Trust must have a trust deed or be established by a Will and must comply with the model trust deed provisions under the Act.

The Trust ceases to be a Special Disability Trust when the principal beneficiary dies.  Therefore, the trust will only exist during the beneficiary’s lifetime.

b.      Who can qualify for a Special Disability Trust?

Section 1209M of the Act lists the beneficiary requirements of a Special Disability Trust.  The trust may only have one beneficiary (“the principal beneficiary”, which is the person with the disability. To be eligible to be a beneficiary if 16 years of age or over, the following conditions must be met:

a. Satisfy one of the following criterion:

  • Have an impairment which would qualify for disability support pension; or
  • Be receiving invalidity service pension under Part III of the Veterans’ Entitlements Act; or
  • Be receiving income support supplement under the Veterans’ Entitlements Act on the grounds of permanent incapacity;

AND

b. Satisfy one of the following criterion:

  • Have a disability which would, if the person had a sole carer, qualify the carer for a carer payment or carer allowance; or
  • Be living in an institution, hostel or group home where care is provided to people with disabilities and where funding is provided (in full or part) under an agreement between the Commonwealth, States and Territories;

AND

Be unable to work as a result of his/her disability and have no likelihood of working for a salary at or above the minimum wage; or be unable to work over 7 hours per week in the open labour market.

If the principal beneficiary is under 16 years of age, each of the following criteria must be met:

a.   He/she must have a severe disability or a severe medical condition;

b.   The carer must have been given a qualifying rating of “intense” under the Disability Care Load Assessment (Child) Determination for caring for the principal beneficiary;

c.   A treating health professional must have certified in writing that because of the disability or condition, the principal beneficiary will need personal care for 6 months or more provided by a specified number of people; and

d.   The carer must have certified in writing that the principal beneficiary will require the same care, or increased level of care (to be provided by him/her) in the future.

Unless the above criteria can be met, a Special Disability Trust cannot be used.

c. Who can be a Trustee of the Special Disability Trust?

Section 1209Q(1) of the Act provides that a trustee of the trust (who is an individual) must be an Australian resident, and have no convictions of any of the following offences:

a. an offence of dishonest conduct against, or arising out of a law of the Commonwealth, State, Territory or foreign country; or

b. an offence against, or arising out of, the Act, the Administration Act or the Veterans’ Entitlement Act; and

c. not have been disqualified at any time from managing corporations under the Corporations Act 2001 (Cth).

However, if the Trustee is a corporation, then the above requirements apply to each director of the Trustee.

This means that parents, grandparents, siblings and even friends of the beneficiary can be a trustee of the Special Disability Trust providing he or she meets the above requirements.

d. Restrictions on use of the Trust

The Model trust deed provisions which are required to be used under the Act strictly limit the ways in which income and capital of the trust can be utilized. However, recent amendments to the Act have expanded the use of Special Disability Trusts to allow for $10,750 per year (indexed each year on 1 July) to be spent on discretionary items that may fall outside the strict limits for other expenditure on care and accommodation needs. This discretionary allowance must be spent for the benefit of the beneficiary, but is not restricted to the beneficiary’s care and accommodation needs. This allows special disability trusts greater flexibility to provide for the beneficiary’s health, well-being, recreation, independence and social inclusion.

The following assets cannot be transferred into the Trust:

Assets belonging to the Principal Beneficiary (or his/her partner) cannot be transferred to the Trust unless the transferred assets are part of a bequest or superannuation death benefit which was received by the Principal Beneficiary (or his/her partner) no more than 3 years before transferring the asset; and

any compensation received by or on behalf of the Principal Beneficiary in the trust.

In addition, Trust assets cannot be used to:

pay an immediate family member or child of the principal beneficiary for providing care services or services for the repair or maintenance of the beneficiary’s accommodation; and

purchase or lease property (includes a right to accommodation for life in a residence and life interest in a residence) from an immediate family member or child of the principal beneficiary (even if the property is used for the beneficiary’s accommodation).

