SPECIAL DISABILITY TRUSTS

QUESTIONS & ANSWERS

IMPORTANT DISCLAIMER

Whether a Special Disability Trust is suitable for your purposes is a complex matter that involves the need to carefully consider your personal circumstances and those of the intended beneficiary. Those circumstances may change over time, as may other factors such as relevant laws, taxation treatment and relevant policies. You should always seek advice from qualified legal, taxation and other professional advisers before taking any action in respect to a Special Disability Trust and take into account both long term and short term considerations as applicable to your individual circumstances.

These Special Disability Trust Questions and Answers and all associated information (the "Information") are intended to provide you with generic and high level information only. While we believe the Information is generally accurate, it is intended for general consideration only and not for decision making purposes. You should not rely on this Information for any purpose. To the extent permitted by law the Commonwealth of Australia provides this information without any representation or warranty of any kind including, without limitation, in respect to accuracy, completeness or currency and will have no liability to you of any kind in respect to any use that you may make of the Information.

  1. About Special Disability Trusts
  2. What is a Special Disability Trust?
  3. Who can establish a Special Disability Trust?
  4. What are the main characteristics of a Special Disability Trust?
  5. What are the social security benefits of a Special Disability Trust?
  6. Will any trust qualify as a Special Disability Trust?
  7. When does a Special Disability Trust end?
  8. What are the recent changes for Special Disability Trusts?
  1. About the beneficiary of a Special Disability Trust
  2. Who can be the beneficiary?
  3. When is the assessment of the beneficiary required?
  4. How is a beneficiary for a Special Disability Trust assessed?
  5. How many trusts can a beneficiary have?
  6. How many beneficiaries can be included in each Special Disability Trust?
  7. Can a beneficiary work?
  8. Are there any restrictions for people with disability residing in gaol or psychiatric confinement?
  9. Can the beneficiary gift to their Special Disability Trust?
  10. Can the beneficiary reside permanently outside of Australia and still be an eligible beneficiary for aSpecial Disability Trust?
  1. About the contributors and contributions to a Special Disability Trust
  2. Who can gift to a Special Disability Trust?
  3. Who can receive the gifting concessions for a Special Disability Trust?
  4. Who is an immediate family member?
  5. Can any amount of money or assets be contributed to a Special Disability Trust?
  6. How much gifting concession can the trust receive?
  1. About the trustee(s) of a Special Disability Trust
  2. Who can be a trustee?
  3. How many trustees are required?
  4. What are the trustee’s responsibilities?
  5. How is the trustee(s) changed?
  1. About the Trust Deed of a Special Disability Trust
  2. When can the trust deed be drafted?
  3. What are the requirements for the trust deed?
  4. Does a Model Trust Deed (or parts of it) need to be inserted into a Will?

5.4.What happens if a ‘beneficiary assessment’ is not done before the trust deed is prepared?

5.5.Can a trust be set up in a Will?

5.6.Where a testamentary trust is being established (with the intention that it be a Special Disability Trust), does the beneficiary assessment need to take place before or on the creation of the trust?

5.7.Do I have to change themodel trust deed if it was created before 1 July 2011 to reflect the 1January 2011 social security measures?

5.8. What happens if I do not change the model trust deed that was created before 1 July 2011?

5.9.How is the trust deed changed?

