Judi Moylan (Pearce, Liberal Party) Share this | Link to this | Hansard source

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)

Bill Shorten (Maribyrnong, Australian Labor Party, Parliamentary Secretary for Disabilities and Children's Services) Share this | Link to this | Hansard source

First of all I would like to thank those members who contributed to this debate on the Tax Laws Amendment (2010 Measures No. 3) Bill 2010. In particular I appreciate the contribution of the member for Pearce. The amendments contained in schedule 1 will freeze indexation of the superannuation co-contribution income thresholds for a period of two years. They will also permanently maintain the co-contribution matching rate at 100 per cent and the maximum co-contribution payable at $1,000. These changes will generate budgetary savings while at the same time maintaining a generous dollar-for-dollar incentive for low- to middle-income individuals to make additional voluntary contributions to superannuation. These changes should also be seen in the context of the new low-income earners government contribution, which will directly boost the retirement savings of individuals on incomes of up to $37,000 through a contribution of up to $500.

Schedule 2 amends division 820 of the Income Tax Assessment Act 1997 to adjust the thin capitalisation calculations for authorised deposit-taking institutions. In January 2005 Australia amended its accounting standards by adopting the Australian equivalent to International Financial Reporting Standards. This had flow-on tax and prudential consequences for authorised deposit-taking institutions. Transitional provisions have applied to insulate authorised deposit-taking institutions’ thin capitalisation calculations from these changes by allowing such entities to elect to use the accounting standards that applied immediately before January 2005.

These amendments effectively continue that transitional treatment for three types of assets. They are treasury shares, the business insurance asset known as the EMVONA asset, which is the excess market value over net assets, and capitalised software costs. This measure formed part of the government’s 2009-10 budget announcement and achieves the government’s specific objective of clarifying the operation of the law in this area and more generally reducing compliance costs and improving the tax law.

Schedule 4 amends the Taxation Administration Act 1953 to empower the Director-General of Security and the Director-General of the Australian Secret Intelligence Service to declare that Commonwealth tax laws do not apply to specified transactions in relation to specified entities if they are satisfied that is necessary for the proper performance of their agency’s functions. These amendments remove the possibility of conflicts arising between Australia’s national security interests and obligations imposed by Commonwealth tax laws.

A declaration has the effect of preventing tax liabilities, obligations and benefits from applying in relation to the specified transactions. Therefore, there will be no obligation to provide information about those transactions to the tax authorities and no requirement for tax authorities to seek that information. Consequently, information that bears on the operational activities of Australia’s security and intelligence agencies will not be disclosed. Exercise of this power will, of course, be overseen and validated by the Inspector-General of Intelligence and Security, who will report on an annual basis to the Parliamentary Joint Committee on Intelligence and Security.

The amendments in schedule 4 deliver on the government’s commitment to help support people with severe disabilities, their families and carers. This measure will help families and carers to provide financially for the care and accommodation needs of people with a severe disability. Under the new arrangements, the unexpended income of a special disability trust is taxed at the principal beneficiary’s personal tax rate rather than automatically at the top personal tax rate plus the Medicare levy. These amendments are part of the government’s broader response to the treatment of special disability trusts. I note that the member for Pearce was talking on a range of matters concerning this legislation, not all to do immediately with this schedule but to do with her general concerns that not enough is being done to improve the operation of special disability trusts. I personally have some sympathy for her observations, and I thank her for her contributions in the past to improve the workings of these operations. I also note that she wrote to the Walter family, and I too thank the Walter family for the work they have done. I recognise that more needs to be done in this area to improve the operation overall of special disability trusts.

However, some of the other parts of the government’s response include broadening the eligibility requirements for beneficiaries, extending the allowable uses for the trust and granting a capital gains tax exemption for main residences. With these measures we want to make it easier for parents, friends and carers to support a person with a disability. We are aware of the enormous burden carried by families and carers in this country and how heavily our social obligation to care for people with a disability falls upon this dedicated group. Carers, particularly those who look after an adult child with a disability, are often described as ‘saints’ or with the phrase ‘I don’t know how they do it’. I would like to suggest that they are not saints. They are just ordinary people who do an amazing job out of a DNA-hardwired love and out of the knowledge that, if they do not do it, it will not get done.

