A special disability trust is a trust that can be established for the express purpose of making financial provision for someone who suffers from severe disability.

Often this type of trust is established by ageing parents looking to provide ongoing financial support to a disabled child or grandchild.

A person can establish a special disability trust while they are still living, or it can be created by their estate once they pass away.

A special disability trust can have only one primary beneficiary who must be severely disabled. Severe disablement is defined in the relevant legislation and for a beneficiary that is aged 16 or older, the characteristics that need to be met include:

• Having a level of impairment that would result in them qualifying to receive a disability support pension, and
• Who has a disability that, if the person had a sole carer, would qualify the carer for a Carer Payment or Carer Allowance, or
• Living in an institution or group home for people with disabilities and the home receives government funding, and
• The disability results in the person not working or having no likelihood of working more than seven hours per week.

Different rules apply where the disabled person is under 16 years of age.

Additional requirements of a special disability trust include:

• The trust deed will generally need to contain clauses set out in a model trust deed (available from Services Australia);
• Have an independent trustee or more than one trustee;
• Provide for the accommodation and care needs of the beneficiary
• Comply with investment restrictions;
• Provide annual financial statements to Centrelink or Dept of Veterans Affairs annually;
• Have the trust audited if required.

Special disability trusts offer several important concessions, particularly from a Centrelink or DVA perspective.

Firstly, if a person establishing a special disability trust is receiving income support such as the age pension, they can contribute up to $500,000 to a special disability trust without it being subject to the usual Centrelink gifting rules.

In addition, up to $781,250 (2023-24 – indexed annually) of assets held in a special disability trust are exempt from the primary beneficiary’s assets test. All income of the trust is exempt from income testing.

The income and capital of a special disability trust can only be used to provide for the care and accommodation of the beneficiary however up to an additional $14,000 per annum (for 2023-24) can be used for other discretionary purposes.

Special disability trusts also receive favourable tax treatment. The net income of the trust is taxed in the hands of the beneficiary at their marginal tax rate.

If income is not distributed in a particular financial year, unlike other trusts that have undistributed income taxed at the top marginal tax rate (45%), undistributed income is taxed at the beneficiary’s marginal tax rate.

Special disability trusts can offer significant social security and tax benefits when making provision for a disabled person.

To receive concessional treatment, a special disability trust needs to comply with some specific rules.

Additional information on special disability trusts can be found here:

https://www.servicesaustralia.gov.au/special-disability-trusts

For those wishing to make a financial provision for family suffering from a disability, it may be worthwhile discussing this option with your financial adviser, solicitor, or accountant.

By Peter Kelly on 4 October 2023

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PK believes people have the right to accurate, affordable and unbiased information that addresses all aspects of their preferred retirement lifestyle, thereby giving them the opportunity to make informed decisions that will empower them to live out their lives with dignity, certainty and security.

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