How the ATO defines interdependency relationships
By William Truong, Technical Services Manager
Low housing affordability in Australia’s capital cities has led to many adult children living at home with their parents for longer periods. In many cases this extends to children staying at home to take care of their ill parents. Sometimes the converse is true, with an unwell child remaining at home so their parents can look after them. Parents and their adult children in these situations sometimes wish to leave part of their super benefits directly to each other when they die as a tax-free super death benefit. Unfortunately, this is not always possible.
In this article, we explore the definition of an ‘interdependency relationship’. We specifically focus on answering the question as to whether children, including adult children, and their parents can have an interdependent relationship and can therefore receive a tax-free super death benefit directly from the deceased’s super fund. Those in an interdependency relationship may receive death benefits tax-free via the estate, but if there is no interdependency relationship they cannot. It’s also important to remember that death benefits paid via the estate can bring its own complications, such as the non-existence of a valid Will or the Will being contested.
The following section of this article explores some of the common definitions in relation to interdependency relationships:
Who can be defined as a death benefit dependant?
The Superannuation Industry (Supervision) Act 1993 (SIS) legislation determines who can receive a superannuation death benefit. For this purpose, the definition of ‘dependant’ is:
‘…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.’
A SIS dependant also includes someone who is a dependant within the ordinary meaning of that term, such as a person who depends on the member financially, for example a ‘financial dependant’. If a person is not a SIS dependant, the only way they can receive a member’s death benefits is via the deceased member’s estate.
Who can receive a tax-free super death benefit?
Dependants are able to receive tax-free lump sum super death benefits and are defined under section 302-195(1) of the Income Tax Assessment Act 1997(ITAA97) as:
- the deceased person’s spouse or former spouse, or
- the deceased person’s child, aged less than 18, or
- any other person with whom the deceased person had an interdependency relationship under section 302-200 just before he or she died, or
- any other person who was a dependant of the deceased person just before he or she died.
The importance of relying on the existence of an interdependency relationship is heightened in certain situations, due to the differences between SIS legislation and ITAA97 definitions of dependency. The following definitions are some of the definitions, but it is not exhaustive as there are other situations where an interdependency relationship could exist:
- While super law recognises adult children as a dependant, the tax definition does not recognise children age 18 and over. This means that while adult children may receive super death benefits directly from a super fund, it won’t always be tax-free in their hands, as is the case with children who are under 18. Alternatively, an adult child who is assessed as a financial dependant or who is in an interdependent relationship with their parent may receive a tax-free super death benefit directly from the super fund.
- While a child is necessarily a dependant (for the purposes of the SIS Act) of their parent, a parent is not necessarily a SIS dependant of their child. A parent who can qualify because of an interdependency relationship, may also be able to receive a tax-free super death benefit directly from a super fund.
- SIS rules impose restrictions on which super death benefits can be received. As a general rule, only dependants, including those in interdependent relationships, can receive superannuation death benefits in pension form and sometimes adult children can only receive such benefits in limited circumstances.
- Difficulty for the beneficiary relying on assessment as having financial dependency on the deceased member.
What is the definition of an interdependency relationship?
Under section 302-200, two people will have an interdependency relationship if:
- they have a close personal relationship, and
- they live together, and
- 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.
This final requirement is further qualified in the relevant regulations to specify that the support and care provided must be of the type and quality normally provided in a close personal relationship rather than by a mere friend or flatmate. This means significant care is provided to the other person when they are unwell physically or mentally.
Where there is a close personal relationship, but other factors are not satisfied because either or both of them suffer from a physical, intellectual or psychiatric disability, it is still possible for an interdependency relationship to exist. An interdependency relationship may also exist where two people are temporarily living apart, for example when one party is overseas or in a correctional facility.
To assist with determining whether there is an interdependency relationship, Regulation 302-200.01 of the Income Tax Assessment Regulations 1997 (ITAR97) provides further matters that should be taken into account when determining whether two people are in an interdependency relationship.
The ‘further matters’ which should be taken into account are:
- All of the circumstances of the relationship between the persons, including (where relevant):
- the duration of the relationship, and
- whether or not a sexual relationship exists, and
- the ownership, use and acquisition of property, and
- the degree of mutual commitment to a shared life, and
- the care and support of children, and
- the reputation and public aspects of the relationship, and
- the degree of emotional support, and
- the extent to which the relationship is one of mere convenience, and
- any evidence suggesting that the parties intend the relationship to be permanent, and
- The existence of a statutory declaration signed by one of the persons to the effect that the person is, or (in the case of a statutory declaration made after the end of the relationship) was, in an interdependency relationship with the other person.
