When it comes to superannuation death benefits, a key question is often whether the recipient qualifies as a “death benefits dependant.” This determination impacts the tax treatment of the payment. A recent ATO private binding ruling looked at the issue of interdependency relationships, which is always a difficult matter to determine.

The Case in Focus

The case involved a parent (“the Beneficiary”) who received a death benefit from their deceased adult child’s superannuation fund. The Beneficiary sought a private ruling to confirm whether they qualified as a death benefits dependant due to being in an interdependency relationship with their child at the time of death.

The ATO ruled that the Beneficiary was not a death benefits dependant under section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997). Let’s explore the reasoning behind this decision.

What is a Death Benefits Dependant?

Under section 302-195 of the ITAA 1997, a death benefits dependant includes:

1. The deceased’s spouse or former spouse;
2. The deceased’s child under 18;
3. Any person in an interdependency relationship with the deceased;
4. Any other person financially dependent on the deceased.

Since the Beneficiary was the parent of the deceased, only options 3 (interdependency relationship) and 4 (financial dependence) were relevant.

Financial Dependence? Not in This Case

Financial dependence typically requires the dependant to rely on the deceased for their ongoing financial needs. In this instance, the ATO found that the Beneficiary was not financially dependent on the deceased.

Therefore, this pathway to being classified as a death benefits dependant was ruled out.

The Interdependency Relationship Test

Section 302-200 of the ITAA 1997 outlines the criteria for an interdependency relationship. To qualify, the relationship must involve:

1. A close personal relationship;
2. Living together;
3. Financial support;
4. Domestic support and personal care.

Here’s how the ATO applied these criteria:

1. Close Personal Relationship

The ATO defines a close personal relationship as one with ongoing emotional support and mutual commitment to a shared life. While the Beneficiary cared for the deceased during their illness, the ATO noted that:

• The care provided was temporary and not indicative of a shared life commitment.
• The relationship did not exceed what is typical between a parent and an adult child.

Consequently, this criterion was not satisfied.

2. Living Together

While the Beneficiary stayed with the deceased for several months to assist during their illness, they maintained a separate home in another state. The arrangement was temporary, and the Beneficiary intended to return to their own residence. This lack of permanency meant the requirement of living together was not met.

3. Financial Support

The deceased covered many household expenses during the Beneficiary’s stay, such as utilities and food. This financial support satisfied the ATO’s criteria for financial interdependence.

4. Domestic Support and Personal Care

The Beneficiary provided significant domestic support, including cleaning, cooking, and emotional assistance. However, the ATO determined that this care was not of a level exceeding what a parent would typically provide to a sick child.

The Final Decision

Although some criteria were partially met, the ATO concluded that the relationship did not satisfy all the requirements of an interdependency relationship under section 302-200. The care and support provided by the Beneficiary were considered temporary and did not indicate the mutual commitment to a shared life required for an interdependency relationship.

In Summary:

1. Temporary arrangements often don’t qualify: Living together must have some permanence, not just be a response to temporary circumstances like illness.
2. Emotional and domestic support must exceed the norm: The relationship must go beyond what is typical for family relationships.
3. Documentation is crucial: The ruling relied heavily on evidence such as financial statements, correspondence, and tenancy records.

For SMSF trustees and beneficiaries, understanding these rules is essential for planning and managing superannuation death benefits. If you’re unsure about your situation, seeking professional advice can help ensure compliance and avoid unexpected tax implications.