5.10. Fivecommon errors with a Special Disability Trust Deed.

  1. About the Income and Assets of a Special Disability Trust
  2. What value of assets can be held in the trust?
  3. How is the trust assessed under the Social Security or Veterans’ Entitlements Acts means test?
  4. How will the trust’s assets and income affect the beneficiary’s Social Security payment?
  5. What are the Taxation requirements of a Special Disability Trust?
  6. How is a Special Disability Trust’s and/or an individual SDT beneficiary’s tax return completed?
  7. What happens if the trust fails to lodge a tax return?
  8. Is there any other Tax relief for Special Disability Trust?
  9. About the expenditure of funds in a Special Disability Trust
  10. What can the trust’s income and capitalbe used for?
  11. Can a beneficiary’s medical needs be met by the trust?
  12. What are reasonable care needs?
  13. What are reasonable accommodation needs?
  14. What else can the trust pay for?
  15. Can the trust pay for care provided by an immediate family member?
  16. Can a third party benefit from Special Disability Trust expenditure?
  1. About reviews and compliance checks for a Special Disability Trust
  2. When is a Special Disability Trust reviewed?
  3. What needs to be provided for each review?
  4. What happens if the required documents are not available by the due date?
  5. Who can prepare the financial reports?
  6. When is an audit of a Special Disability Trust required?
  7. Who can request an audit of a Special Disability Trust?
  8. What happens if the trust, trustee or trust deed is found to be non-compliant with the Special Disability Trust requirements?
  9. About ending a Special Disability Trust
  10. What happens when the beneficiary dies?
  11. Are there any implications under the gifting rules when the beneficiary dies?
  1. About finding out more regarding a Special Disability Trust
  2. Where can I get further information about Special Disability Trusts?

1.About Special Disability Trusts

1.1What is a Special Disability Trust?

A Special Disability Trust is a trust established primarily for succession planning by parents and immediate family members for the current and future care and accommodation needs of a person with a severe disability or medical condition.

The general approach is that the trust can pay for any care, accommodation, medical costs and other needs of the beneficiary during their lifetime.

We recommend that you consult with a financial advisor and/or a solicitor for advice before establishing a Special Disability Trust.

Note: ‘Special’ refers to the Social Security and Tax treatment of the trust and is not a reference to the beneficiary’s disability.

1.2Who can establish a Special Disability Trust?

Anyone can establish a trust for an eligible severely disabled beneficiary.

Note: It is important that, before a Special Disability Trust is established, the prospective trust beneficiary be assessed as severely disabled under the legislation for this type of trust.

In general, there are four main roles in establishing a trust:

1.The Settlor: The Settlor is the person or company who,with the trustee(s),establish the trust by contributing an initial amount (typically $10 is the settled sum) and executing a trust deed. After the trust is set up, assets or cash to purchase assets can then be transferred into the trust.

The Settlor will often be an accountant, solicitor or a distant family member, who will not have an ongoing role in the operation of the trust. A Settlor cannot be a beneficiary, contributoror trustee of the trust.

The intention of this provision is to prevent the person who formally sets up the trust from still being seen as the owner of the trust assets and income for tax purposes. To ensure this, the Settlor has nothing further to do with the trust.

  1. The Appointor: An Appointor can be any person or corporation who is not the beneficiary or Settlor. The Appointorusually indirectly controls the trust and hires (and can dismiss) the trustee(s). An Appointor is not responsible for the day-to-day operation of the trust.

The trust deed should provide for the future control of the trust after the Appointor dies.

2.

3.TheTrustee: The Trustee manages the day to day activities of the trust, conducting business on behalf of the trust, including making investment decisions aimed at increasing the value of the assets.

Trustees, among other things, must be fully acquainted with the terms of the trust and their responsibilities, know what the assets and liabilities of the trust are, keep proper accounts and prepare tax returns.

4.The Beneficiary:The beneficiaryis the person who benefits under the trust. They have no right or claim to any of the trust property until it is vested in them under the terms of the trust. This means that they receive what the Trustee(s) determine is applicable under the trust deed.

1.3What are the main characteristics of a Special Disability Trust?

A Special Disability Trust must meet the following requirements:

•have only one beneficiary (that is the person for whom the trust is established),

•the beneficiary must meet all eligibility criteria. See 2.1 Who can be the Beneficiary?,

•the primary purpose must be toprovide only for the accommodation and care needs of the beneficiary,

•have a trust deed that contains the clauses as set out in the model trust deed,

•have an independent trustee, or alternatively have more than one trustee,

•comply with the investment restrictions,

•provide annual financial statements, and

•conduct independent audits when required.

