Years ago, there was great sport in reducing assets to qualify for social security – and discretionary trusts were at the top of the playlist. However, all good things come to an end, and legislation was changed in 2002 to capture income and assets from private discretionary trusts.
The flexible nature of discretionary trusts made the introduction of specific assessment rules quite difficult, so a broad-reaching, catch-all set of attribution rules was implemented. The general premise is that a client who has any involvement with a trust as an appointor, trustee or beneficiary, will be assessed as owning all or some of the assets of the trust, as well as the corresponding income, under attribution rules. The attribution rules have two components:
1. The source test
2. The control test
The aim is to assess the assets of a private trust to the person with control over the assets. These amounts are included in the means test assessments to determine age pension entitlements and fees for aged care services. It should be noted that the same rules apply for Veterans’ Affairs means-testing of private trusts. However, for the purposes of this article, reference is made only to Centrelink. Similar rules also apply to private companies.
The income assessment
If a client has been attributed with the assets of a private trust, the same proportion of the net income will also
be assessed to the client. If, in the example given (see box), Alison were assessed with 100 per cent of the assets, she would be assessed as earning 100 per cent of the trust’s income, regardless of how it is distributed.
Income from a private trust is assessed as the adjusted net profits for the previous financial year. This is generally measured as taxable income; but the following expenses are not allowed as deductions:
- Prior-year losses
- Offsetting losses from unrelated businesses
- Superannuation contributions for controllers and associates that exceed the required superannuation guarantee
- Certain capital expenses.
If income is distributed to beneficiaries other than the controller, this will create gifting and deprivation issues.
Advising clients
Unravelling a private trust and working out the likely assessment for Centrelink purposes is not easy and requires analysis of the trust accounts and tax returns over the previous five years, or maybe even longer.
Clients who have operated family businesses or managed family wealth through trusts may wish to relinquish control to their children. If the aim is to avoid means-testing, the client will also need to remove themselves as a beneficiary; but Centrelink will consider that they have gifted the assets and apply deprivation rules.
The rules are definitely not simple. So when providing advice to clients, it is important that you not only unravel the structure of the trust to identify who is involved, but that you also unravel the history of transactions.
Clients who have been asked by children to be beneficiaries of the children’s trusts for tax purposes may wish to think carefully if they are hoping to qualify for Centrelink benefits.
The 2002 changes largely removed the incentive to use trusts, from a Centrelink point of view. Some concessions can still be obtained under the income test, where trusts invest in non-income-producing assets (such as insurance bonds), and under both the income and assets tests, where the trust meets the requirements for a Special Disability Trust.
| The source testGifting and deprivation rules generally do not apply when money or assetsare transferred into a private trust. Instead, the source test applies. Put simply, under this test, if you transfer money or assets into a trust, they will still be captured as your assets. Deprivation rules do not apply, as you have not disposed of the assets. As far as social security legislationis concerned, you still own the assets.Tip:When completing accounting records, from a social security point of view, the transfer should be recorded as a gift, not a loan. If the transfer is recorded as a loan, the assets are double-counted. The loan is a financial investment subject to deeming and is assessed in addition to the value of the assets in the trust. If the transfer is a genuine gift and the client has no ongoing involvement with the trust (including not being a potential beneficiary), the deprivation rules may apply instead of the source test. |
| The control test This test is used to determine who has effective control over the trust, and as such, who has access to and control over the assets.If the client is the trustee or appointor of the trust, they will be deemed a controller, and all or some of the assets will be attributed to them. Alternatively, if these roles are performed by an associate of the client, or someone else who could reasonably be expected to be influenced by the client, the control test may still apply to attribute assets of the trust to the client.This may cause problems and sometimes even unfair outcomes, but it is up to the client to show just cause to Centrelink as to why they should assess a different outcome. If the client has been a beneficiary of the trust, Centrelink may require the client to remove themselves as a beneficiary. |
Example: Alison has a discretionary trust that was set up many years ago to operate a business. She has since retired and handed over the business operations and trustee role to her son. Alison remains a beneficiary and receives small distributions each year.Alison now wishes to apply for an age pension.Centrelink has advised that under the control test shewill be deemedto be the controller of the trust and 100 per cent of the assets and income will be assessable to her for means-test purposes.Alison is deemed to be the full controller of her family trust. Therefore, the full $400,000 assets figure is included in her assets test assessment. During the last financial year, the trust derived taxable income of $90,000. She distributed this equally between herself and two children. As Centrelink attributes 100 per cent of the assets to her, she is also attributed with 100 per cent of the income. Centrelink will include $90,000 as assessable income to her.The $60,000 distributed to her children will be considered a gift. This increases her assessable assets by $50,000 (assuming she can still use the $10,000 allowable gifting limit for the year). Deeming is applied to this $50,000 deprived asset.Checklist of questions:
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