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Death Benefits - Tax or No Tax - what does your family want?


No Tax - Adult Children happy they are Financial Dependants for Taxation Purposes on Death


  1. Introduction to Death Benefits

When it comes to planning for the future, particularly in the context of an SMSF, understanding how your assets will be handled after your passing is crucial. Unlike the often complex and drawn-out process of managing estate affairs through probate, SMSFs offer a more straightforward path. With an SMSF, the transfer of a deceased member's superannuation interests can typically be done directly within the family's fund. This method not only bypasses the intricate probate process but also reduces the likelihood of family provision claims that can arise during estate distribution.


However, it's important to note that when making direct death benefit payments, whether as a lump sum or as a pension, there are specific legal limitations that the Trustee of the Fund must navigate. Understanding these rules can ensure that your wishes are carried out smoothly and without legal complication. The SMSF strategic possibilities for a member of a Fund in terms of their SMSF estate planning are seen in the following Table:

 

 

Table 1: The Payment of Death Benefits to a Member’s SMSF estate

Beneficiary

Allowable Superannuation Benefit

Spouse

Lump sum, income stream and/or both

Dependant child under the age of 18

Lump sum, income stream and/or both. However, any income stream must cease by age 25

Dependant child between the ages of 18 and 25

Lump sum, income stream and/or both. However, any income stream must cease by age 25

Dependant grandchild

Lump sum, income stream and/or both

Non-dependant grandchild

Lump sum via the legal estate

Dependant child over the age of 25

Lump sum

Non-dependant child over the age of 18

Lump sum

Non-dependant (not a child of the member)

Lump sum via the legal estate

Legal estate

Lump sum

 

2. Who Qualifies as a Dependant?

Navigating the maze of SMSF death benefits isn't just about understanding who gets what; it’s about grasping the essence of the term "dependant." Different laws—SISA and ITAA 1997—paint different pictures of who qualifies. Under SISA, even non-financially dependent children are considered dependants. In contrast, tax laws are stricter, reserving tax breaks for a narrower group deemed dependants, emphasizing financial interdependence.


Here’s who can receive death benefits tax-free:

  • a deceased person’s spouse or former spouse; or

  • a deceased person’s child, aged less than 18; or

  • any other person with whom the deceased person had an interdependency relationship just before he or she died; or

  • any other person who was a dependant of the deceased person just before he or she died — that is a financial dependant.


The meaning of “interdependent relationship” has been described as “one of continuing mutual commitment to financial and emotional support between two people who reside together. The definition will also include a person with a disability who may live in an institution but is nevertheless interdependent with the deceased. For example, two elderly sisters who reside together and are interdependent will be able to receive each other’s superannuation benefits tax-free. Similarly, an adult child who resides with and cares for an elderly parent will be eligible for tax-free superannuation benefits upon the death of the parent.”


3. The Meaning of Financial Dependence

The concept of financial dependence has intrigued courts for over a century, touching on workers' compensation, taxes, and superannuation.

For super there have been two significant cases concerning the meaning of financial dependant, for the purposes of the Superannuation Laws — Malek v FC of T 99 ATC 2294 and Faull v Superannuation Complaints Tribunal [1999] NSWSC 1137.


In Malek’s case, Antoine Malek was aged 25 when he died. He was single, had no children and, prior to his death, he and his widowed mother lived together. Mrs Malek received a disability support pension of approximately $153 per week, but her accountant estimated that Antoine Malek contributed approximately $258 per week to Mrs Malek’s living expenses for food, mortgage payments, taxi fares, medical expenses and other bills.


The tribunal reviewed the cases on financial dependence and in its decision cited the following authoritative statement from Gibbs J of the High Court:


Gibbs J said in Aafjes v Kearney (1976) 180 CLR 1999 at page 207:

“… In Kauri Timber Co. (Tas.) Pty. Ltd. V. Reeman (1973) 128 CLR 177 at pp 188–189, I accepted that one person is dependent on another for support if the former in fact depends on the latter for support even though he does not need to do so and could have provided some or all of his necessities from another source. I adhere to that view.”


In the end, the Administrative Appeals Tribunal held that Mrs Malek was a financial dependant because the financial support she received from her son maintained her normal standard of living. Moreover, she was reliant on the regular continuous contribution of the other person to maintain that standard.


In Faull’s case, the Court held that the mother of 19-year-old Llewellyn Faull was a financial dependant of his at the time of his death and determined that his death benefit in its entirety should be paid to her. At the time of her son’s death, Mrs Faull had regular employment that earned her income of $30,000 pa. Her wages were supplemented by an amount of $30 per week paid by her son as board and lodging. Although the sum paid to Mrs Faull every week by her son was small, the court stated that “the payment of that amount augmented her other income and, to that extent, she was dependent upon the deceased for the receipt of some of her income. Accordingly, she was partially dependent upon the payments made by the deceased”.


Such cases highlight that even partial, consistent financial support can establish dependance, influencing how benefits are allocated under SISA.


4. Regulator Guideline 

APRA's guidelines break it down further: complete financial dependence isn't necessary. What matters is the regularity of support, making even partial dependence sufficient for SMSF death benefits. This flexibility means that mutual financial dependence can also qualify under payment standards.


The ATO also provides private rulings on cases, assessing whether adult children can be considered dependants based on the specifics of each case. At Abbott and Mourly Lawyers, we’ve successfully navigated these rulings to secure favorable outcomes for our clients. If you’re seeking to clarify a dependant’s status or establish guidelines within your SMSF, don't hesitate to reach out at nush@abbottmourly.com.au.


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