This article provides an overview of SDTs, including their benefits and limitations, and explains how tailored drafting can improve the standard Model Trust Deed.

What is an SDT?

An SDT is a trust designed to provide for the care and accommodation of a person with a severe disability, subject to strict legislative requirements under the Social Security Act 1991 (Cth) (SSA).

An SDT may cover care and accommodation costs as well as limited lifestyle and recreation expenses (currently capped at $14,750 per year). Eligible care costs include personal care, medical and therapy support, equipment, and housing-related expenses.

Further guidance can be found in Services Australia’s publication Special Disability Trusts — Getting things sorted.

Who can benefit from SDTs?

The advantages of an SDT extend to different parties involved in the trust:

Primary beneficiary

The principal beneficiary can hold trust assets up to the indexed concessional limit (currently $832,750) without affecting social security assets tests. Importantly, distributions from the SDT are not assessed as income under the social security income test.

Contributors

Contributors, typically family members, can transfer assets directly to an SDT without triggering a capital gain or loss, provided the trust pays no consideration (note that duty and other indirect taxes may still apply).

Gifts to the SDT are also exempt from the usual social security disposal or gifting rules, allowing contributors to reduce their assessable asset pool by up to $500,000 immediately — far more than is typically possible with a standard family trust.

Trustees

Trustees benefit from concessional tax treatment: income of the SDT is generally taxed at the principal beneficiary’s marginal rate rather than the top marginal rate. If the SDT owns residential property as sole owner, it may also qualify for a main residence capital gains tax exemption.

Limitations and other considerations

Expert advice is recommended before establishing any trust, particularly an SDT, as they may not be suitable for every family. In particular, it should be noted that:

· SDTs are subject to higher levels of financial reporting and auditing compared with standard discretionary trusts.

· Trustee composition rules apply, eg, two trustees are required if a professional trustee cannot be appointed.

· Various investment and compliance rules apply, and the use of funds in an SDT is generally restricted to supporting the beneficiary in a family home. For example:

o the trust cannot be used to pay rent to a family member;

o grocery and household expenses must be split at purchase (the trust cannot reimburse after the fact);

o non-care or accommodation expenses are subject to an annual cap.

Given these constraints, expert advice is strongly recommended before establishing an SDT.

What is required to establish SDTs?

To qualify as an SDT, both the trust deed and its administration must comply with the SSA. The key eligibility requirements include:

· Severe disability — the beneficiary must typically qualify for a Disability Support Pension, an invalidity service pension under the Veterans’ Entitlements Act, or an income support supplement on permanent incapacity grounds. They must also be unable to work more than seven hours per week and live in institutional care, group housing, or with a carer eligible for a carer payment or allowance.

· Age-specific rules — different provisions apply to beneficiaries under 16, requiring specialist advice.

· Deed compliance — the deed must incorporate the prescribed SDT terms. Otherwise, while the trust may exist legally, it will not attract SDT concessions and may impose additional reporting burdens without the intended benefits.

To help families, the Department of Health, Disability and Ageing provides a Model Trust Deed template. This template includes both the prescribed requirements and several optional provisions, but it is not always well suited to every family’s circumstances. It can be used to establish either an inter vivos trust (during lifetime) or a testamentary trust (on death).

How does DBA Lawyers approach SDTs?

While the Model Trust Deed provides the foundation for an SDT, it is only the starting point. Importantly, the baseline provisions in the Model Trust Deed may not contain the optimal rules for families and trustees.

You can enhance and tailor the trust terms so they meet regulatory requirements while also retaining flexibility to address individual circumstances. This ensures the trust is compliant, adaptable, and practical for long-term administration.

Examples of enhancements that can strengthen an SDT include:

· Broad investment powers as well as appropriate powers to deal with regulators and tax authorities.

· Modern taxation provisions, including appropriate provisions for determining income and capital, and for allocating and apportioning expenses.

· Succession planning provisions to ensure continuity of control if a trustee or appointor dies, resigns, or loses capacity.

· A robust trustee decision-making framework, including deadlock provisions, to support accountability and reduce disputes.

Without such enhancements, trustees may lack the clarity or flexibility needed to manage the trust effectively, and in some cases, the SDT’s concessional treatment may be put at risk.

Corporate trustees and constitutional governance

Where a corporate trustee is used for an SDT, the company’s constitution is equally critical. The constitution sets the governance rules for the body corporate and must align with what is appropriate for an SDT. Standard company constitutions are not usually suitable in this context, and constitutions for existing family companies that families and advisers might look to repurpose are often outdated and can present significant pitfalls for the unwary.

To support the trustee’s role and preserve the SDT’s concessional treatment, it is strongly recommended that the company adopt a constitution specifically designed to be SDT-compliant. A tailored constitution can restrict inappropriate powers, clarify director and member rights, and provide the governance framework needed to ensure the trust is administered in line with regulatory requirements. DBA Lawyers regularly prepares such constitutions as part of its broader approach to SDT planning.

Final thoughts

Establishing a framework of support for a loved one with a disability can be both complex and emotionally challenging, often involving technical requirements alongside sensitive family considerations.

Getting the documents right at the outset is essential to ensure the SDT is compliant, flexible, and capable of serving the family’s needs over time.

While SDTs provide valuable concessions, these advantages can be undermined if the trust is not set up or managed correctly. Two common traps to be mindful of are:

· relying solely on the Model Trust Deed without adapting it to the family’s circumstances; and

· repurposing a generic or outdated company constitution where a corporate trustee is used.