Interdependency key to tax-free benefit payment
SMSF professionals need to consider the extent of any interdependency relationships when having estate planning conversations with their trustee clients, as this could have a key impact on the amount of tax paid on a death benefit, according to DBA Lawyers.
Speaking in a seminar in Sydney on Wednesday, DBA Lawyers senior associate William Fettes said by planning ahead around which family member would take on care responsibilities when an SMSF member’s health was deteriorating, advisers could ensure a tax-free payout of the member’s death benefit and reduce the financial stress on the carer.
“Imagine if we have an elderly parent with deteriorating health and $1.6 million in super and their benefits comprise a 100 per cent taxable component,” Mr Fettes said.
“There’s quite a bit of tax the adult child beneficiary has to pay, depending if they are the LPR they may have to pay Medicare levy, so the tax would be between $240,000 and $273,000.
“That’s quite a lot of money, so taking responsibility for the parent might seem more attractive on the basis [that they are a dependent], and maybe the prospect even of doing reduced hours of work or foregoing aspects of their career might seem viable.”
Mr Fettes said there was no set time frame that an adult child needed to live with their parent before death in order to establish interdependency and become a tax dependent, but that aspects such as completion of domestic tasks, administration of medication and contribution to the living expenses of the member all needed to be documented as much as possible.
“Record keeping is going to be important around financial support, plus the more support there is, the more you can show this entanglement in the relationship,” he said.
“The more generosity and bill paying, expense paying, all that stuff is going to flesh out what the relationship meant.”
Further, he added that it was important to make proper provision for any family members that made the decision to establish the interdependency relationship, as this did not automatically entitle them to the member’s full death benefit.
“When the benefit is paid to the estate, there is a look-through provision that operates, and it says broadly to what extent have tax dependents benefited or have been expected to benefit from the death benefit,” Mr Fettes said.
“Sometimes it might be straightforward, but it depends how the will is drafted. Watch out for inappropriately drafted wills where it is not quarantined appropriately in terms of super hitting the estate, because you don’t want general death and funeral expenses coming out of super, for example.”
