Social Security Payments and Their Effect on Discretionary Trusts

For businesses and families managing discretionary trusts, understanding how social security laws intersect with trust arrangements is critical. For businesses and families managing discretionary trusts, it is critical to understand how social security laws interact with trust arrangements.

The structure and operation of a discretionary trust can affect individuals who receive social security payments and may also benefit under the trust. In some cases, trust income or assets may be deemed to belong to the individual, reducing their social security entitlements. This article outlines the key legal rules, including:

the definition of associates;
control tests; and
steps to reduce adverse impacts on social security recipients.

If certain conditions are met, Centrelink may treat the assets and income of a discretionary trust as belonging to an applicant. However, this can reduce or eliminate their social security entitlement. This may occur even if the individual is not a beneficiary and has never received any benefit from the trust.

In practice, this usually arises where Centrelink considers the individual to have “control” over the trust, such as where they are a beneficiary or a relative acts as trustee.

There are several scenarios where a trust may be deemed “controlled” by such an individual. Some examples are as follows:

Trustee Involvement: The individual or their associate is a trustee of the trust.
Reasonable Expectations: The trustee could reasonably be expected to make payments from the trust to the individual if the individual could not meet his or her living costs.
Beneficial Interests: The individual and their associates hold 50% or more of the beneficial interests in the trust.
Eligibility for Distributions: The individual and their associates collectively are eligible to receive distributions that exceed 50% of the total eligible recipients.

Control can also be inferred based on discretionary powers, such as the trustee’s ability to decide who receives distributions from the trust.

It is important to read the trust deed carefully and to understand the actual circumstances surrounding the trust and any pattern of distributions. These factors will provide an indication of whether an individual may “control” that trust for social security purposes.

Understanding Associates and Relatives in Controlled Private Trusts

The broad definition of “associates” means many people can be linked to a single trust, directly or indirectly. As a result, the actions of one person, such as a trustee or appointor, can affect the social security entitlements of other associated beneficiaries.

As such, the concept of “associates” plays a central role in determining whether a discretionary trust is controlled for social security purposes. An “associate” includes a “relative”, and the term “relative” is broadly defined to include a broad range of familial relationships, including direct relatives such as:

parents;
siblings,
children; and
more distant relations (i.e. first and second cousins and spouses).

In cases where a single individual serves as both the sole trustee and sole appointor of a discretionary trust, the control test is likely to be triggered. This can result in the trust being considered as a controlled private trust of the relatives who receive social security payments, such as siblings or parents, potentially affecting their social security entitlements.

Corporate Trustees and Control

Using a corporate trustee does not automatically prevent a trust from being considered “controlled” for social security purposes. If an individual sufficiently influences the company, such as by holding more than 50% voting rights, control may still be found. As a result, appointing a corporate trustee alone may not remove control where significant influence remains.

Renouncing Beneficial Interests

Individuals receiving social security payments may avoid being deemed to “control” a trust by renouncing their beneficial interests. Renunciation can be achieved by:

Amending the Trust Deed: excluding the individual as a beneficiary of the trust.
Executing a Deed of Renunciation: a separate legal document is required for each individual, formally relinquishing their entitlement to income or assets from the trust.

The renunciation must be irrevocable and witnessed appropriately. An example renunciation statement confirms the individual’s intention to give up any current or future benefits from the trust.

Capital Gains Tax Implications

While renunciation may prevent a trust from affecting social security payments, individuals should seek tax advice before proceeding. This is because renunciation can trigger capital gains tax (CGT) events, which may have adverse tax consequences for that individual. The CGT events that may be triggered by a renunciation are:

CGT Event C2: The cancellation of an intangible capital asset. CGT event C2 may occur when a beneficiary renounces their interest, causing that interest to end. If the beneficiary had no prior entitlement to trust assets or income, any capital gain is likely to be nil.
CGT Event H2: The receipt of something for an event relating to a CGT asset (such as an interest in a trust). This event may be triggered if the individual receives compensation for the renunciation, potentially resulting in a taxable capital gain.
CGT Event E1: The resettlement of a trust may be triggered by an amendment to the trust deed to remove a beneficiary.

To protect the social security entitlements of the beneficiaries, the following steps may be considered:

Resignation of Trusteeship: Associates of social security recipients, serving as sole trustees or appointors, should consider resigning to remove the direct link between the trust and social security recipients.
Renunciation of Beneficial Interests: Impacted recipients should execute a deed of renunciation to formalise their disassociation from the trust.
Amendment of Trust Deed: Prepare a deed of amendment to the trust deed to exclude the social security recipients from being considered as eligible beneficiaries of the trust for the period of social security entitlements.
Setting up the Trust Deed with the exclusion at the beginning: Excluding social security recipients as a beneficiary when the trust deed is drafted. This would be the best-case scenario as it would mitigate any tax events listed above.

However, the above actions should be considered carefully since there may be adverse tax consequences that arise as a result.

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Key Takeaways

The interplay between discretionary trusts and social security payments is complex. They can have negative consequences on an individual’s social security payments if that individual is deemed to have “control” of that trust. This can occur because of the broad definitions of associates and control under Australian law.

For businesses and families managing trusts, proactive measures are essential to safeguard their social security entitlements, such as:

excluding social security recipients from beneficiaries of the trust; and
resignation from trustee roles and renunciation of beneficial interests.

However, this must be balanced against broader tax consequences, especially with respect to CGT. By consulting legal professionals and understanding beneficiary arrangements and control tests, you can: