Escaping the 17% Super Death Benefits Tax for Adult Children
- Master Admin
- Mar 3, 2022
- 2 min read
.... and Grandchildren?
We all know that when a member of a superannuation fund - retail, industry or SMSF dies, any taxable component will be taxed in the hands of non-dependants at a rate of 17%. This is a death benefits tax and a huge sting in the tail for superannuation estate planning, particularly for adult children. But there may be a way out thanks to recent private binding rulings from the Commissioner of Taxation.
If the beneficiary of the deceased member's superannuation death benefit is a "death benefits dependant" for taxation purposes then there is no taxation on the death benefit. A dependant is defined as:
(a) the deceased person’s spouse or former spouse; or
(b) the deceased person’s child, aged less than 18; or
(c) any other person with whom the deceased person had an interdependency relationship under section 302-200 just before he or she died; or
(d) any other person who was a dependant of the deceased person just before he or she died.
The ATO has ruled that Financial Dependency means NO taxation
A beneficiary who is a financial dependant by law is to be treated as a dependant for death benefit taxation purposes.
Financial dependants are those who are financially dependent on the Deceased at the time of the Deceased's death and are reliant on the regular continuous contributions of the Deceased to maintain the standard of living to which they were accustomed.
Quick Example
John and Sally Smith, aged 60 provide a $1,200 per month family allowance to their son, Max's family. This is directed for the living expenses of Max, his spouse Anne and two sons William and Harry. This is under a formal and binding Family Allowance Agreement. The test of whether Max and his family members are dependants is at the time of John or Sally’s death.
SMSF Solution
There are a number of private binding rulings that show the Commissioner deems financial dependency is established where a person provides a better standard of living to another person on a regular and continuing basis. As advisers we are aware that many parents provide for their adult children and the adult child’s family on an ad hoc basis.
Note: it is not just for SMSFs but for all superannuation funds...
The Family Allowance Agreement formalises the relationship between parents and adult children that may substantiate and evidence financial dependency. The Family Allowance Agreement is a monthly or quarterly payment made by a member of a superannuation fund to an adult child and their entire family for the purposes of enhancing their standard of living.
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