I would point out firstly that this question is around the taxable portion of any death benefit which includes any insurance benefit via super . The Tax free component will always pass tax-free to any beneficiary or your estate.
So when it comes to that taxable component which includes:
- Super Guarantee Payments,
- Salary Sacrifice,
- Personal concessional contributions by self-employed and
- Insurance claim benefits on policies held through super;
The answer is maybe depending on their circumstances and the records of financial support and trail of paper evidence you can show over a prolonged period.
Some worth keeping?
In most circumstances once your adult children have their own job or have left home they no longer qualify as a “financial dependent” for superannuation death benefits. However there has been ambiguity about when the line between self-reliance and financial dependency is crossed.
The ATO released a determination – see below SMSFD 2014/6 on who is a financial dependant for superannuation tax purposes? The question was important as any death benefit payment to the dependant child over the age of 18 would be tax-free if they were seen as a financial dependant. However other factors particular to this case and some previous Private Binding Rulings from the ATO may mean we have to be careful about relying on this determination. Also on the back of this latest ATO determination the question has been raised as to whether this determination may be used to help pass funds to grandchildren.
The facts of ATO ID 2014/6 released on 12th February 2014 are as follows:
The taxpayer in this case received a death benefit from the parent’s superannuation fund after the parent’s death. The taxpayer was over 18 years old at the time and receiving Youth Allowance payments from Centrelink but was still living at home with his parent until the parent’s death and receiving the lower “living at parental home” Youth Allowance payments from Centrelink.
What was the Issue?
Is a taxpayer in receipt of Youth Allowance at the time of the death of a parent, a death benefits dependant of the parent for the purpose of section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. On the facts given, the taxpayer is a death benefits dependant of the parent for the purpose of section 302-195 of the ITAA 1997.
Reasons given by the ATO for their decision
The term ‘death benefits dependant’ is defined in subsection 302-195(1) of the ITAA 1997. Paragraph 302-195(1)(d) states that a death benefits dependant, of a person who has died, is any other person who was a dependant of the deceased person just before he or she died.
Dictionary definitions of ‘dependant’ make reference to substantial financial support. That dependency involves substantial financial support or maintenance is supported by passages in the Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No.3) 1984 and Explanatory Memorandum for Taxation Laws Amendment Bill (No. 5) 1987.
The determination of financial support is a question of fact. The Youth Allowance payments the taxpayer received were calculated at a lower ‘at home’ rate as opposed to the higher ‘independent’ rate. This indicates that the taxpayer was substantially financially dependent. A comparison of the level of financial support provided by the taxpayer’s parent with that provided by the Youth Allowance payments also indicates that the taxpayer was financially dependent.
So what strategies does it make us revisit:
As well as looking to improve the result for of children in need of support in their 20’s and possibly 30’s an ongoing strategy that some advisers have used and others have discounted is to set in place a strategy to show a grandchild can be financially dependent upon a grandparent. The strategy usually created that financial dependency through payment of school fees or special medical treatment to address disabilities, all designed to fund and enhance the grandchild’s basic standard of living not as just an improvement of their quality of life through gifts, holidays and luxuries.
So does this new determination change the status quo? This where I rely on the legal profession to step in and show some guidance so you should read the following from DBA Lawyers – Bryce Figot, one of my favourite presenters and a mine of information on all things SMSF.
ATO ID 2014/6 and the latest on financial dependency … including grandchildren
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
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The SMSF Coach 