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ATO ruling on interdependency relationships when dealing with SMSF death benefits

In this article, I would like to reflect on the outcomes of a recent ATO private binding ruling (1051399443350). The question put to the ATO was whether the beneficiaries were death benefit dependants of the deceased as defined in section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997). More specifically, the analysis was whether the beneficiaries were in an interdependency relationship with the deceased (who we are assuming here was a male) as defined under section 302-200(1) of the ITAA 1997. A quick snapshot of the facts of the case are as follows.

The beneficiaries were parents of the deceased who passed away in his own apartment in 2015. Leading up to his death, the parents accompanied the deceased to doctors’ appointments, looked after his medication and provided emotional support (as the deceased did not have a spouse or children), as well as domestic support and personal care in the form of cleaning, washing, meal preparation, medical planning and management. The beneficiaries also provided financial support in the form of regular contributions towards living costs.

A statutory declaration was provided disclosing the deceased and beneficiaries were in an interdependency relationship.

At the time of death the deceased was at his apartment. The deceased spent most of his time at the apartment and it was his usual listed address.

Before I reveal the ATO’s decision, let’s have a quick look at what is defined as an interdependency relationship under section 302-200(1) of the ITAA 1997. An interdependency relationship exists between two people if:

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

Therefore, whether there is an interdependency relationship is an objective assessment based on the above-mentioned criteria, as well as further guidance in the regulations.

In this instance, the ATO confirmed a ‘close personal relationship’ existed between the deceased and beneficiaries as the level of care and support was above that of a normal family relationship. However, when reading further, there was a question mark over this point, due to the fact  he lived independently to his parents for most of the time and only stayed occasionally at the family home at a later time when his health declined. It was questioned as to whether there was a mutual commitment to a shared life, or rather a decision made out of convenience.

The ATO concluded the beneficiaries had provided a sufficient level of financial, domestic and personal care so as to satisfy the relevant subsections of the definition. The sticking point then came as to whether subsection 302-200(1)(b) had been satisfied, that is, ‘they live together’. As previously mentioned, the deceased died in his apartment and hence at the time of his death was not living together with the beneficiaries. The ATO further went on to state that even though the deceased intended to permanently move back into the family home, he had spent most of the time in his apartment and the apartment was his usual postal address. It was also found the deceased did not satisfy the ‘disability’ exemption under section 302-200(2).

It is important to note the test under section 302-200(1) is all-inclusive. All criteria must be satisfied unless one of the exemptions specifically apply.

Therefore, based on the fact the ATO believed the deceased and beneficiaries did not ‘live together’, there was not an interdependency relationship between them at the time of the deceased passing. This was the position even though all of the other requirements of the definition were arguably satisfied.

Interdependency comes in many shapes and forms and is different from one family or situation to another. What makes it difficult is then trying to ‘box it’ into an objective set of criteria and then overlaying it with the heightened level of emotions and stress the death of a family member brings. Therefore, it is key that, as SMSF specialist advisers, we are proactive with our SMSF clients on what it means to be in an interdependency relationship. This case illustrates that something as simple as the deceased wanting to maintain his living regularity, even though he required a substantial level of financial, domestic, emotional care, was enough for the beneficiaries to miss out on the tax-free status of the death benefits.

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