Children who are financially dependent on a deceased parent will pay no tax on receipt of the taxable component of the parent’s superannuation benefit. The meaning of dependant is particularly important in relation to the payment and tax treatment of superannuation death benefits.
SMSF Alliance principal David Busoli said there is a view that independent children can qualify as financial dependents simply by being in receipt of regular payments from their parents and arranging suitably worded declarations.
“This is simply not true. Financial dependence occurs where a person is wholly or substantially maintained financially by another person,” he said.
“The ATO’s test is simple. If the financial support received by a person were withdrawn would the person be able to survive on a day-to-day basis.”
Mr Busoli noted that if the financial support merely supplements the person’s income and represents “quality of life” payments, then it would not be considered substantial support.
“What needs to be determined is whether or not the person would be able to meet the person’s daily needs and basic necessities without the additional financial support,” he explained.
“Simply providing a financially independent child with a regular payment, however well documented, does not make them a financial dependent.”
The Federal Government has already determined what is sufficient for the ‘necessities of life’. Pick one of unemployment benefit, sickness benefit, disability support or old age pension.
Lot of heroes and glory hunters giving their two cents here.
Due to inflation, its now worth five cents
It is unethical that people would suggest unnecessarily transferring money to their kids regularly to avoid paying death benefits tax. People should pay their dues to society.
They have already paid their dues to society. If they withdrew the money just before they died, they could hand it to their kids tax free. This is simply an unfair law that the government keeps in place simply because it benefits them and there is not enough outcry for them to change it.
Its debatable if the parents have paid their dues to society. I was actually referring to the children not paying their dues to society on money they get for free. The children didn’t earn it, shouldn’t be tax-free under any circumstances.
But their parents did earn it, and paid for it from after-tax income. Why should it be taxed twice, or three times, or four times if those kids sell it or pass it on to their kids.
How many slices of the pie is the State entitled to?
Perhaps all deceased estates should be forfeited to the State and the proceeds banked into consolidated revenue. Perhaps all income and wages should also go to the State, which then hands out a monthly allowance to everyone so no one person receives more than another.
Agree, bring back inheritance tax
This wasn’t me……..
I agree with David. While it will always depend on the circumstances, the ATO has consistently taken the position that ‘financial dependence occurs where a person is wholly or substantially maintained financially by another person. The point to be considered is whether the facts show that a person depended or relied on the earnings of the deceased for their day to day sustenance’.
Given this, if the financial support merely supplements the person’s income and represents quality of life payments, then it would not be considered substantial support. Therefore, what needs to be determined is whether or not the person would be able to meet their daily basic necessities (shelter, food, clothing, etc.) without the additional financial support.
As a result, while financial support provided to an adult child could result in financial dependency, I think the default position will be that it doesn’t unless they can prove:
• the deceased provided ongoing financial assistance that was regular and relied upon
• the financial support made by the deceased was not supplementary to the income of the beneficiary, and
• the beneficiary would not have been able to meet their daily necessities without the additional financial support provided by the deceased.
Given this, I think a strategy of advising a client to start paying part of an adult financially independent child’s living costs to make them financially dependent will fail unless an objective assessment of all the facts and circumstances indicates the adult child was reliant on that support at the time of death for their day to day sustenance. That is, you can’t just create or manufacture financial dependency.
What would be interesting to know is the ATO’s view on what the daily basic necessities equate to.
Take shelter for instance, the term basic daily necessities generally makes me think of having a private place to stay, however simple that might be. However, if the individual was relying on the financial support in order to pay rent on a very expensive property, would this still be considered a daily basic necessity? From reading Re Malek, it seems it would, based on the following:
“In my view, the relevant financial support is that required to maintain the [b]persons normal standard of living[/b] and the question of fact to be answered is whether the alleged dependant was reliant on the regular continuous contribution of the other person to maintain that standard.”
