Section 2: Special disability trusts and social security: the general rules and concessions for special disability trusts

General

Australia’s social security system is based on need and is designed to be a safety net for people who are unable to support themselves. To ensure the system provides help where it is most needed, there is a means test which has two components: the income test and assets test.

The amount of income support payable to a recipient is calculated under both the income and assets tests. The test that results in the lower rate of income support is the one that is applied.

Under the means test, there are special rules for the treatment of gifts made to third parties and private trusts and companies.

These rules can be complex, depending on your circumstances. You should get financial and legal advice about how the rules may affect you or any trust you have or intend to set up.

For more information, including payment rates, please contact your nearest Centrelink Customer Service Centre or DVA office. This information can also be found online on the Centrelink and DVA websites.

Concessions for special disability trusts

The new legislation concerning special disability trusts is intended to reduce the impact of the rules applying to trusts and encourage families who wish to make their own arrangements for family members with severe disability. The general thrust of the special disability trust legislation is to create exceptions to the ordinary means test rules applying to trusts for a person with severe disability.

These are potentially significant concessions where family members and people with severe disability rely (or may rely in the near future) on social security or veterans’ affairs entitlements, or would potentially qualify for income support if they transferred funds to a special disability trust.

However, for these concessions to be available, the trust must adhere strictly to the rules for special disability trusts, and the rest of this section explains how those rules operate. Most importantly, the trust must be established for the sole purpose of providing care and accommodation for a person with severe disability. The initial step should be to verify with Centrelink or DVA that the person for whom the trust is being established is ‘severely disabled’ as required by the special disability trust rules (see page 13) before establishing a special disability trust.

Concessions for people with severe disability

Income test

Income from the assets of a special disability trust will not be counted for the application of the income test to the beneficiary of the trust.
The use of money from the trust to pay for accommodation or care for the person with severe disability will not be counted as that person’s income for income support purposes.

Assets test

If a person with severe disability is the beneficiary of a special disability trust, the assessable assets of that trust up to $500,000 (to be indexed annually) will be disregarded for the application of the assets test. This means that it will not affect the income support entitlements of the person with severe disability. For the meaning of ‘assessable assets’, see general assets test rules at www. centrelink.gov.au and www.dva.gov.au or contact your nearest Centrelink Customer Service Centre or DVA office.

As the principal home of the person with severe disability would also be disregarded, this means that the special disability trust could have assessable assets of up to $500,000 plus the home in which the person with severe disability lives before the excess assets are included in the principal beneficiary’s assessable assets.

Example

A special disability trust has $700,000 in assets plus a home for the beneficiary with severe disabilitys Carol, as at 1 January 2007. The assets to which the assets test applies will be the ‘excess’ above the assets test concession (which is $500,000 as at 20 September 2006): that is, $200,000 after the home and $500,000 assets test concession are disregarded. Carol is assessed as a single homeowner for the purposes of the means test. Depending on Carol’s other assessable income and assets, Carol’s income support payments may be reduced.

The assets test concession for special disability trusts, initially set at $500,000 on 20 September 2006 and indexed annually, applies at any point in time, so if assets are spent and the trust is topped up, the concession still applies up to the limit.
As the assets test concession is indexed, the amount the trust can hold without affecting the income support payments of a person with severe disability will change annually.

Example

A special disability trust has $500,000 at 20 September 2006. On 1 July 2007, the assets test concession is increased by indexation to $510,000. The trust has earned income of $20,000 and spent $15,000, so the assets held in the trust on 1 July 2007 are worth $505,000. Because the assessable assets are less than the $510,000 indexed limit, none of the trust’s assets are assessed under the assets test.

Concessions for immediate family members of a person with severe disability

Gifting concessions

Anyone can give to the special disability trust. However, the principal beneficiary that is the person with disability and their partner can only do so if the gift is funded by:
- assets the principal beneficiary received under a will; or
- a superannuation death benefit received by the primary beneficiary;
and the funds are transferred to the trust within three years of their receipt by the principal beneficiary.
Any gift to the trust, whether it is from an immediate family member or any other person, must be unconditional and made without expectation of receiving any payment or benefit in return.
The gifting concession is only available to an immediate family member who:
- receives a social security pension and has reached age pension age; or
- receives a service pension and has reached the veterans’ pension age; or
- receives a veterans’ income support supplement and has reached the qualifying age for the payment.
‘Immediate family members’ of the person with severe disability are:
- parents (including adoptive and step parents);
- legal guardians of a person with severe disability who is less than 18 years old, and people who were legal guardians when the person with severe disability was less then 18 years old;
- grandparents; and
- brothers and sisters (including adoptive and step brothers and sisters and half brothers and sisters).
The gifting concession applies to gifts up to $500,000 (which is not subject to indexation). To use the concession, you must be an immediate family member who is receiving a qualifying payment and inform Centrelink or DVA of your intention to use the concession. Where the concession has been fully used, additional contributions by immediate family members will be assessed under the normal gifting rules.
Gifts from people who are not immediate family members, or gifts in excess of the gifting concession from immediate family members, are assessed under the normal gifting rules.

