Can an adult child be a tax dependant — ATO ID 2014/22 says yes!

ATO Interpretive Decision 2014/22 addresses the question: ‘Can an adult child be a ‘death benefits dependant’ of his or her deceased parent for the purposes of section 302-195 of the Income Tax Assessment Act 1997 (Cth)?’

The adult child was considered to be a death benefits dependant for the purposes of this section.

Tax definition

Section 302-195 provides:

1. A death benefits dependant, of a person who has died, is:
   1. the deceased person’s *spouse or former spouse; or
   2. the deceased person’s *child, aged less than 18; or
   3. any other person with whom the deceased person had an interdependency relationship under section 302-200 just before he or she died; or
   4. any other person who was a dependant of the deceased person just before he or she died. [Emphasis added.]

As you can see from the definition above, an adult child is not covered by paragraphs (a) or (b) of s 302-195(1). Indeed, paragraph (b) only expressly recognises a child aged less than 18 years as a death benefits dependant. Therefore, it is usually understood that an adult child does not qualify as a death benefits dependant for tax purposes unless they fall within paragraphs (c) and/or (d) above.

The ATO confirmed in ATO ID 2014/22 that the definition of death benefits dependant in s 302-195(1)(d) does not stipulate the nature or degree of dependency, but it is generally accepted that this refers to financial dependence and it is a condition that must exist in relation to the taxpayer at the time of the deceased’s death.

SIS definition

Note that we are focusing on the tax definition here as the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) definition of dependant is:

dependant, in relation to a person, includes the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship. [Emphasis added.]

Thus, an adult child is always a dependant for SISA purposes who can be paid a superannuation lump sum death benefit directly from a deceased parent’s superannuation fund. However, an adult child does not obtain a tax free death benefit unless he or she is a dependant for tax purposes (ie, a death benefits dependant under s 302-195).

The facts in ATO ID 2014/22

Returning now to the facts of ATO ID 2014/22, the adult child had given up work to care for the terminally ill parent and received no financial support from anyone, other than the parent, during that time.

The ATO confirmed by way of a note at the end of ATO ID 2014/22 (after confirming the main point that the adult child was financially dependent on the parent) that the child and parent also satisfied the interdependency relationship.

What is an interdependency relationship?

Under s 302-200(1) two persons have an ’interdependency relationship’ if:

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

Regulation 302-200.01 of the Income Tax Assessment Regulations 1997 (Cth) requires that certain further matters be taken into account in determining whether two persons had an interdependency relationship before one of them died. Those circumstances include:

1. the duration of the relationship;
2. whether or not a sexual relationship exists;
3. the ownership, use and acquisition of property; and
4. the degree of mutual commitment to a shared life; …

ATO ID 2014/22 — interdependency relationship

The ATO confirmed in ATO ID 2014/22 that the adult child and parent had a close relationship; they lived together; the parent provided financial support for the child; and the child was providing significant care for the parent. Thus, the adult child satisfied the interdependency relationship limb of the definition of ‘death benefits dependant’. In particular, the requirements under s 302-195(1)(c) and as described in paragraphs 302-200(1)(a),(b),(c) and (d) above were satisfied.

Thus, the adult child could be paid the deceased parent’s lump sum superannuation death benefit and since the adult child was a ‘death benefits dependant’, the payment was entirely tax free.

The ATO’s finding that the adult child was financially dependent on the parent at the time of the parent’s death is not surprising. However, it is interesting to note that the explanatory statement to the legislative instrument that introduced the additional factors in an ‘interdependency relationship’ under both the SISA and tax regulations (Select Legislative Instrument 2005 No.262) stated that:

Each of the matters listed is to be given the appropriate weighting under the circumstances. The degree to which any matter is met or is present or not, as the case may be, does not necessarily of its own accord, confirm or preclude the existence of an interdependency relationship.

Generally speaking, it is not expected that children will be in an interdependency relationship with their parents. [Emphasis added.]

This is believed to be why there has been some uncertainty that the ATO may not accept an interdependency relationship in respect of an adult child and his or her parent in prior years. However, the above extract from the explanatory statement was followed by an example where a 23 year old child named Daniel had died with $30,000 in super and was given in the context that this child’s parents and a younger brother would not generally be in an interdependency relationship. The facts in ATO ID 2014/22 can be distinguished from Daniel’s example in the explanatory statement as in the adult child in ATO ID 2014/22 was, among other things, providing significant care to the parent.

Conclusions — the strategic news

Thus, this ATO ID is an extremely important clarification as it confirms that the ATO is now comfortable accepting an ‘interdependency relationship’ being satisfied in respect of an adult child and a parent. Moreover, often this criteria is generally more readily satisfied, as compared to financial dependency, as an increasing number of adult children are spending more time looking after and caring for their elderly or sick parents who have a limited time to live.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.