Saving Tax on Death Benefits

By having the Family Allowance Agreement, it formalises the relationship between the parties, which may substantiate the matter of financial dependency.

Problem

Where a member of a superannuation fund - retail, industry or SMSF dies, any taxable component will be taxed in the hands of non-dependants at a rate of 17%. This is a death tax and not liked by clients.

Background

If the beneficiary of the deceased member's superannuation death benefit is a 'death benefits dependant' for taxation purposes, then there is no taxation on the death benefit - section 302-60 of the ITAA 97. 

302-195 Meaning of Death Benefits Dependant

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.

The ATO has ruled that Financial Dependency is included with NO taxation

Sub-section (4) enables a person who is a financial dependant at law to be treated as a financial dependant.  In the Commissioner's private binding ruling - 1051231612657 ruled that there was NO death benefits tax in the following case:

The Beneficiaries did not reside with the Deceased. Rather, the Beneficiaries lived with their parent. The Beneficiaries did not receive any financial support from their parent.

The Deceased provided the Beneficiaries with ongoing financial support including the following:
● regular payment of tertiary education course fees for the First Beneficiary;
● provision of supplementary income to the Second Beneficiary for living expenses; and
● provision of supplementary income to the Third Beneficiary for living expenses.

The facts indicate that the Beneficiaries were financially dependent on the Deceased at the time of the Deceased's death. The Beneficiaries were reliant on the regular continuous contributions of the Deceased to maintain the standard of living to which they were accustomed. Consequently, the Beneficiaries are death benefits dependants of the Deceased for the purposes of section 302-195 of the ITAA 1997.

Adviser Solution

As the Commissioner has ruled, financial dependency is established under the ITAA 1997 where a person provides a better standard of living to another person on a regular and continuing basis. As advisers are aware many parents provide for their adult children and the adult child’s family on an ad hoc basis. 

The Family Allowance Agreement formalises the relationship between the parties which may substantiate and evidence the matter of financial dependency. The family allowance agreement is a monthly or quarterly payment made by a member of a superannuation fund -it applies to retail, industry and SMSF, to a specific person or better still a family so that the entire family has some of their living expenses met. 

Quick Example

John and Sally Smith, aged 60, provide a $700 per month family allowance to their son, Max's family.  This is directed for living expenses of Max, his spouse Anne and two sons William and Harry.  This is under a formal and binding Family Allowance Agreement.  

How to create the Family Allowance Strategy

If the client is in a retail or industry super fund:

1. Identify who is to be a financial dependant including families
2. Ensure the client has a binding death benefit nomination directing the member's death benefits to family members identified
3. Complete a family allowance agreement (which can cover a couple and any child or other family, such as brothers or sisters) by logging into your account and going to the Document Wizard and heading to Templates. You will find it in the Estate Planning / SMSF Wills and Other Documents folder (or simply by searching the document in the top right corner) 'Family Allowance Agreement.' 

If the client has a SMSF:

1. Upgrade the client deed to a current strategic SMSF deed enabling family allowances, which can be found in Templates again under the SMSF Establish, Maintain & Upgrade and Standard SMSF and Documentation and Minutes folder or simply search 'SMSF Deed of Variation.' 
2. Complete a family allowance agreement (which can cover a couple and any child or other family, such as brothers or sisters) as per above.
3. Provide a Dependancy Declaration by the member of the fund detailing each financial dependant and why - 'the provision of on-going living expenses'.  This is completed per member and you can include multi-dependants

Recommended Pricing

This will depend on tax saved.  If the client has $1M of taxable component in their superannuation fund and is leaving it to their two adult children and their respective families, an effective complying Family Allowance agreement leading to the adult children and their families being 'death benefits dependant'" will result in tax savings of $170,000.  

A fee of $7,500 or 4.4% of tax saved is recommended.  

Meaning of Dependant PBR