Example

David has a special disability trust. His parents Paul, aged 65, and Lucy, aged 63, are both receiving the age pension. When the trust was established in 2006, they contributed $300,000 to the trust. By 2012, most of the funds had been spent on care and accommodation, and Paul and Lucy contribute a further $300,000 to the trust. The gifting concession will apply to the first contribution and to $200,000 of the second contribution. Therefore, the normal gifting rules will apply to the excess of $100,000.

An immediate family member who is not of qualifying age (and whose partner is not of qualifying age) can make contributions to a special disability trust and take advantage of the concession later, when he or she reaches qualifying age, providing the gifting concession has not been fully used. This means that it is possible to put assets in the trust up to five years before claiming the age pension or relevant veterans’ entitlement, and still have the assets disregarded for means test purposes when you receive income support. Where you are already receiving income support before reaching qualifying age, the gift will be counted under the normal gifting rules until you reach qualifying age.

Example

Greg has severe disability and his father John, aged 58, has established a special disability trust for him. On 1 October 2006, John gave $500,000 to the trust. John cannot apply to Centrelink for the gifting concession as he is below age pension age.

On 1 June 2011, John gives another $500,000 to the trust. The trust has not received any other contributions since John’s initial contribution in 2006.

In 2013, John turns 65 and applies for age pension. John’s gift in 2006 is disregarded because it was more than five years prior to his claim for age pension. His gift in 2011 is within five years of his claim, and as he is an immediate family member his gift is eligible for the gifting concession. Therefore his gift in 2011 will be disregarded for social security means test purposes.

Example

A variation of the above example: in 2012, Greg’s grandmother Marie puts $200,000 into Greg’s trust. Marie is currently receiving the age pension. As Marie is an immediate family member, her gift is eligible for the gifting concession. Marie receives the gifting concession.

In 2013, John turns 65 and applies for age pension. When he applies for the age pension, the available gifting concession is $300,000. John’s gift in 2011 of $500,000 would be partially eligible for the gifting concession. The remaining $200,000 of his 2011 gift will be assessed under the normal gifting rules.

Example

A further variation of the example above: if the contribution in 2012 was from Paul, a close family friend (rather than Greg’s grandmother), his gift would not qualify for the gifting concession as Paul is not an immediate family member. John would get the benefit of the full concession.

The gifting concession is applied to each special disability trust. Where there are two children who are eligible within one family, immediate family members of qualifying age can use the gifting concession of up to $500,000 for each special disability trust.

The rules for special disability trusts in more detail

The special disability trust legislation implements the Government’s objective of encouraging families who wish to make provision themselves for family members with severe disability. Some of the rules may seem restrictive. However, they are intended to prevent people from using the trust for purposes other than supporting the person with severe disability, and to discourage use of the concessions for the primary purpose of obtaining income support, rather than to provide additional resources for a person with severe disability.

The questions and answers below cover some of the issues you need to consider before deciding whether a special disability trust is appropriate for you and your family’s circumstances. For further information on issues to be considered, please refer to The Guide to Social Security Law, or contact your nearest Centrelink Customer Service Centre.

Who is a person with ‘severe disability’?

A person with severe disability is someone over 16 who:

has an impairment which would entitle them to Disability Support Pension (Social Security Act) or invalidity service pension or invalidity income support supplement (Veterans’ Entitlement Act);
because of their disability, is not working, and is not likely to work, at relevant minimum wages;
and either:
- lives in an institution, hostel or group home that provides care for people with disability and for which funding is provided (wholly or partly) under an agreement between the Commonwealth, the States and the Territories; or
- has disability that would, if the person had a sole carer, qualify the carer to receive Carer Payment or Carer Allowance.

