4.14.4.30 Deprivation & special disability trusts
Summary
This topic contains information on:
- winding-up due to death of principal beneficiary
- winding-up due to no available funds, and
- what happens when a trust becomes non-compliant.
Winding-up due to death of principal beneficiary
Where the principal beneficiary of a special disability trust dies, there may be an impact on the income support payments a donor is receiving (if they are on income support) where they contributed to the trust within 5 years of the trust ceasing to be a special disability trust.
Note: These rules may also apply where a trust ceases to be assessed as a special disability trust because of non-compliance with the legislative requirements.
Deprivation may apply where the contributor DOES NOT receive, on winding-up of the trust, a comparable percentage of the funds at winding-up that reflects the total of all of their contributions to the trust. Deprivation will apply from the date the trust is wound-up and will continue until 5 years from the date of the original gift to the trust.
Note: Deprivation will only apply for gifts made within 5 years of the trust ceasing to be a special disability trust.
The amount of deprivation that results from the distribution of funds can be calculated as follows:
- (gifted amount/s × final net assets of the trust ÷ total contributions to the trust)
- minus amount returned to the contributor
- plus any deprivation at the time of the gift (this continues unchanged).
These deprived amounts apply from the date the trust ceased to be assessed as a special disability trust. It is assessed for the remaining period that would have applied for the original gift (i.e. where the original gift was 3 years ago, the gifting period would be the remaining 2 years of the 5-year deprivation period).
Note:
- Where the calculated amount is less than zero, the amount of deprivation at the point in time that the trust is wound-up will be zero (i.e. no deprivation will be assessed).
- When the trust is wound-up and the calculated deprived amount is less than zero, any deprivation that applied before the trust was wound-up will continue to be assessed for the whole 5-year deprivation period.
Example: Paul has a special disability trust, which was established by his father, Peter. When the trust was being established, Peter contributed $300,000 and receives the gifting concession for $300,000. That is, nil deprivation at the time of the gift.
1 year later, Paul's grandmother, Joan contributes $300,000 to the trust. She receives a gifting concession for $200,000 and the remaining funds of $100,000 are assessed under the deprivation rules at the time of the gift.
On the second anniversary of the trust being established, the trust is wound-up after Paul passes away. At this time, the total net trust assets are $500,000 and the total contributions to the trust are $600,000.
There is a range of scenarios depending on to whom the remaining funds of $500,000 are given to:
Scenario 1: Peter and Joan have $250,000 each returned.
Peter: (300,000 × 500,000 ÷ 600,000) − 250,000 + 0 = nil
Joan: (300,000 × 500,000 ÷ 600,000) − 250,000 + 100,000 = $100,000
Scenario 2: Peter and Joan have nil each returned.
Peter: (300,000 × 500,000 ÷ 600,000) − 0 + 0 = $250,000
Joan: (300,000 × 500,000 ÷ 600,000) − 0 + 100,000 = $350,000
Scenario 3: Peter has $300,000 returned and Joan has $200,000 returned.
Peter: (300,000 × 500,000 ÷ 600,000) − 300,000 + 0 = nil
Joan: (300,000 × 500,000 ÷ 600,000) − 200,000 + 100,000 = $150,000
Note: Deprivation cannot be less than zero, thus the deprived amount is zero.
Scenario 4: Peter and Joan have $100,000 each returned and the balance is donated to a charity.
Peter: (300,000 × 500,000 ÷ 600,000) − 100,000 + 0 = $150,000
Joan: (300,000 × 500,000 ÷ 600,000) − 100,000 + 100,000 = $250,000
Act reference: SSAct section 1209ZD Cessation of special disability trusts
Winding-up due to no available funds
Where a special disability trust has used up all of its available funds (i.e. the available funds are zero), the trust must be wound-up. As there are no available funds, no deprivation will apply to contributions that received the gifting concession.
For contributions to a special disability trust that are being assessed for deprivation, the deprivation being assessed will continue to be assessed for the full 5-year deprivation period.
Note: As long as there are funds remaining, the trust must continue to meet its reporting obligations specified in 4.14.3.50.
What happens when a trust becomes non-compliant
Where a special disability trust has been assessed as not meeting the legislative requirements, it will be considered to be non-compliant. Non-complying trusts will be reassessed under the normal private trusts and companies rules.
For deprivation purposes, the gifting concession ceases to apply from the date that a trust becomes non-compliant. The normal gifting rules apply from that date to all gifts made within the previous 5 years where the contributor received a gifting concession. There are 2 steps in calculating the amount of deprivation to be assessed depending on whether the contributor is assessed as being an attributable stakeholder.
Step 1: The deprived amount is calculated as per the following formula:
- (gifted amount/s × final net assets of the trust ÷ total contributions to the trust)
- minus amounts returned to the contributor
- plus any deprivation at the time of the gift (this continues unchanged).
Step 2: If the contributor is determined to be an attributable stakeholder under the normal private trust and companies rules, then the deprivation amount is reduced according to the disposal rules in 4.12.10.20.