Strategy, Tax

Allowance a more solid link to dependency

SMSF members should arrange to pay allowances rather than specific expenses to better establish a dependency relationship with future death benefit recipients, a strategic expert for the sector has said.

I Love SMSF founder Grant Abbott noted a common practice in the past had been for SMSF members to pay for specific expenses such as school fees for grandchildren to establish these individuals as dependants, allowing them to qualify for preferential tax treatment if they became death benefit recipients.

However, Abbott pointed out paying an allowance to the grandchildren’s guardian, that is, their parents, was a more effective way to achieve the optimal tax result.

“The problem with the school fees is that all the case law stipulates a financial dependant has to have a reliance on payments from the SMSF member to satisfy daily living expenses or quality-of-lifestyle costs,” he said.

“So if the members pay an allowance to the grandchildren rather than the school fees that would be a better indication of the existence of dependants [as defined by the Income Tax Assessment Act].

He noted in the event of paying just the school fees on the grandchildren’s behalf, the commissioner of taxation would argue the expenses belong to the SMSF member’s children as opposed to their grandchildren.

“But if you pay an allowance to the grandchildren into their bank account, then the parent being the guardian can utilise that to pay the school fees, living expenses and holidays,” he said.

“That’s going to get you a lot closer to establishing that there are financial dependants.”

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