1.4What are the social security benefits of a Special Disability Trust?

A gifting concession is available of up to $500 000 combined (total amount in trust that has received gifting concession) by one or more eligible family members of the beneficiary.

An Assets Test assessment exemption of up to $609,500 (as at 1 July 2013indexed annually) is available for the beneficiary.

All trust income is excluded from the income testassessment for the beneficiary.

1.5Will any trust qualify as a Special Disability Trust?

No. A trust will not be a Special Disability Trust unless the legislative requirements are met. For example, a trust deed must include the compulsory clauses of the ‘model trust deed’. These are provisions that cannot be watered down if the trust is to qualify as a Special Disability Trust. However a Special Disability Trust can have its own individual provisions, so long as they are consistent with the specified requirements.

1.6When does a Special Disability Trust end?

The trust will end on the earlier of:

a)the death of the beneficiary,

b)if/when the assets are fully expended on the beneficiary, or

c)any earlier date as required by law ('the end date').

1.7What are the recent changes for Special Disability Trusts?

In response to the Senate Standing Committee Inquiry into Special Disability Trusts the Government announced several measures in the 2009/10, 2010/11 and 2011/12 Budgets respectively to make further allowances for immediate family members to contribute into a Special Disability Trust for the benefit of a family member with severe disability. These include:

Social security changes from 1 January 2011:

  • a beneficiary of a Special Disability Trust can work up to seven hours a week at or above the relevant minimum wage,
  • atrust can pay for the beneficiary’s medical expenses, including private health fund membership costsand maintenance of trust property, and
  • the trust can spend up to $10,750in a financial year (as at 1 July2013, indexed annually), on discretionary items not related to the care and accommodation needs of the beneficiary of the trust as long as the expense complies with legislative requirements.

NOTE: Trust Deeds created before 1 July 2011 need to be changed to reflect the 1 January 2011 social security measures to ensure the Special Disability Trust remains compliant. Please refer to question 5.7.

Taxation changes:

  • from 1 July 2008 unexpended income of a Special Disability Trust is taxed at the beneficiary’s personal income tax rate, rather than the highest marginal tax rate,and
  • from 1 July 2006,
  • allow capital gains tax exemption for any asset donated into a Special Disability Trust,
  • allow capital gains tax main residence exemption for Special Disability Trusts,
  • allow capital gains tax exemption for the recipient of the beneficiary’s main residence, if disposed of within two years of the beneficiary’s death, and
  • ensure equivalent taxation treatment amongst Special Disability Trusts established under different Acts.

These changes build upon and expand the existing regulations for Special Disability Trusts.

In 2013 the Government commenced a review of the amount that can be held in a Special Disability Trust on a concessional basis, the amount that can be gifted, and who can request audits of the Trusts. The review will take into account the impact of the 1January2011 changes.

2.About the beneficiary of a Special Disability Trust

2.1Who can be the beneficiary?

To be eligible to be a beneficiary, the disabled person must meet the definition of severe disabilityunder section 1209M of the Social Security Act 1991:

(a)a person who has reached 16 years of age:

•whose level of impairment would qualify the person for Disability Support Pension or who is already receiving a Department of Veterans’ Affairs Invalidity Service Pension or Department of Veterans’ Affairs Invalidity Income Support Supplement, and

•who has a disability that would, if the person had a sole carer, qualify the carer for Carer Payment or Carer Allowance, or

  • who is living in an institution, hostel or group home in which care is provided for people with disabilities and for which funding is provided under an agreement between the Commonwealth, the States and the Territories, and

•who has a disability as a result of which he or she is not working and/or who has no likelihood of working for more than seven hours per week at or above the relevant minimum wage.

