I read your article last week. I have adult children living with me at home. Someone told me at the bar the other week that my children aren’t really dependents. Is this right? Are there some restrictions on dependency? Can I nominate them as my dependents to get my super tax free?
Platinum Member, Applecross, WA
Unfortunately it’s not as easy as you think. While your adult children physically drain your resources – they are not necessarily dependents to get your super tax free.
A “dependent” under both the SIS Act and the ITAA 97 includes:
- financial dependents
- your spouse
- your children under 18
- anyone that you are in an interdependent relationship with.
The distinction is that the SIS Act (and fund rules) determines who receives your superannuation death benefits. The Tax Acts determine the tax payable on that amount.
Does this mean that a financial dependent isn’t a dependent under the SIS Act?
Not necessarily. Neither of the definitions within the Acts is exhaustive. Case Law and the general meaning of the term “dependent” are also relevant to Super and Tax.
In practice it would be a rare situation where someone would be considered a dependent according to one Act and not the other. However, strange things do happen in the mind of the ATO.
The relationship depends on the surrounding facts and not the title of it.
Take the example of a 24 year old adult child who still lives at home with a parent, does a few chores and pays nominal weekly board:
- Is the adult child dependent on the parent?
- Is the parent dependent on the adult child?
- Are the parent and adult child in an interdependent relationship?
- Is the relationship of non-dependency?
Many practitioners assume that adult children cannot be dependent on a parent under either the SIS Act or the ITAA 1997. However, it is the facts of the situation which determines dependency. Each of the 4 scenarios is potentially possible. Each one has different tax consequences.
Consult your accountant or adviser. They can work out the numbers to see where a dependent relationship exists. If your accountant requires guidance on the legal issues, Civic Legal is there to help. Give me a call and I’ll arrange one of our team of Specialist Tax Lawyers to work with you.
What does this mean for Binding Death Benefit Nominations?
Before making a Binding Death Benefit Nomination you need to consider:
- Who are your dependents now?
- Who are your dependents likely to be in the future? And
- Are any of those people likely to be dependents now and in the future?
The Trustee may choose to ignore the Member’s intention. If that happens the Trustee pays benefits to either the Member’s estate or to someone that the Trustee, in their discretion, deems to be dependent.
A Trustee that pays the estate can create huge problems for any non-dependent, namely:
- The non-dependent may not have been provided for in the Member’s Will. Depending on the relationship, the non-dependent may not be able to challenge the Will.
- Where Letters of Administration are granted, the non-dependent will not receive anything if they are not entitled to receive a share under the relevant legislation.
- Even if the non-dependent does receive the superannuation payment through the Will or Letters of Administration, they may pay non-dependency tax on the lump sum payout at either 16.5% or 31.5%.
Source: LawCentral Newsletter 2/5/11