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Wednesday, 23 June 2010
Page: 6282


Mrs MOYLAN (11:06 AM) —In continuation, the measures in the Tax Laws Amendment (2010 Measures No. 3) Bill 2010 apply to the most severely disabled people in the country. The one thing they and their families should be able to rely on is assistance from the Commonwealth and at least clear, unambiguous tax treatment of the one device available to assist families to make preparation for the future care of their dependants. The disability community has fought hard for change and has come to welcome any relief and assistance. Although this bill provides slight relief in the tax treatment of special disability trusts, it fails the test of clarity.

Administration of the trusts is so complex, I have been told, that major trustee organisations such as Perpetual Trustees will not manage them. For instance, money can be used from the fund for expenses related to the beneficiary’s medical care but not for ordinary household maintenance. When put into practice, this means power bills cannot be paid from trust funds but recharging an electric wheelchair can, so the trustee must determine the precise individual power units used to charge a chair and contribute from the trust that exact amount to the power bill. As a concept, special disability trusts are a worthwhile vehicle for carers to ensure that their dependants have the care and accommodation they require to live their lives. But the criteria surrounding such trusts have made them complex and impractical. We must approach the subject with a renewed focus and keep foremost in this debate the individuals whose lives are affected.

The bill before us will extend the allowable uses of trust funds to the maintenance of special disability trust properties, which will avert some of the problems, such as that just described, in administering the trusts. But there is a slight difference between a recommendation made by the Senate and the proposal in this bill. Recommendation 6 of the Senate Standing Committee on Community Affairs report advocates for a broader allowable application of funds, being day-to-day expenses which maximise the beneficiary’s health, wellbeing, recreation and independence—not just their maintenance.

The importance of this distinction is highlighted in a recent appeal by Mr Brian Broughton as trustee of his daughter’s special disability trust. In evidence to the Social Security Appeals Tribunal, correspondence between Mr Broughton and Centrelink regarding authorised expenditure shows that Centrelink strictly applied the definition of maintenance costs. It raises the question: is the definition of maintenance wide enough to encompass positive changes to a special disability trust property that other homeowners can carry out? Can trust funds be used to create a garden or an extension that previously did not exist? It can be argued that such improvements would maximise the beneficiary’s wellbeing or independence but strictly would not be maintenance as the items did not previously exist. Whether such a narrow view is adopted will largely depend on the guidelines issued to Centrelink as to what are accepted expenditures. As a matter of common sense, I would urge that the guidelines issued adopt the widest possible meaning.

Related to recommendation 6 of the report is the government’s intention to create a discretionary spending category. Up to $10,000 a year can be spent on any miscellaneous items for the beneficiary. In part, it circumvents the current prescriptive ‘allowable uses’. The change is welcome, but there appears to be no rationale for the limit. The Senate’s recommendations do not mention any such limit. In fact, with recommendation 6 the Senate has essentially endorsed that any day-to-day expense, as long as it is constructive for the beneficiary, should be allowed.

Flexibility to meet the needs of the beneficiary should remain core to the policy, and I worry that this arbitrary figure will constrain the beneficiary, especially as there is no mention of it being indexed. It is quite possible that the figure is designed to limit the potential losses in what would be a very rare case of a trustee misusing funds. The trustee’s expenditure of SDT moneys, though, is overseen by Centrelink, with, as I understand it, comprehensive audits at least once a year. The potential for misuse of funds is minimal. Flexibility for a trustee to expend funds to care for the beneficiary in the manner they believe best should outweigh the unlikely possibility of abuse. The government should ensure that the $10,000 cap is at least indexed, or increased, if not entirely removed.

Taxation of the trust’s income is another area of discontent. Ray Walter, a passionate campaigner for disability equality, points out that all funds contributed to the trust by family members are after tax. He contends that taxing the money again is simply double dipping. The intention of the fund is to maximise its growth to cover the ever-increasing cost of health care and living expenses, relieving the public purse. Stunting the trust’s growth through taxing already taxed money is antithetical to its concept. Exempting SDTs from tax, at least until after the winding up of the trust following the death of the beneficiary, would certainly help the long-term growth of funds.

Currently, funds distributed to the beneficiary are taxed at the applicable marginal rate, and unexpended income retained by the trust is taxed at 46.5 per cent. The current model has been rightly recognised as too harsh, and the report recommended that unexpended income should be taxed at the individual’s marginal tax rate. The concept of taxing unexpended trust funds at a marginal rate has been widely endorsed, but the mechanics of bringing about this change have created a great deal of uncertainty.