Or

•a person under 16 years of age who is a profoundly disabled child as defined in SSAct section 197(1) who was a beneficiary immediately before 1July 2009, or

(b)a child under 16 years of age:

•who is a person with a severe disability or a severe medical condition, and

•another person (the carer) has been given a qualifying rating of intense under the Disability Care Load Assessment (Child) Determination for caring for the child under 16 years of age, and

•a treating health professional has certified in writing that, because of that disability or condition:

–thechild will need personal care for 6 months or more, and

–thechild care is required to be provided by a specified number of persons,

and

  • thecarer has certified in writing that the beneficiary will require the same care, or an increased level of care, to be provided to him or her in the future.

2.2When is the assessment of the beneficiary required?

Centrelinksuggests that the assessment of the beneficiary take place before the preparation of the trust deed to ensure that the person with a disability is assessed as being eligible for a Special Disability Trust.

If a beneficiary assessment is not done and the trust deed is prepared, when it comes time for the trust deed to be implemented there is a risk that the person with a disability may be assessed as notbeing an eligible beneficiary for a Special Disability Trust.If this occurs, the trust will be assessed under normal trust rules and neither the beneficiary nor the contributor will benefit from the means test concessionsthat are applied to Special Disability Trusts.

2.3How is a beneficiary for a Special Disability Trust assessed?

Centrelink Special Disability Trust team will assess the beneficiary against the legislated criteria for medical impairment, care needs and work capacity.

In many cases, Centrelinkhas most, if not all of the information already available. Where the information is not available, evidence needs to be supplied by your medical practitioner or Centrelink will arrange for a work capacity assessment. This assessment is carried out by Centrelinkand there is no cost or obligation to proceed at any stage.

People who are interested in setting up a Special Disability Trust should first contact the Centrelink Special Disability Trust team. An assessment officer will explain what a Special Disability Trust is and how it works, the process that needs to be followed and the information to be provided so that the beneficiary assessment can be completed. They will also send an information package containing the following:

  • Planning for the Future: People with disability booklet,
  • Special Disability Trust: Getting things sorted booklet,
  • Centrelink Financial Information Service factsheet, and
  • Relevant Centrelinkforms for completion.

Note:Centrelink is unable to recommend any specific solicitors or financial advisers to you to consult about Special Disability Trusts.

Anyone, you as the Centrelink customer, your nominee or financial adviser or solicitor on your behalf, can call theSpecial Disability Trust team on1800 734 750 to discuss these matters further.

2.4How many trusts can a beneficiary have?

Each beneficiary can only have one Special Disability Trust established on their behalf. The beneficiary can have other types of trusts in addition to the Special Disability Trust but any further trusts will not qualify for the generousSpecial Disability Trust asset and gifting concessions.

2.5How many beneficiaries can be included in each Special Disability Trust?

Each Special Disability Trust can only have one beneficiary.

2.6Can a beneficiary work?

From 1 January 2011, a beneficiary can work up to seven hours a week at or above the minimum relevant wage in open employment and still qualify for a Special Disability Trust.

Where a person is working for wages in accordance with the Supported Wage System (SWS) administered by the Commonwealth, there is no limitation to the number of hours a person can work in the SWS.

2.7Are there any restrictions for people with disability residing in gaol orpsychiatric confinement?

There are no restrictions for people with disability who are in gaol or psychiatric confinement having a Special Disability Trust established for them where they meet the eligibility criteria.

2.8Can the beneficiary gift to their Special Disability Trust?

There are restrictions on what a beneficiary or their partner can gift to their Special Disability Trust.

Two types of assets cannot be contributed to the trust:

  • any compensation money received by the beneficiary of the trust (for example, damages from a motor vehicle accident claim),
  • orany property contributed by the beneficiary himself or herself (or his or her partner), unless it was received from a bequest under a Will or from a superannuation death benefit within the three years before it was transferred to the trust.
  • Can the beneficiary reside permanently outside of Australia and still be an eligible beneficiary for a Special Disability Trust?

A beneficiary is not able to reside permanently outside of Australia. One of the purposes of a Special Disability Trust is to pay for the reasonable care needs for the beneficiary and those needs must be met in Australia. However, a beneficiary is able to travel overseas on a temporary basis.