The Special Disability Trust (SDT) is a trust structure established to provide for a person with severe disability. There is no limit on the value of assets held in the trust. However, there are limits regarding the concessional effects for the asset tests and income tests for the beneficiary and there are some taxational benefits following are an explanation:
Assets test: If the trust holds the main residence for the beneficiary the value of the residence is exempt from the asset test for the beneficiary regarding their social security tested entitlement. With regard to the other trust assets the first $647,500 (as at the 1st July 2016, and is indexed every year) will be exempt from asset tests. Trust assets above that limit will be counted as assessable assets for the beneficiary regarding their social security tested entitlement.
Income test: 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, as per the conditions of the use of the trust income.
What are the taxation requirements of a Special Disability Trust?
Changes to the way a Special Disability Trust is taxed were announced in the 2009/10 and 2011/12 Budgets.
Taxation measures include:
• 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:
- a capital gains tax exemption is allowed for any asset donated into a Special Disability Trust,
- a capital gains tax main residence exemption is allowed for Special Disability Trusts,
- a capital gains tax exemption is allowed for the recipient of the beneficiary’s main residence,
if disposed of within two years of the beneficiary’s death, and
- equivalent taxation treatment amongst Special Disability Trusts established under
different Acts is ensured.
How is a Special Disability Trust’s and/or an individual Special Disability Trust beneficiary’s tax return completed?
• Unexpended income of a Special Disability Trust is taxed at the beneficiary’s personal income tax rate,
rather than the highest marginal tax rate.
• The changes to taxation of unexpended income require consideration of how to complete tax returns
for both a trustee of a Special Disability Trust and the trust’s beneficiary.
What happens if a Special Disability Trust fails to lodge a tax return?
Failure to lodge a tax return, if required, could result in the Special Disability Trust being assessed as non-compliant, resulting in access to the concessions being denied.
Further, if the trust is not compliant with the social security requirements, the trust may lose the benefit of the taxation changes, resulting in the unexpended income being taxed at the highest marginal tax rate rather than the personal income tax rate of the principal beneficiary.
Is there any other tax relief for Special Disability Trusts?
Some state and territory governments have advised there are concessions available, eg stamp duty and rates. Contact your local state or territory government for further information on concessions and any exemptions available for Special Disability Trusts.
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Disclaimer and Warning
The information above is of a general nature only. It should not be used as a source to make financial decisions. It's also important to note that the legislation and figures related to this topic tend to change regularly and therefore the information above may not reflect the current status. We recommend that if you are looking for advice on this matter, you should contact us.