A person under 16 may be a person with severe disability if they are a ‘profoundly disabled child’ under the Social Security Act.

The initial step should be to verify with Centrelink or DVA that the person for whom the trust is being established is ‘severely disabled’ as required by the special disability trust rules before establishing a special disability trust.

For more information on what these tests mean:

for Centrelink payments, please contact 13 10 21 to make an appointment or contact your nearest Centrelink Customer Service Centre;
for DVA payments, please contact the Trusts & Companies Team on 1800 550 462, via email at trusts&companies@dva.gov.au, or via post at PO Box 21, Woden ACT 2606.

Can a person with severe disabilities have more than one special disability trust?

No. There can only be one special disability trust for each person with severe disability, so if a special disability trust already exists, any further trust will not qualify for the special disability trust concessions.

What are ‘reasonable accommodation and care needs’?

The sole purpose of a special disability trust has to be to meet the reasonable accommodation and care needs of the person with severe disability.

The scope of reasonable accommodation and care needs will be included in the Guide to Social Security Law. The guiding principle is that a special disability trust can only pay for:

the cost of accommodation for the person with severe disability; and
extra care costs arising from the disability; and
incidental expenses such as fees for professional trustees, and investment and accounting expenses.

Apart from accommodation:

the trust can only be used for things which are necessary because of the disability; and
the special disability trust cannot pay for things that a person without disability would ordinarily buy or ordinary day-to-day expenses. The person’s income support payments or other assets or income should pay for those things.

What will be reasonable in each case will depend on the level of disability and the needs of the person concerned. What is reasonable for one person with severe disability will not necessarily be reasonable for another. The most important consideration is what the beneficiary with disability requires by way of accommodation, and by way of care because of the disability.

For further information regarding reasonable care and accommodation costs, refer to the Guide to Social Security Law. These guidelines will develop over time. The trustee will need to be aware of the rules and keep up to date with them to understand what a special disability trust for a particular person can, and cannot, do.

Can the trust pay family members for providing services?

No. The trust cannot be used to pay immediate family members for providing care and accommodation:

the trust cannot spend money to pay an immediate family member or child of the beneficiary for providing care for the beneficiary;
the trust cannot spend money to pay an immediate family member or child of the beneficiary for providing maintenance services for the beneficiary’s accommodation;
the trust cannot spend money to buy or lease property from an immediate family member or child of the beneficiary, including ‘granny flats’.

(For definition of ‘immediate family members’ see above1.)

How can I provide for things other than care and accommodation?

If you want to provide for a person with severe disability to have resources for things outside the scope of ‘accommodation and care’, such as holidays, a TV, a CD player, clothes or ordinary furniture (not necessary only because of the disability), you will need to make separate provision for this. These things cannot be paid for from a special disability trust.

You could set up separate trusts: that is, a special disability trust through a trust deed or will to meet care and accommodation costs and another more general form of trust to meet other costs.

Alternatively, you could set up a general trust without having a special disability trust. You will need to consider how important the various considerations are and how to balance or prioritise them. These considerations include:

income support entitlements;
need for the trustees to provide a broad range of benefits beyond ‘reasonable care and accommodation’;
the extent to which you have arranged future housing and care;
how much money might be needed to fund those arrangements in future;
how much property you have to deal with; and
the cost and complexity of the arrangements with which the trustees will have to deal.

Will any trust qualify as a special disability trust?

No. The legislation requires that the trust must meet the specified requirements. So it is essential that the terms of the trust meet those requirements and do not contradict them in any material way: ‘any trust’ will not do.

However, this doesn’t mean that the trust can’t have its own individual provisions, so long as they are consistent with the specified requirements. The ‘model trust deed’ (see Section 3) is just that: a model, not a compulsory form of document. You and your advisers do not have to follow all of its terms exactly. You can make changes to suit you personally, so long as the trust is still consistent with the legislative requirements. The model special disability trust deed contained in Section 3 has been marked up to show which provisions are compulsory (non-shaded) and which are optional (shaded).

Some provisions of the model disability trust deed are compulsory if the trust is to qualify as a special disability trust, so you cannot ‘water down’ those provisions and can only change them to make the provisions of the trust more specific.

For example, you might not want to make the trust assets available for accommodation and care generally; you might want to be more specific about how the trust assets can be used. So you might say in the trust deed that it can only pay for accommodation in the form of a place in a group home. Such a trust could still be a special disability trust, as the purpose of the trust is still to meet reasonable care or accommodation needs.