Child includes a natural child, adopted child or step-child or someone who is a child within the meaning of the Family Law Act 1975.

e. What are the reporting and audit requirements?

On or before 31 March of each year, the Trustee must give written financial statements about the Trust (for financial year ending 30 June of the previous year) to Centrelink.

The Trustee’s duties involve the Trustee (within a reasonable time after a request has been made) arranging for the Trust to be audited or giving a copy of the audit report of an earlier requested audit which has been or being carried out.

Any one of the following may request an audit of the Trust at any time:

  • the principal beneficiary;
  • an immediate family member of the principal beneficiary (which includes parents or step parents, legal guardian, grandparents or siblings of the principal beneficiary);
  • person who is the legal guardian or financial administrator of the principal beneficiary;
  • person who is acting as the principal beneficiary’s guardian on a long-term basis; or
  • Centrelink.

f. How is the income of the Special Disability Trust treated?

Section 1209V of the Act provides that any amount of income received from the Special Disability Trust by the beneficiary will not be counted as income for the purpose of the Centrelink income test.

g. How are assets of the Special Disability Trust treated?

According to section 1209Y of the Act, assets of the Special Disability Trust (valued up to $609,500 which is indexed on 1 July each year to CPI) are not included in the assets of the principal beneficiary of the Trust for the purpose of the Centrelink asset test when assessing the eligibility for pension.

However, if the value of the assets owned by the Trust exceeds $609,500 (the Trust’s asset value limit), the extent to which it exceeds the limit will be included in the assets of the principal beneficiary and will be counted for the asset test.  This amount is indexed annually.

Importantly, the value of the principal home of the principal beneficiary is disregarded for the purpose of the Centrelink assets test if the home is held within the Special Disability Trust.

h. Who can contribute to the Trust and what is the limit on the contribution?

Anyone can contribute to the Trust.  However, as stated above, the beneficiary (and their partner) cannot contribute to the trust unless the asset comes from a deceased estate or superannuation death benefit, which has been received within 3 years.  There is no contribution limit if such a contribution is made by the beneficiary (or their partner).

For eligible asset transfers by the Principal Beneficiary (or his/her partner), the transfer of the asset will not be a disposal of an asset if the person transferring the asset is:

  • the principal beneficiary or his/her partner;
  • receiving no consideration and is not entitled to any consideration for the transfer; and
  • the transfer is unconditional.

For transfers by all other persons, the transfer of the asset is not a disposal of an asset if the person transferring the asset is:

  • an immediate family member of the principal beneficiary;
  • receiving a social security pension and has reached pension age or is receiving a service pension and has reached pension age, or is receiving income support supplement;
  • receives no consideration and is not entitled to consideration for the transfer;
  • the transfer is unconditional; and
  • the value of the assets (and any previously transferred assets) is less than $500,000.

Therefore, the gifting concession of up to $500,000 is available to eligible family members of the principal beneficiary and can only be used once.  This means that it will not be means tested by Centrelink and the beneficiary’s Centrelink benefits will not be reduced as a result of the transfer.

Where the immediate family member making the transfer is not receiving a social security pension, service pension, or income support supplement (and neither is their partner), the immediate family member will not be taken to have made the transfer until either they (or their partner) is receiving a social security, a service pension, or income support supplement.

i. Further changes to Special Disability Trusts

In the 2009/2010 budget, the Government announced that any unexpended income of the trust will be taxed at the beneficiary’s personal income tax rate (this takes effect for the financial year ending 30 June 2009). Further, it will also extend the Capital Gains Tax main residence exemption to include a residence owned by the Trustee of the trust and used by the beneficiary as their main residence (this will take effect from the financial year ending June 2010).

Further changes from January 2011 provide that beneficiaries may work up to 7 hours per week at or above the minimum wage, without affecting their eligibility for a Special Disability Trust. Additionally, the trust may now pay for the medical expenses of the principal beneficiary, including private health fund membership. Finally, discretionary spending is now allowed up to $10,750 per annum, providing greater flexibility for the fund to contribute towards the general health, well-being and social inclusion of the principal beneficiary (discussed above at (d)).