Please note, that for parent and child relationships not all of these matters identified in the Regulations would be relevant in every case. This list is a guide rather than a definitive set of required circumstances.
There are also some prescribed circumstances where an interdependency relationship is deemed not to exist, for example, when care is provided as part of an employment relationship or as part of a contract to provide services.
Importantly, where an interdependency relationship is established, both individuals are ‘dependants’ of each other. The same does not apply to financial dependence because only one party is a ‘dependant’ of the other.
Can a parent and their children be in an interdependency relationship?
The Explanatory Statement (ES) Select Legislative Instrument 2005 No.261 to the Income Tax Amendment Regulations 2005 (No. 7) made the point, that generally, it is not expected that children will be in an interdependency relationship with their parents because there would not be a mutual commitment to a shared life between the two.
In particular, the ES noted that while a normal familial relationship which exists between parent and child would be expected to be close, it would also be expected to change over time as the child moves out of home and obtains independence.
While it appears harder to demonstrate an interdependency relationship between family members than between unrelated individuals because there is a level of closeness, care and support assumed whenever a family relationship exists. This does not rule out the possibility of an interdependency relationship between parent and child, especially where unusual and exceptional circumstances exist. This needs to be determined on a case-by-case basis, so it’s important to include all the relevant facts to support your client’s case.
Can the Australian Taxation Office provide guidance?
Yes, the Australian Taxation Office (ATO) provides private binding rulings and interpretative decisions which provide guidance. We provide examples of these rulings and decisions in the following section to help you better understand how it’s possible to have an interdependency relationship recognised.
Following is an example of a deceased parent and their adult child where the ATO deemed an interdependency relationship existed.
In private binding ruling (PBR) 1051185592493, a deceased parent and their adult child were found to be in an interdependency relationship. The ATO decided that a close personal relationship was found to have existed, domestic support and personal care was found to have been provided, despite the adult and child no longer living together at the time of death.
Circumstances and background:
- The deceased suffered from two diseases, the ongoing and progressive effects of which restricted their ability to perform everyday physical tasks and, as their health declined, they required ongoing care and support.
- The beneficiary suffered from multiple medical conditions, the ongoing effects of these illnesses meant that the beneficiary required ongoing emotional support.
- The beneficiary cared for the deceased following the death of the deceased's spouse, until the deceased's death.
- The deceased lived with the beneficiary, with brief periods of respite care, until the deceased’s complex care needs required them to move into an aged-care facility.
It was found that the beneficiary provided the deceased with ongoing financial support and domestic support and personal care, even after the deceased moved into an aged care facility. It was also found that a close personal relationship existed because the relationship between the beneficiary and the deceased was over and above that of a normal family relationship, due to:
- The beneficiary providing care to the deceased over a significant period of time.
- The beneficiary and the deceased lived together until the beneficiary could no longer provide the care that the deceased required.
- While the parties lived together, they provided each other with ongoing financial, domestic and emotional support.
- After the deceased moved to an aged care facility, the beneficiary continued to provide financial, domestic and emotional support to the deceased.
- The parties' behaviour indicates a mutual intention that their close familial relationship was permanent; the deceased moved into the aged care facility only because the beneficiary was no longer physically able to care for them.
- The beneficiary's ongoing commitment to provide extensive emotional and domestic support and personal care to the deceased despite living separately at times, indicates that their relationship was not one of mere convenience; and at the time of the death, they did not live together. However, in this case, they did not live together because the deceased suffered from a physical and mental disability. Consequently, section 302-200(1) of the ITAA 1997 was satisfied.
In contrast to this example, in PBR 1051193976261, the ATO deemed no interdependency relationship to exist between a deceased parent and their adult child.
Circumstances and background:
- The deceased suffered from various illnesses, the ongoing and progressive effects of which restricted the deceased's ability to perform everyday tasks.
- The deceased did not reside with the beneficiary. Prior to moving into an aged-care facility, the deceased resided in their own home. As the deceased resided in close proximity to the beneficiary, the beneficiary visited the deceased daily.
