It has been unfortunate, but I have received a spike in queries in relation to the establishment and mechanics of special disability trusts (SDT). Thanks to the super reforms, the analysis and application of non-SMSF entities are on the rise.
What is an SDT?
An SDT is a trust established with the main objective of providing for the current and future care and accommodation needs of a family member with a severe disability or medical condition. Since 1 January 2011, the trust can also have a level of discretionary spending that is not directly related to the care and accommodation needs of the beneficiary. For the current financial year, this amount cannot exceed $11,750 in order to meet additional costs relating to the beneficiary’s health, well-being, recreation, independence and social inclusion.
An SDT must meet the following conditions:
- it must have only one beneficiary,
- the beneficiary must reside within Australia,
- the beneficiary must meet the definition of severe disability under section 1209M of the Social Security Act 1991,
- the primary purpose must be to provide for the accommodation and care needs of the beneficiary,
- each beneficiary can only have one SDT established on their behalf,
- the trust deed must contain the relevant clauses,
- it must have an independent trustee or alternatively have more than one trustee,
- it must comply with the investment restrictions, and
- it needs to provide annual financial statements and conduct independent audits when required.
The main benefits of an SDT are:
- a gifting concession of up to $500,000 combined by one or more eligible family members of the beneficiary. This gifting concession can only be used once per trust. To receive the gifting concession, the person gifting must be at, or over, age or service pension age and receiving a pension. Immediate family members who are within five years of age pension age or over age service pension age and are not on a pension may still contribute to an SDT and take advantage of the gifting concession later when reaching qualifying age, provided the gifting concession has not been fully used,
- an assets test exemption of up to $657,250 (as at 1 July 2017) is available for the beneficiary. This excludes the principal place of residence of the beneficiary,
- all trust income is excluded from the income test assessment for the beneficiary,
- capital gains tax (CGT) exemption for any assets donated into the trust,
- CGT main residence exemption,
- CGT exemption for the recipient of the beneficiary’s main residence, if disposed of within two years of the beneficiary’s death, and
- unexpended income is taxed at the beneficiary’s personal income tax rate.
When can it come into effect?
An SDT can stand alone as a trust deed or come into effect as part of a person’s will, that is, an SDT can be a testamentary trust established through a will. In relation to a member’s superannuation interests, on the death of a member, the interests can be directed to the legal personal representative of the estate of the deceased. An SDT would then be triggered in relation to the eligible beneficiary.
Income and assets test
As mentioned above, one of the main advantages of an SDT is the favorable treatment in relation to the income and assets test with regard to social security assessment. A summary is as follows:
- the concessional amount of assets that can be held in the trust for the 2018 financial year is $657,250. This does not include the beneficiary’s principal place of residence,
- all of the trust’s income is exempt from the means test for the purposes of calculating the beneficiary’s income support payment as long as all the trust income is only used for the benefit of the beneficiary and administrative purposes, and
- the above income and asset concession amounts are in addition to the existing social security income and assets test-free areas.
An SDT can be a very a favorable structure to put in place for a family member who suffers from a severe disability. It allows for the carveout of assets to provide for the care and accommodation required while benefiting from a social security and taxation perspective.