Interdependency relationships play a crucial role in determining eligibility for superannuation death benefits. Many parents assume their children will automatically receive these benefits tax-free after death. However, this isn’t the case. Understanding how these benefits are taxed is essential for estate planning, as tax rates can vary from 0 – 30%.
Children under 18 years are automatically dependants and will receive the money tax free. But for adult children (18 or older), it’s much more complex as the ATO has specific criteria for determining whether an adult child qualifies as a “death benefits dependant” of their deceased parent.
Under the Income Tax Assessment Act 1997 (“Tax Act”), adult children and parents are typically not classified as “dependants” unless they are financially dependent or in an interdependency relationship.
Under Tax Law, key factors in assessing an interdependency relationship include:
- A close personal relationship;
- Living under the same roof; and
- One or both parties providing financial, domestic support and personal care.
In our previous article, we referenced earlier private ATO rulings where in a number of cases, the definition of an “interdependent relationship” was satisfied. However, all but 1 private ATO rulings since January 2024 (to date) failed to demonstrate that a ‘close relationship’ existed between the parent and adult child – a key factor considered in establishing interdependence.
In a publishing of private rulings (PBR) from April 2024, a parent was considered independent with their deceased adult child who suffered from a range of medical conditions and substance abuse. These issues left them with physical and intellectual limitations. Prior to their death, the child was reliant on their parent for personal and domestic care, comprising menial day-to-day and financial support including general living and medical expenses, while paying minimal rent. Furthermore, there were several documentations evidencing the nature of their relationship, including a letter from the deceased’s daughter and their doctor, confirming that the two had lived together for some years before the deceased passed.
In the other examples of PBR’s we reviewed since 2024, where adult children were claiming an interdependent relationship with their deceased parent, all failed. There were a variety of reasons but contributing factors included not living together for long period and unable to show a mutual commitment to a shared life, and in other cases no documentary evidence of financial support being provided.
What can we take away from these decisions?
- More than “just family” – It is not easy for a child to establish an interdependent relationship with a deceased parent. Clear evidence of living together, and something beyond a “typical” family relationship is required.
- Documentation is essential – Keep thorough records of financial support, including regular bank transfers, receipts for living expenses (rent, groceries, utilities), and other evidence showing both frequency and purpose of financial assistance.
- If in doubt, a private ruling application might be appropriate. This is particularly the case for executors of an estate, because they bear the liability when the death benefits are paid via the estate.
How we can help
The Wills, Estate Planning and Structuring team at Moores is one of the largest in Australia and can assist you in preparing your Will and Enduring Powers of Attorney to ensure that your assets are not only looked after in the event of your death, but in the event of your incapacity to make decisions.
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