Special Disability Trusts – Part 6: Capital Gains Tax Relief

Welcome to the sixth in our series on Special Disability Trusts (SDTs), where we hope to demystify particular aspects of these trusts, and highlight the benefits, eligibility requirements and restrictions to look out for.

As discussed in our previous articles in this series, the two main benefits of establishing an SDT for a vulnerable person are:

  1. Protecting the person from poor decision making and exploitation from others; and
  2. Preserving the person’s receipt of the Disability Support Pension (DSP).

In this article we discuss the relief from capital gains tax (CGT) that may be available when transferring a CGT asset to an SDT.

Capital Gains Tax

Capital Gains Tax laws can be quite complex, with a variety of discounts, exemptions or other forms of relief from paying this tax available, depending on the particular circumstances.

Common examples of CGT assets are shares or real estate (other than for the period a property was the principal place of residence) that were acquired after 20 September 1985 when the CGT laws were introduced in Australia.

Ordinarily if a person disposes of a CGT asset, tax is payable on any increase (gain) between the value at the time they acquired the asset (the cost base) and the value at the time they dispose of the asset. The CGT applies on the increased value, even if the asset is gifted for no money in return.

However, under section 118-85 of the Income Tax Assessment Act 1997 (ITAA 97), any capital gain from a transfer of a CGT asset to an SDT or a trust that becomes an SDT as soon as practicable after the transfer, is disregarded.

In addition to the capital gain being disregarded, the cost base of the property in the hands of the trustee of the SDT is deemed to be equal to the market value of the property when the SDT acquires it (s 112-20 ITAA 97).

In other words, the cost base of the property isn’t just rolled over and transferred to the trustee, but is “refreshed” to the asset’s market value at the time it is transferred to the SDT.

Let’s consider the following example:

  • Richard and Jane have a son, Brendan, aged 31 years who has a disability that qualifies him to be the beneficiary of an SDT (see our previous article on eligibility requirements here).
  • Brendan has been living at home but wants more independence.
  • Richard and Jane bought a flat nearby in 2005 for $250,000. They feel this would be a suitable home for Brendan to live in with some support from them and other carers.
  • The flat is currently valued at $650,000.
  • If they sold the flat (or gifted it to their son or a trust that was not an SDT) after available discounts and based on their current tax rates, they would pay around $70,000 in CGT.
  • However, by gifting the flat to the SDT, there is no CGT to pay.
  • The cost base of the property when the SDT acquires the flat is now $650,000 (the trustee of the SDT doesn’t “inherit” Richard and Jane’s cost base of $250,000.

How we can help

If you (or someone you know) are considering gifting an asset (such as shares or real estate) to a SDT, then this could be something to explore further. You should first seek advice from a licenced financial planner who has expertise in this area, to see if this would be suitable for your particular circumstances.

Look out for the next article in our series, when we discuss the Land Tax relief that may be available on real estate owned in a Special Disability Trust.

Contact us

Please contact us for more information and tailored help.

Subscribe to our email updates and receive our articles directly in your inbox.