There are other trust provisions which are not specifically required by the rules for special disability trusts. For example, clause 2.2 of the model special disability trust deed says whom the trustee should consult: the trustee must ‘review the needs of the Principal Beneficiary at least annually and consult with the Principal Beneficiary’s immediate caregiver and the Principal Beneficiary (if possible)’. This clause could also mention consulting other members of the family and other people involved in the life of the person with severe disability generally (for example, any significant service providers) or specifically (for example, a named friend or medical adviser), or it could be omitted altogether (though omitting it altogether would make it more difficult to ensure that the trustee considers what is in the best interest of the person with severe disability).

Who can be a trustee of a special disability trust?

Anyone can be a trustee as long as they meet the legislative requirements (which are included in the model trust deed in clause 5.1: see page 29). This includes parents, immediate family members, accountants, solicitors, corporate trustees and state trustees. The legislative requirements are set out in the Guide to Social Security Law. There are also state-based laws that govern trustee responsibilities.

Are there any restrictions on what can be gifted to a special disability trust?

Yes. Two types of assets cannot be contributed to the trust:

compensation money received by the beneficiary (for example, damages from a motor vehicle accident claim);
property contributed by the beneficiary himself or herself (or his or her partner), unless it was received under a will or from a superannuation death benefit within the three years before it was transferred to the trust.

These rules are intended to preserve the existing treatment of compensation payments and prevent the person with severe disability from putting their own property into a special disability trust in order to qualify for income support, rather than using it directly for their own support.

What happens if someone fails to comply with the rules?

If there is a failure to comly within the rules, the trust may cease to be a special disability trust and the principal beneficiary may lose income support concessions. You should also note that there may be an impact on a donor’s income support entitlement.

However, Centrelink / DVA have the discretion to disregard some contraventions. This will depend on how serious, deliberate and prolonged the contravention was, which provisions were contravened, and how the contravention or waiver of the contravention may affect the interests of the person with severe disability.

What happens if a special disability trust ceases to be such a trust?

The trust will cease to be a special disability trust when the beneficiary with severe disability dies. It may also cease to be a special disability trust because of infringements of the rules.

The provisions of the trust should specify what should then happen to any property remaining in the trust. For example, see clause 4 in the model special disability trust deed (see section 3).

If the trust deed allows, the people who have contributed funds to the trust can specify what they want to happen to any surplus property derived from their contribution. For example, it could be returned to them (if they are still alive) or to their executors to be dealt with under their will. Or they could nominate their children, other family members or a charity to receive their share.

The assets may return to the people who contributed them, in which case they will then have these assets for means test purposes, which may affect their income support entitlements.

If the trust comes to an end or ceases to be a special disability trust within five years of property being transferred to the trust, that property may be subject to the gifting rules and may affect the income support entitlements of the person who gave the property to the trust.

Well, I’ve considered all these rules. Should I set up a special disability trust or not?

The answer to that depends entirely on your own circumstances and the specialised professional advice you obtain. However, at a general level, consider these matters:

if the person with disability does not have ‘severe’ disability (see page 13), then a ‘special disability trust’ cannot be established;
if neither you nor the person with severe disability rely on (or are likely to rely on) income support, there may be no benefit in setting up a special disability trust;
if you or the person with severe disability do, or may, rely on income support, but the level of assets you are likely to provide for care and accommodation will not have any effect on entitlements, then there may be no benefit in setting up a special disability trust. This might be because you do not have enough money to provide for care and accommodation or because you have already made arrangements which do not require further extensive funding;
if the need for money for care and accommodation is only a possibility rather than a likelihood, it may not be appropriate to tie up a lot of money in a special disability trust where it cannot be used for other things and where there will be tax consequences (for example, if income accumulates rather than being spent) and ongoing accounting expenses;
if you want funds to be available for the person with severe disability more broadly than for just care and accommodation, a special disability trust will not be suitable or may be only part of the arrangements you need to establish.

However, if:

income support does matter to you or the person with severe disability;
the disability is severe and eligibility is confirmed by Centrelink or DVA;
you have funds available which will make a difference to care and accommodation arrangements for the person with severe disability, now or after you are gone;
those funds are large enough to affect the income support entitlements of the person with severe disability or your entitlements (through the gifting rules);

then a special disability trust may help significantly in planning for the future of your family member with severe disability.

In that case, obtain professional advice, and consider working such a trust into your vision and plan for the future.

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