- The beneficiary provided the deceased with ongoing financial and domestic support and personal care, including informal financial support, assisting with routine domestic tasks such as cooking meals, laundry and shopping, contacting the deceased's medical practitioners and regularly checking on the welfare of the deceased.
In this case, the beneficiary was an independent adult child and did not cohabitate with the deceased. There was nothing to indicate a level of commitment to a shared life or a level of care above what would be normal or expected of an adult child that lives nearby their ill parent. Consequently, it was not considered that a close personal relationship existed between the beneficiary and the deceased.
Even if it had been argued that the beneficiary and the deceased did, in fact, have a close personal relationship the ATO stated they would not have an interdependency relationship. The ATO decided that just before the deceased died, they were living in an aged care facility and neither party provided financial support to the other, nor did the beneficiary provide domestic support and personal care to the deceased.
The following section is an example of a deceased adult child with a parent beneficiary where the ATO deemed an interdependency relationship did exist.
Generally, unless the child suffers from a serious injury or illness, a parent would not be in an interdependency relationship with their adult child. However, in PBR 1051346759852, a parent was found to be in an interdependency relationship with their deceased child despite not living together at the time of death:
Circumstances and background:
- On or around late 2012, the deceased suffered from a disorder.
- Due to the deceased’s declining health, they were largely unable to work. The parent supported the deceased financially by allowing them to live rent-free in their home and by paying for meals and utilities. In earlier periods when the deceased had lived away from the parent’s home, the parent had aided them financially by paying their rent and bills, paying for clothing and groceries, and providing cash for expenses.
- The deceased spent increasing periods of time at the parent’s home due to their deteriorating health. They also stayed for some intermittent periods with their siblings for practical, financial and moral support.
- On or around late 2015, the deceased was diagnosed with a terminal illness. At this time, the deceased was living with the parent at the parent’s home.
- The deceased’s health continued to deteriorate. As the parent was suffering from their own illnesses, they were physically unable to provide all the increased level of care and assistance the deceased required.
On or around early 2016, the deceased moved into their sibling’s home where family provided them with day-to-day personal care such as toileting, showering and dressing. While they lived at the parent’s home, the parent provided domestic support to the deceased in the form of attending to the household cleaning, preparing food, washing their clothing, and helping them attend medical appointments. The parent also assisted the deceased by providing emotional support, including palliative care in the lead-up to their death in early 2016.
In relation to a close personal relationship the ATO found it was clear that a close family relationship existed prior to, and at the time of the deceased's death. The parent lived with the deceased until 2016, and the deceased temporarily moved in and out of the parent’s home in 2012 due to their worsening health. It was not known when, or if, the deceased would be well enough to live independently.
The ATO decided the parent provided a significant degree of support to the deceased throughout the course of their illness, regardless of whether they were living together or separately. It was clear that a loving and supportive relationship existed between the parent and the deceased. It was considered that the relationship between them is of the type envisioned by the legislation.
In relation to co-habitation, the deceased was considered to have been living with the parent at their home even though they relocated to their sibling’s home just prior to their death. The reason for the relocation was due to their deteriorating heath, compounded by the parent’s own illnesses which meant the parent could not provide their child with the care and assistance required just prior to their death.
It was clear that the parent provided the deceased with financial support during the last years of the deceased’s life, and from the facts presented, the parent clearly provided domestic support (defined as significant assistance, including helping them with medical appointments, washing their clothing, attending to household cleaning, preparing food, and other aspects of physical care). It was also apparent that the parent provided the deceased with significant emotional support during the course of their illness.
The ATO, in ATO ID 2014/22, also determined an interdependency relationship existed when an adult child was caring for a terminally ill parent.
In this decision it was clarified that an adult child and their parent also satisfied an interdependency relationship as they had a close relationship, they lived together, the parent provided financial support for the adult child, and the adult child was providing significant care for the parent.
Defining interdependency is not always straightforward and all aspects of their living arrangements need to be taken into account.
It is important to remember that interdependency is determined at the time of death which means someone may satisfy the tests today but may not later if their situation changes. Having a good understanding of the tests can help you when navigating the process. Please keep in mind that because some of the tests are subjective it can create some uncertainty, so it may be necessary to ask the ATO to provide guidance to confirm an interdependency relationship exists.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.