Adult children as tax free dependants

With an increasing number of elderly parents living with their adult children is it possible that an adult child of a deceased parent could, on the death of the parent, receive their parent’s superannuation tax free? 

For an adult child to receive their deceased parent’s superannuation benefit, the adult child must either be a “financial dependent” of the parent or have an interdependency relationship with their parent at the time of death of the parent.

This article will consider whether an adult child can have an interdependency relationship with their parent.  It is presumed that the adult child is legally and financially independent of the parent.

Interdependency relationship  -  a poor choice of a name

The name “interdependency relationship” is simply the term used in the statutory definition.  Unfortunately, the term suggests that each individual in the relationship is in some way dependant on the other with the consequence that the understanding of the elements of the definition are distorted by viewing each requirement through the lens of mutual dependency which is both financial and non-financial in scope.

Elements of the Relationship

For the relationship to exist between two individuals, four elements must be satisfied.

• they must have a close personal relationship;
• they must live together;
• one or each of them provides the other with financial support;
• one or each of them provides the other with domestic support and personal care.

Close personal relationship

This element does not require a sexual or romantic relationship to exist between the two individuals.  A relationship can be close and personal without being sexual or romantic.  There is no requirement that the relationship be marriage-like.  Though a marriage-like relationship will qualify as a close personal relationship.

Living together

This element only requires that the two individuals share the same residence.  This element imports no romantic or sexual requirement.

Financial Support

This element does not require financial dependency of one on the other.  Financial support is less onerous threshold than financial dependency.  Further there is no requirement that each individual must provide the other with financial support.  It is sufficient that only one individual provides financial support to the other.

Domestic support and personal care

This element does not require that each individual must provide the other with domestic support or personal care.  It is sufficient that one individual provides the other with domestic support and personal care.  It would also be sufficient if one individual provides the other domestic support while the other provides the first with personal care.

How to establish each element?

In building a case that an interdependency relationship exists between two individuals, each of the four elements must be satisfied.  This general statement is subject to exceptions.  

As to the “close personal relationship” – this will exist if there is a demonstrated and ongoing commitment to the emotional support and well-being between two individuals.  A shared life will satisfy this requirement.  The absence of a shared life does not negative the existence of a close personal relationship.  If there is no shared life (which would typically be the case between a parent and an adult child), the element could be established by details of the daily or weekly interactions between the parent and the adult child – such as telephone calls, outings, the subject of the conversations between the two.  In the case of a parent and adult child, interactions would have to be above the normal interactions – both in frequency and in the content of the interactions.

As to “living together” – this element will be satisfied if the individuals share the same accommodation and the arrangement is not short term only or for a particular purpose (such as moving in while a house is being built).  If the living arrangement is of indefinite duration and there are elements of a shared life – such as eating together, sharing cleaning and cooking and entertaining together – the element will be satisfied.  The element will not be satisfied if the arrangement is one of pure economic convenience.

As to financial support – this element will be satisfied if either or both of them contribute on a regular basis to the financial support of the other.  For example, each contributes to the running costs of the residence (electricity, council rates, water rates, broadband, repairs, maintenance, food and so on).  This element could be satisfied even if both individuals are financially independent.  The critical issue is the recognition of joint expenses and the sharing of the joint expenses on an indefinite basis.

As to “Domestic Support and Personal Care” – this element will be satisfied if either or both of them provide support as such shopping, house cleaning and laundry and ironing (domestic support) or attend to their mobility needs, medical appointments, dressing and emotional support (personal care).

As with any case, specific instances and documentary evidence are vital.  Under each element, details should be provided of the instances relevant to the element.  For example if there are medical appointments – dates and nature of the appointment, who arranged the appointment and who provided the transport.  If meals are taken together – how often.  If expenses are shared – evidence of payment.  Mere assertions in the absence of specific details will not establish the existence of the relationship.

Who decides whether there is a special relationship?

In the first instance it will be the trustee of the super fund paying the benefit.  Where the super fund is an SMSF, the trustee should provide quite detailed documentary justification of the existence of the relationship.  The trustee should take the approach as if the trustee were submitting a request for a Private Binding Ruling as to whether the adult child and the deceased member were in an interdependency relationship.

The decision of the trustee of an SMSF, however, does not bind the Commissioner of Taxation.  The Commissioner could form his own different view as to whether there was an interdependency relationship.  For this reason, the trustee (and/or the beneficiary) may first seek a Private Binding Ruling from the Commissioner. 

Alternatively, the trustee could pay the death benefit to the beneficiary on the basis that there was no interdependency relationship and allow the beneficiary to lodge their personal tax return on that basis with the beneficiary then lodging an objection to the return on the basis that the death benefit is in fact not taxable on the basis that there was an interdependency relationship. 

There are many Private Binding Rulings which have been published (on an anonymous basis) which have held that an adult child and their parent were in fact in an interdependency relationship.  The common feature of the Binding Rulings which have been favourable to the beneficiary is the detail which has been provided as to each element of the interdependency relationship.

NOTE:  This article was prepared as at March 2024.  The article has not been updated in light of subsequent developments.