If this is correct, then to the extent that these payments have been relied upon to have a high standard of living doesn’t necessarily mean the there wasn’t financial dependency.
I maybe taking the Malek quote out of context however it may also be possible to argue that payments that are used for quality of life reasons (ie not the basic necessities) could help establish financial dependency on the basis that they were used to maintain that person’s “normal standard of living”. I note the ATO doesn’t take this view in their PBRs.
Thoughts anyone?
I think the point here is that every scenario is different and that, unless clear financial dependency has been established based on the necessities of life, the prospect of a rejection by the ATO is very high. If the intent is to enter into an agreement that purports to establish financial dependency, coupled with an ongoing payment arrangement to back it, is regarded as creating an environment where tax dependency MIGHT be established then that’s fine. To enter into this arrangement with the idea that it WILL create tax dependency is wrong as it is more likely to fail than to be successful unless other circumstances exist at the time of death.
The private ruling Grant Abbott refers to in his comment effectively takes the view that the financial dependency can be established if the financial support was used to maintain the individual’s normal standard of living rather than the whether the financial support was required to meet the basic necessities of life.
It’s interesting to see as it’s the first ATO ruling that I’ve seen that has taken that view.
While not binding, the private ruling 1051454663269 dated 21/12/18 discusses relevant case law in this area in detail. The case law discussing the definition of the words ‘financially dependent’ essentially accords with your view, Craig.
This view does not accord with the Commissioner’s private rulings. Review PBR Authorisation Number: 1051231612657 which held in the affirmative that supplementary income for living expenses for an adult child is financial dependence.
Grant, can’t find this PBR in ATO’s edited private rulings – may have been taken down. Please send it to me. In any case a PBR is specific to an individual case. Extrapolating the result for general use broader than the ATO’s general interpretation, which is as I have stated, often results in costly court proceedings with variable results. Is the member aware of this probability at the outset I wonder?
I actually think that this PBR affirms David’s view, including the consideration of Malek’s case. The PBR and the case refer to the maintenance of the person’s normal standard of living, with the context of that particular case being that the adult children’s normal standard of living was with respect to the continuation of tertiary studies and a gap year – were it not for the support provided by the deceased, the children wouldn’t have been able to undertake those studies or gap year.
However, every case is obviously different – the PBR refers to supplementary income, but also in the context that were it not for those payments then the normal standard of living would not be met. So, the consideration is the extent and degree of any supplementary payment – what is the impact on the normal standard of living of the individual, and as David says – if the financial support was withdrawn, would the person be able to survive. So, not just that regular / supplementary payments gets you there, but the impact that would have if they were withdrawn, factoring in the particular normal standard of living of the individual.
It is also prudent, in my opinion, that any argument for dependence is well documented, with the evidence showing the level and extent of the support and the impact on the individual’s normal standard of living.
Dear Mr Busoli, please provide legal case references for your claims.
You state the ATO test but how has that been interpreted by the courts ?
Court cases rely on specific facts peculiar to each case. My comments apply to situations where financial dependency is assumed simply due to the provision of financial support and an agreement. There are numerous PBRs which support my position. PBR 18688 – enjoying a reasonable standard of living cannot be taken into account and are irrelevant. PBR 64085 – paying for social outings, medication, pocket money, chocolate, music CDs and ‘costs for football’ will not count. PBR 40376 – amounts spent on luxury items such as entertainment, rather than the child’s day to day living expenses. ‘not so much maintaining the child’s standard of living, but rather improving it, hoping to give the child the best chance of a happy and successful life…’
Most probably don’t get to the courts, but try Malek v FC of T 1999 FCA 525. I agree with David’s comments, for what it’s worth.
I don’t agree. Given the cost of housing, a regular earmarked payment for rent or mortgage interest should do the job. Why should homosexual lovers be treated better for tax purposes than children?
Just wishing for something does not make it so. Please refer to my answer to “Court cases please” above. Also the law regards same sex partners as spouses which automatically makes them tax dependents.