When can superannuation death benefits be paid tax-free to the member’s adult child?
If a member dies with no spouse or minor children, then there will, of course, be tax payable in respect of that member’s superannuation death benefits, unless he or she was in an “interdependency relationship” with someone. Generally speaking, it is not expected that adult children will be in an interdependency relationship with their parent, but it is possible for the legal requirements to be met, particularly in situations where:
- a child has a serious disability and is cared for by the parent/s
- a child is terminally ill and is cared for by the parent/s
- a parent has a serious disability and is cared for by a child
- a parent is terminally ill and is cared for by a child
Two recent decisions – Williams v IS Industry Fund  FCA 524 – TBCL and Commissioner of Taxation (Taxation)  AATA 264 – highlight the need for advisers to consider whether an adult child could, in fact, be, at the time of his or her death, in an “interdependency relationship” with the parent/s and vice vera.
The definitions of “interdependency relationship” in our taxation legislation and superannuation legislation are not identical but in terms of meaning are sufficiently close for present purposes. In both cases, there are effectively four criteria to be met to satisfy the definition.
Two people will have an interdependency relationship if they:
- have a close personal relationship; and
- live together; and
- one or each of them provides the other with financial support; and
- one or each of them provides the other with domestic support and personal care. However, the domestic and personal care requirement must be of the type and quality normally found in a close personal relationship rather than as a mere friend or flatmate.
There are exceptions to the last three requirements if an individual does not meet these requirements because they:
- suffer from a physical, intellectual or psychiatric disability; or
- they are temporarily living apart for example if one of them is overseas or in jail.
In the case of a parent and an adult child, something more than a normal familial relationship (which is expected to be close) needs to exist. Clearly, the necessary “close personal relationship” can arise because of illness and the degree of care and support required either by a child from the parent/s or required by the parent from a child. In the case of a deceased adult child, the relationship needs to be more than mere convenience – most likely with the deceased child requiring the parent/s care for the rest of the child’s life, meaning that there has then been a change in the relationship so that it becomes a mutual commitment to a shared life together or a relationship involving a demonstrated and ongoing mutual commitment to the emotional support and well-being of each other (and the deceased child in particular) over a number of years.
The case of TBCL and Commissioner of Taxation (Taxation)  AATA 264 which considered a request made to the ATO for a private binding ruling, demonstrates the need for advisers to be aware of the legal elements of an “interdependency relationship” so that an application for a ruling goes further than simply outlining a fact situation which establishes that the member was dependent upon a person.
Holistic estate planning and thorough deceased estate administration considers these issues and opportunities to minimise the tax that would otherwise be payable.
This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.