Minister for Financial Services & Superannuation
14 September 2010 - 1 July 2013
Joint Media Release with
Parliamentary Secretary for
Disability and Carers
Removal of Income Tax Impediments Affecting Special Disability Trusts
The Assistant Treasurer, the Hon Bill Shorten MP, tonight announced the Government will introduce legislation to remove further income tax barriers that impede families from making financial contributions to a Special Disability Trust (SDT).
"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
- Backdate the application of the 2009‑10 Budget measure that provides a CGT main residence exemption for SDTs to 2006-07
- 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
- Ensure equivalent taxation treatment amongst SDTs established under different Acts.
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 Attachment has more detail on the changes and will form the basis for the Government's four-week consultation on the policy design of these reforms. More information on how to make a submission is available on the Treasury website.
The Government will 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.
10 May 2011
Background on SDTs
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.
2011‑12 budget Reforms
1. CGT exemption for assets transferred into an SDT for no consideration
When an asset is transferred into an SDT, a CGT taxing point may arise. This may be the case even where an asset is transferred into an SDT for no consideration, as the transferor will be treated as having received proceeds equal to the market value of the asset. A CGT liability arising on the transfer of such assets is a major disincentive for families considering setting up an SDT.
Depending on how an asset is transferred into an SDT, the CGT liability may rest with the transferor or the trustee of the SDT.
- For inter vivos transfers (that is, assets transferred when the transferor is alive), any CGT liability rests with the transferor.
- For testamentary transfers (that is, assets transferred from a deceased estate to an SDT), any CGT liability is usually deferred until the trustee of the SDT has a later dealing with the asset.
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.
2. Backdating the CGT main residence exemption for SDTs
In the 2009‑10 Budget, the Government announced that the extension of the CGT main residence exemption to SDTs would apply to CGT events happening from 1 July 2009.
There may be circumstances where a dwelling owned by an SDT, and used by a principal beneficiary as their main residence, was sold before this time. This would have resulted in a trustee of an SDT incurring a CGT liability on the dwelling, even though the dwelling was effectively being used as the main residence of the principal beneficiary.
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.
3. 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
Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides a CGT exemption to the trustee or beneficiary of a deceased estate, where their ownership interest in the dwelling ends within two years of the deceased's death. For post‑CGT assets, the dwelling must have been the deceased's main residence and not used to produce income just before their death.
For SDT cases, this exemption is not available to an entity that receives the principal beneficiary's main residence after their death. Even though the recipient receives the dwelling in similar circumstances to a deceased estate case, they are not eligible for the exemption as the dwelling does not pass to the recipient from the principal beneficiary's estate.
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.
Note: A partial exemption may be available to the trustee of an SDT if the dwelling was used to produce assessable income just before the principal beneficiary's death.
4. Provide equivalent taxation treatment amongst SDTs established under different Acts
The legislation that delivered the unexpended income measure limited the definition of SDTs in the ITAA 1997 to SDTs established under the Social Security Act 1991.
This means that SDTs set up under the Veterans' Entitlements Act 1986 will not be able to access the unexpended income measure, the CGT main residence extension or any of the current changes discussed above.
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.