The ability to establish an existing interdependency relationship to qualify for concessional tax treatment of SMSF death benefits is complicated and needs to be approached in a specific manner, according to a superannuation commentator.
In particular, the circumstances of an adult child and parent relationship will not automatically qualify for any special tax treatment.
“That’s probably different to what a lot of us think. So you take a typical adult child, whether they be at university, or just started full-time work, living with mum and/or dad, sharing expenses … no tax concessions by the look of it will be applicable,” Super Central consultant Tony Negline said.
“So the way you apply for these concessions and the way you think about these concessions is very important.”
Specifically, Negline pointed out individuals had to satisfy some but not all of four stipulated elements before the Australian Taxation Office (ATO) would consider granting special tax treatment.
Under the existing legislation these are proof there is a close personal relationship, the two parties live together, one or each provides the other with financial support, and one or each provides the other with domestic support personal care.
To illustrate the point, Negline referred to ATO private binding ruling 1012336401340, which was unfavourable.
In this case, the adult child died and the divorced parent received a death benefit payment and wanted concessional tax treatment.
It was established the child and the parent lived on a farm where the child preformed household chores and shared the expenses equally. Both parties provided emotional support to each other – the child during the parent’s divorce and the parent during a time of unemployment and depression for the child.
The child also lived with the other parent three to five days a week due to the proximity of their workplace and gave the other parent emotional and financial support due to ill health.
“This is how the ATO assessed this case. They said close personal relationship, not today. The relationship between the parents and the child was expected to change over time. The child worked on the farm – big deal. It was deemed to be a typical child-parent relationship,” he said.
“Cohabitation? No. The ATO ruled the child lived with the parent out of necessity.
“Financial support? No. The ATO found sharing expenses was nothing special.
“Domestic support? No. The ATO deemed it was no more than what a normal child would be expected to do.”