This government has increased the amount it pays to carers, but I acknowledge that this is still just an early improvement and that the desperation and need is still out there. In fact, the 2005 Australian Institute of Health and Welfare analysis of the Commonwealth, State and Territory Disability Agreement funded services revealed a high level of unmet need. Noting that its estimate of community access to services was conservative, the analysis found that unmet need for accommodation and respite services was 23,800 people and unmet demand for community access services was 3,700 people. I do believe that they are conservative numbers. I also believe that it is appropriate to continue to try and improve the operation of special disability trusts to reward people who choose or who have the capacity to invest in the future of their adult child with severe or profound disabilities and that action in itself actually supports the distribution of the remaining funds available for disability services to those whose families are not in the same position to assist their loved ones themselves.

The vast reservoir of goodwill and love possessed by carers has helped Australia cope up until now, but I do recognise that there is a limit to human endurance. There are 1.5 million people in Australia with a severe or profound disability and there are nearly 500,000 people who are full-time carers of a person with a disability. Demographers predict that the number of people with disability will rise to 2.3 million by 2030, while the number of carers drops. Our current systems are a scattered patchwork and are too often constrained by rationed budgets rather than the actual needs in the community. I recognise the work of the previous government and former Minister Patterson in creating special disability trusts, but this government did also recognise upon election to office that the take-up had been very small. We have made some modest changes, which were the source of considerable debate, and the schedule will reflect some of those changes.

I also happen to believe that a national disability insurance scheme, which the Rudd government has asked the Productivity Commission to investigate, may offer the hope for a better system which intervenes earlier, which provides services when they are needed and which gives long-term certainty to parents and carers of a person with a disability. That anxiety which ageing carers and parents face of wondering who will look after their adult child with significant needs is not a question which can be satisfactorily answered at this stage by the nation. We are currently spending, at all levels of government, over $22 billion on disability services, payments to carers and the Disability Support Pension. I do not believe that we are getting sufficient value for the money. We are paying a lot of money for an inefficient system. Whilst I do not believe that amount of money should be reduced, I do believe we can do better with it. We need to see whether more timely interventions can be made to improve the quality of the lives of people with a disability and their families. It will be up to the Productivity Commission to independently crunch the numbers on this scheme to see whether it is indeed feasible or possible, but I do believe the principle of some kind of insurance scheme for people with a disability is the best chance. We have to improve a system that will provide real support for the growing number of people with disability in this country.

Of course a disability trust, as I have said earlier, is not an appropriate solution for all families but, for those who can take advantage of them, this bill is important. One of the most difficult aspects, as I have said, for a parent who is caring for an adult child with a serious developmental delay is not knowing what will happen to their child, whom they love, when the carer dies or when the carer is no longer able to provide the care required. It is not to our credit as a nation that we cannot guarantee the answer to that question. To make it easier for families to provide some stability and some certainty for the future through a disability trust is one of the good things which is achieved by this bill. We will certainly study very carefully the contribution of the member for Pearce and those families who have worked hard to improve the operation of the special disability trust to see what further work is required.

Turning to schedule 5, it amends the definition of a managed investment trust, or MIT, to more closely align the definition of withholding tax with the definition of the MIT capital account treatment. This measure extends the definition of an MIT to cover certain wholesale managed investment schemes and government owned managed investment schemes, commonly referred to as wholesale funds. The definition will apply for the purposes of the MIT capital account election rules recently passed by this parliament. The amendments will ensure that the rules apply appropriately to both retail funds and wholesale funds that are widely held collective investment vehicles undertaking passive investments while ensuring that any changes to the definition for withholding tax purposes do not unfairly disadvantage existing investors and funds. These amendments will support the Australian funds management industry by limiting the operation of the MIT withholding tax rules to funds that carry out their investment management activities in Australia. The changes made by this schedule are in line with the government’s objective to secure Australia’s position as a pre-eminent financial services centre. This bill deserves the support of the parliament. I commend the bill to the House.

Question agreed to.

Bill read a second time.