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Australia Improves Disability Trust Tax Rules

Monday, May 23, 2011

The Australian Assistant Treasurer Bill Shorten has announced that the government will introduce legislation to remove further income tax barriers that impede families from making financial contributions to a Special Disability Trust (SDT).

Since 2006, families have been able to establish an SDT to provide for the current and future care and accommodation needs of a family member with severe disability (the "principal beneficiary"). SDTs attract social security means test concessions for the eligible contributors and the principal beneficiary.

"These changes will ease the financial burden on families by assisting them to provide for the care and accommodation needs of a person with severe disability," the Assistant Treasurer said.

To make SDTs more beneficial for families, the government will:

  • Provide a capital gains tax (CGT) exemption for assets transferred into an SDT for no consideration. The proposed treatment is that for inter vivos transfers, the transferor will disregard any capital gains or capital losses on the asset when it is transferred into an SDT for no consideration. For testamentary transfers, the first element of the asset's cost base and reduced cost base in the hands of the trustee of an SDT will be equal to the market value of the asset on the day the transferor died. This effectively exempts any capital gain or capital loss that has been accrued up until the transferor's death.
  • Backdate the application of the 2009-10 Budget measure that provides a CGT main residence exemption for SDTs to 2006-07. The proposal is that this measure will now apply to CGT events happening in the 2006-07 income year and later income years. This aligns the application date of the measure to when SDTs were first able to be established.
  • Provide a CGT exemption for the recipient of the principal beneficiary's main residence, if disposed of within two years of the principal beneficiary's death. The proposed treatment is that the recipient of a dwelling that was a principal beneficiary's main residence will disregard a capital gain or capital loss on the dwelling, providing the recipient's ownership interest ends within two years of the principal beneficiary's death. To be eligible for the exemption, the following conditions must be satisfied just before the principal beneficiary's death: the dwelling must be the principal beneficiary's main residence; the dwelling must not be used to produce assessable income; and the trust must be an SDT.
  • Ensure equivalent taxation treatment amongst SDTs established under different Acts. This proposal will ensure that the taxation treatment of SDTs set up under the Veterans' Entitlements Act 1986 will be the same as the treatment for SDTs set up under the Social Security Act 1991.

These changes will apply from the 2006-07 income year, to align with when SDTs were first able to be established.

Parliamentary Secretary for Disability and Carers, Senator Jan McLucas, said: "By removing these barriers, SDTs will become more attractive for families looking to provide for the long-term care of a family member with severe disability."

The government intends to release an exposure draft of the legislation as soon as is practicable after the consultation on the policy design, covering these changes as well as the previously announced measure to extend the CGT main residence exemption extension to SDTs.