Under Section 62 of the Superannuation Industry Supervision Act 1993, trustees are permitted to distribute death benefits to either dependants or the legal personal representative of the deceased. Here, dependants are defined (Section 10(1)) to include spouses, children, and anyone with whom the deceased had an interdependency relationship.

If a beneficiary is considered a “death benefits dependant” under Section 302-60 of the Income Tax Assessment Act 1997 (ITAA 97), they won’t incur any death benefits tax. The Act defines a dependant in Section 302-195 to include:

• Spouses or former spouses
  
• Children under 18
  
• Individuals in an interdependency relationship with the deceased
  
• Financial dependants

Section 302-195(1)(d) acknowledges financial dependants as legitimate death benefits dependants—meaning no tax payable. A landmark private binding ruling (1051231612657) clarified this:

In this case:

• The beneficiaries didn’t live with the deceased; they resided with their parent and received no financial support from them.
  
• The deceased, however, provided consistent financial support, including:
  
  • Regular tertiary education payments for one beneficiary
    
  • Ongoing living expenses for two others
    

This support was considered continuous and necessary for the beneficiaries to maintain their standard of living. The ATO concluded they were financially dependent and thus qualified for tax-free treatment under Section 302-195.

It’s common for parents to provide for adult children and their families, often informally. But formality can be the key to strategic tax planning.

Our recommendation? Consider a Family Allowance Agreement. This agreement formalises a parent's ongoing financial support to adult children and their families, substantiating financial dependency.

This strategy isn’t limited to SMSFs. Whether your client has a retail, industry or SMSF, the Family Allowance Agreement can apply.

John and Sally Smith, both aged 60, provide $1,200 per month to support their son Max, his wife Anne, and their two children William and Harry. The payments are formalised through a Family Allowance Agreement. When John or Sally passes, this agreement can help prove Max and his family are financial dependants, potentially exempting the benefit from the 17% death tax.

1. Identify intended financial dependants, including extended family.
2. Ensure the death benefit nomination directs funds accordingly.
3. Seek specialist advice for a Family Allowance Agreement. 

1. Ensure the fund’s deed to support strategic family allowance planning
2. Seek advice for a Family Allowance Agreement.
3. Seek advice regarding completing a Dependency Declaration, detailing each dependant and the nature of financial support.

Let’s say a client holds $1 million in taxable super. Without planning, their adult children could face $170,000 in tax. But with a properly executed Family Allowance Agreement and supporting documentation, those children and their families may qualify as death benefits dependants—and the $170,000 stays in the family.