Interdependency Relationships: When Can an Adult Child Be a Dependant?
When a parent passes away, determining who can receive their superannuation death benefit can be more complicated than simply identifying their next of kin.
In some circumstances, an adult child who has been providing significant care and support to an ageing parent may be considered to have been in an interdependency relationship with that parent.
This can have important implications for the tax treatment of a superannuation death benefit and how the benefit may be paid.
However, establishing an interdependency relationship between a parent and adult child can be difficult. The relationship must satisfy specific requirements under Australian tax and superannuation law, and the circumstances of each family need to be considered carefully.
What is an interdependency relationship?
An interdependency relationship is defined under section 302-200 of the Income Tax Assessment Act 1997.
Broadly, two people may be considered to have an interdependency relationship where they:
have a close personal relationship;
live together;
provide each other with financial support; and
provide each other with domestic support and personal care.
The legislation also allows certain circumstances to be taken into account where one or both people have a physical, intellectual or psychiatric disability.
Importantly, the requirements are considered together. Meeting one or two of the conditions does not automatically establish an interdependency relationship.
What does this mean for an adult child caring for a parent?
The circumstances of an adult child who has moved in with an ageing parent can be particularly complex.
For example, an adult child may move into their parent's home, provide regular assistance around the house, help with medical appointments and personal care, and contribute financially to the household.
While these circumstances may appear to demonstrate a high level of dependence and support, that does not automatically mean an interdependency relationship exists.
Each of the relevant requirements needs to be considered.
1. Domestic support and personal care
The level of care provided is an important consideration.
Domestic support may include activities such as:
preparing meals;
cleaning and maintaining the home;
doing laundry;
grocery shopping;
paying household bills; and
managing other day-to-day household tasks.
Personal care may involve more direct assistance, such as helping with mobility, dressing, personal hygiene, medication or attending medical appointments.
The nature, extent and regularity of the assistance can be important when assessing whether the support goes beyond what might ordinarily be expected within a family relationship.
Keeping appropriate records of the care provided can also help demonstrate the actual circumstances of the relationship.
2. Financial support
Financial support is another consideration.
This does not necessarily mean that one person must be completely financially dependent on the other. Instead, the circumstances may involve ongoing financial assistance between the parties.
Evidence could include:
bank statements;
regular transfers;
payment of household expenses;
payment of medical or personal expenses; and
records showing how shared living costs were managed.
The overall financial arrangements between the parent and adult child should be considered rather than relying on a single payment or expense.
3. Living together
Living arrangements are also relevant.
Generally, the parent and adult child need to be living together for the relationship to satisfy the relevant requirement. However, simply sharing a property does not necessarily establish an interdependency relationship.
For example, there may be a difference between an adult child moving into the parent's home to provide ongoing care and two family members sharing accommodation simply for convenience or financial reasons.
The reason for the living arrangement and the nature of the household relationship can therefore be important.
4. A close personal relationship
This can be the most challenging requirement in a parent and adult child situation.
The legislation does not provide a simple test for determining whether a relationship is sufficiently close and personal. Instead, the circumstances of the relationship need to be considered as a whole.
Factors that may be relevant can include the length and nature of the relationship, the degree of mutual commitment and support, the level of emotional support, and the extent to which the parties have organised their lives around caring for and supporting each other.
For an adult child caring for an ageing parent, the relationship may involve significant personal commitments. For example, the child may relocate to provide care, change their employment arrangements or make substantial changes to their own lifestyle.
These circumstances may be relevant when considering whether the relationship goes beyond the ordinary support that might reasonably be expected between a parent and adult child.
Why the distinction matters
Whether an interdependency relationship exists can have significant consequences for a superannuation death benefit.
The tax treatment of a death benefit can depend on whether the recipient is considered a dependant for tax purposes. Separately, superannuation legislation can affect how a death benefit may be paid.
This means that an assessment of the relationship should not be based solely on whether the family considers the adult child to have been a dependant.
The relevant legislation, regulations and individual circumstances all need to be considered.
What evidence should families keep?
Where an interdependency relationship may be relevant, maintaining clear records can be particularly important.
Depending on the circumstances, useful evidence may include:
records of the living arrangements;
details of care and domestic assistance provided;
evidence of financial support and shared expenses;
medical or care-related records;
evidence of changes to employment or lifestyle to provide care; and
other documentation demonstrating the nature and extent of the relationship.
The stronger the evidence of the day-to-day relationship, the easier it may be to demonstrate the circumstances if the classification is later questioned.
The key takeaway
An adult child caring for an ageing parent is not automatically considered to be in an interdependency relationship.
At the same time, the fact that the relationship is between a parent and child does not, by itself, mean that an interdependency relationship is impossible.
The important question is whether the particular circumstances of the relationship satisfy the legislative requirements.
Where a significant superannuation balance, estate or ongoing income stream is involved, it can be worthwhile obtaining appropriate professional advice before making assumptions about how a death benefit will be treated.
At ODV Private Wealth, we can help you understand how superannuation, retirement and estate planning considerations may interact as part of your broader financial plan.
For further information, or to discuss your superannuation and estate planning needs, call ODV Private Wealth on (08) 8352 2522 or email planning@odvwealth.com.au.
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