Pensions and Private Trusts and Companies

Trusts, Private Companies and Social Security Pension Entitlements

This is a complex area in which we simply provide an introduction; it is not an area for the "DIY enthusiast" and experienced professional, usually legal, advice is absolutely necessary before committing to the establishment of any trust or company, of any nature.

Background

Prior to January 1, 2002 the means test rules then in place with respect to social security benefits, such as the age pension, meant that assets and income held within trusts and private companies may not have been attributed to individuals, even though they may have been the source of the funds and, either directly or in concert with other associates, the individuals may have had direct control over those assets and income. This meant, in short, that individuals were able to divest themselves of assets and income - placing them in trusts and private companies - to assist in them qualifying for Social Security entitlements.

On January 1, 2002, new "attribution rules" were introduced and their purpose was to include interests held within family trusts, testamentary trusts and private companies under both income and assets tests.

Attribution Rules

The new legislation introduced two distinct tests that apply jointly to determine whether assets and income held within private companies or trusts should be included for asset and income test purposes. Those two tests are:

• "Source" Test; and
• "Control" or "Attribution" Test

In very simple terms, the Source Test relates to the source of funds within a trust or private company, and the Control or Attribution Test seeks to assess who is in control of the trust or private company – for instance, the company directors, corporate trustee, individual trustees, appointors and/or beneficiaries/shareholders.

We believe it is reasonable that people who control significant assets and income within trusts and private companies should use those assets and income to support themselves before any attempt is made to access taxpayer-funded social security entitlements. That also applies, in our opinion, to testamentary trusts where individuals may seek to distribute assets away from a surviving spouse, to other relatives and family, so that the spouse may qualify, for example, for an age pension.

What is a "Private Company or Private Trust"?

For the purpose of these rules, Centrelink will deem any entity as a "private company" if, at the end of the last financial year, it met any two of the following three criteria:

• the consolidated gross operating revenue of the company and any subsidiaries was less than $25 million;
• the consolidated gross assets of the company and any subsidiaries were less than $12.5 million;  and
• the company and any subsidiaries had less than 50 employees.

As for trusts, Centrelink considers a trust is a "private trust" unless::

• ALL of the following conditions are satisfied:
  • the trust is a fixed trust,
  • the units in the trust are held by 50 or more persons,
  • the trust was not created or operated under a scheme (section 1207A) that was entered into to gain a social security or Veterans' Affairs advantage, OR
• the trust is a complying superannuation fund, OR
• the trust is an excluded trust.

In Summary

Assets and income held within private trusts and companies may be attributable to you for the purposes of the asset income test for age pension and other social security benefits. Whether there is any attribution, and to what extent, will depend upon your detailed circumstances and the extent to which you contributed and continue to control the assets in question. Again, as mentioned above, this is a complicated area that requires professional advice.