A discussion paper released by Treasury on taxing special disability trusts details the proposed methodology of assessing both the individual and the trust’s tax. First, the net income of the trust, whether expended or not, is worked out at the appropriate marginal rate. This is payable by the trustee. Then the individual combines any personal income with the net trust income and claims an offset for the tax payable by the trust. When the tax-free threshold is factored in, plus other low-income offsets, the situation becomes more confusing. To make matters worse, only the first of the discussion papers actually computed the amount of tax payable, albeit in a puzzling manner. The discussion papers released since do not work out the actual tax payable or even mention tax-free thresholds. Example workings from my office have been sent to Treasury in an effort to determine how the tax will actually apply. Frankly, we are unsure whether the individual will be burdened by more tax or the situation will be improved.

But perhaps the most devastating financial pitfall of the trust is the application of capital gains tax. A trust may purchase a property for the beneficiary to live in, but, if the property is found to be unsuitable and sold, the beneficiary’s principal place of residence is subject to capital gains tax, as it is held in the trust. Bear in mind that these are the most disabled people in our community, who in most cases cannot manage their own affairs. Even transferring a property into a trust exposes the transferrer to capital gains.

A potent example is that of Kevin and Olive McGarry, living in Kardinya in WA. The couple previously purchased a property for their disabled daughter to live in when the time came that they could no longer care for her. The self-funded retirees have been hit by the global financial crisis and need income support. But, as the second house intended for their daughter is held in their names, they exceed the asset test and are ineligible for financial assistance. Transferring the property to a disability trust for their daughter would allow Kevin and Olive to claim support so they can meet their own day-to-day needs, but it would also leave them with a liability to pay $45,000 in capital gains tax—a bill they cannot afford. To get by, the option they are faced with is selling the home so they can diligently invest for their daughter’s future.

The McGarry’s situation is not the only example. Mr O’Hart, also from WA, bought a property, in his name and his wife’s name in 1988, for their severely disabled daughter to live in. To transfer that property into a special disability trust, an accountant has calculated that Brian and Jean O’Hart will both be liable to pay over $63,000 in capital gains tax—a total of more than $126,000—to simply swap a name. Brian and Jean are self-funded retirees. The cost of transferring the property is prohibitive. But they are extremely worried about ensuring their daughter has appropriate accommodation in the future.

Affected trustees and family members of disabled individuals have described the situation to me as perverse and unfathomable. The Building trust report specifically mentions the adverse application of capital gains tax. Recommendation 5 calls for a property transferred into a special disability trust to be exempt from capital gains. I echo the words of Ray and Wendy Walter in their submission to the inquiry, where they ask:

Do you believe it is fair, just and reasonable that some people with disabilities have been singled out to be the only members of our community to pay Capital Gains Tax on the sale of their place of residence?

The reforms before this House today represent only a handful of the changes that carers and trustees have been calling for. In its report, the Senate highlights a number of further areas in need of reform. Recommendation 8, for example, calls for the first home owner grant to be applicable to properties bought by a special disability trust. As many beneficiaries have no testamentary capacity due to their disability, they are unable to purchase a property in their own name and therefore are unable to receive the grant. Allowing first home owner grants to be extended to beneficiaries would remedy the inequality. But so far no indication has been given that this will be pursued. As I said in my speech at the beginning last night, this is positively discriminating against people with a disability, and I think it is a very unsatisfactory state of affairs.

Similarly, special disability trust beneficiaries are not eligible for other benefits afforded to first home buyers, such as home saving accounts. Although not specifically mentioned in the Senate recommendations, there is no reason why people with a disability should be excluded from these measures simply because the money is held in a trust. Special disability trusts were envisaged to help the beneficiary, and I do not think it was ever intended that they should exclude measures available to those in the wider community without a disability.

Recommendation 7 of the Senate report also calls for unexpended funds from the special disability trusts to be able to be contributed towards superannuation. The recommendation does not suggest the measure to be mandatory, giving trustees the flexibility to determine whether it is suitable for the individual’s circumstances. We should find a way to accommodate ways so that people with a disability can contribute to their superannuation through the trust system.

In closing, I would like to recite the words of Ray and Wendy Walter, from their submission to the Senate inquiry. They say:

Working together we believe we can find the best possible solutions to provide a better quality of life for those members of the community with a disability.

The removal of the barriers … we believe can be done at little … cost to the Commonwealth and would be a huge step forward … bringing hope and providing some peace of mind to families who can see little light at the end of—

a very dark—

tunnel …

I look forward to working with my colleagues in this House to promote greater changes for the benefit of people with a disability. (Time expired)