• They won’t move out of home!
  • Are they exempt from superannuation death tax?

Given the rising cost of housing, adult children are living with their parents for longer and parents have more in superannuation than ever before.

We are witnessing more adult children move out of home at a younger age (typically in their early twenties) and then return (in their late twenties) as they try to save for a deposit on their home or pay off university HECS debts. These children are well known in our society as “Boomerang Children”.

So what happens when parents die, do such “Boomerang Children” get an important exemption from superannuation death tax?

The answer is probably yes. Instead of paying at least 15% income tax on the taxable component of their parents’ superannuation death benefits, “boomerang children” might be able to receive death benefits income tax free.

This will totally rely on if a “boomerang child” is in an “interdependency relationship” with their parent as at death.

Although the laws on interdependency relationships have existed for 11 years now, we have only just received the first Administrative Appeals Tribunal consideration of them in the income tax context – TBCL and Commissioner of Taxation [2016] AATA 264.

 

Facts of TBCL

The parents’ son was aged 24. He was their only child and lived with his parents consistently until 2007 when he moved to Melbourne to study a pilot’s course at Swinburne University.

He returned to live with his parents in 2009 and he continued to live with his parents until his death.

His parents paid $40,000 towards the total cost of the deceased’s course, accommodation of $250 per week and living expenses of $1,000 per month while he lived in Melbourne. Further, the parents bought the son various items and paid for expenses such as a computer, TV, pilot’s gear and a motor vehicle.

In 2013, the son was working as a pilot and tragically died in a motor vehicle accident. The son also paid various expenses for his parents.

The parents and son shared their living expenses (such as $350 per week for food, $850 for electricity per quarter, council rates of $3,000 per year and water charges of $1,600 per year) equally. The parents provided the son with domestic support in the form of preparing meals, doing laundry, cleaning and a number of other tasks. In turn, the son helped his parents by performing tasks around the house.

In relation to personal care, the parents and the son provided each other with love, care, affection and psychological assistance.

At the time of the son’s death, the parents had just begun to convert their garage into a private living space for their son. Approximately $10,000 was spent on the conversion prior to their son’s death and at least a further $7,000 was spent after the son’s death as work had already commenced and needed to be completed.

 

Superannuation Death Benefit

TAL Superannuation and Insurance fund paid a benefit of $500,000 to the son’s Estate in May 2014.

In August 2014, the parents made an application for a private ruling that the sum was not assessable because they were each a “death benefits dependant” of the son (naturally, a “death benefit dependant” includes someone in an interdependency relationship.)

In November 2014 the Commissioner issued a Notice of Private Ruling to the parents containing a ruling that they were not “death benefit dependants”.

The parents asked the administrative appeals tribunal to review this decision.

Two persons (whether or not related by family) have an interdependency relationship under this section if:

  • They have a close personal relationship
  • They live together
  • One of each of them provides the other with financial support
  • One of each of them provides the other with domestic support and personal care

 

What the AAT Found

Based on the facts as stated above, the AAT found that there was not enough evidence to establish an interdependency relationship.

AAT remitted the matter back to the Commissioner of Taxation to request the parents to make another application for private ruling, presumably with more facts.

 

Implications

Although not expressly stated, we suspect where an adult child only has a “regular” relationship with their adult parents and they only live together with reasons of commercial convenience, then an interdependency relationship will not exist.

However, based on the ATO’s approach in ATO ID 2014/22, we suspect that an interdependency relationship may well exist either if a terminally ill parent has moved into an adult child’s home, or if an adult child has moved back into their terminally ill parent’s home so that the adult can care for the parent.

This is a very interesting article and the results of the AATA is something we all should be aware of.

 

Note: This article was provided to us by Bryce Figot, a partner in SMSF specialist Law Firm
DBA Lawyers. He regularly provides excellent articles to financial advisers to be aware of so we can advise our clients in these matters. This article also recently appeared in Professional Planner magazine.

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David Watkins, has been providing advice to clients since 1987. He is a Certified Financial Planner, a member of the Financial Planning Association (FPA), and Superannuation Professionals Association of Australia (SPAA).Google Plus

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