Pension phase at time of death

Income streams paid from a superannuation fund because of the death of a member are often referred to as death benefit pensions.

Where there is a nominated reversionary beneficiary at the commencement of the pension, when the member passes away, the pension automatically reverts to that nominated beneficiary. If the pension is commuted to pay a lump sum, it will only be regarded as a death benefit lump sum (and receive concessional tax treatment) if it is paid within the death benefit period. Any commutation of this pension to pay a lump sum outside this period may be treated as a member benefit lump sum, which potentially has less favourable tax treatment.

The death benefit period is usually the latter of:

• 6 months after the date of the member’s death

• 3 months after the grant of probate that deceased person’s Will or letters of administration of that deceased person’s estate

• 6 months after legal action ceases if the payment of the benefit is delayed because of legal action about entitlement of the benefit

• 6 months after the process of identifying and making initial contact with potential recipients is completed if the payment of the benefit is delayed for reasonable reasons.

Who can receive a superannuation death benefit?

The purpose of superannuation, on death of a member, is to provide for those who would or should have received ongoing financial support from the member had they not died.

A superannuation death benefit can be paid to:

• Dependants of the deceased member

• The Legal Personal Representative (LPR) of the deceased member (i.e. the Executor of the Will or Administrator of the Estate)

• Another person, only if the trustee has not found either of the above persons and the regulator (in the case of SMSFs the ATO) has approved the payment in writing (and subject to the fund’s rules).

A dependant for SIS purposes includes:

• A spouse, which includes a de facto spouse (of the opposite or same sex)

• A child, which includes an adopted child, step-child, or an ex-nuptial child (of the member or their spouse)

• Any person who was financially dependant on the member at the time of the member’s death

• A person who had an interdependency relationship with the deceased member immediately before the member’s death.

However, under the SIS Regulations, benefits can only be paid as a death benefit pension from 1 July 2007 to a person:

• Who satisfies the definition of a dependant under the SIS Act and, in the case of a child of the deceased member:

o The child is under the age of 18, or

o If they are 18 years of age or over:

· They are financially dependant on the member and under 25 years old, or

· Has a disability of the kind described in the Disability Services Act 1986.

Financial dependants

Superannuation trustees determine whether a person is financially dependant on the deceased member at the time of the member’s death. The legislation provides no guidance to the meaning of financial dependency and therefore it can be subject to interpretation by individual trustees. A superannuation trustee will consider whether financial support is required to maintain the person’s normal standard of living and whether the person was reliant on the regular, continuous contribution of the deceased member to maintain that standard.

The Australian Prudential Regulation Authority (APRA) holds the view that “there is no need for one person to be wholly dependant upon another for that person to be a dependant. Financial dependency can be established where a person relies wholly or in part on another for his or her means of subsistence. Nor must the recipient show a need for money in order to qualify as a dependant”

Interdependency relationships

A dependant includes a person who was in an interdependency relationship with the deceased member at the time of death. An interdependency relationship between two people is characterised by:

• A close personal relationship

• Living together

• Financial support

• Domestic support

• Personal care of a type and quality above the care and support that might be provided by a mere friend or flatmate.

An interdependency relationship may include a partner who does not meet the definition of a spouse. An interdependency relationship may also exist where there is a close personal relationship between two people, but they do not live together; where they provide financial support, domestic support or personal care due to one or both of them having a physical, intellectual or psychiatric disability, or they are temporarily living apart due to one (or both of them) temporarily working overseas or serving a jail sentence.

Examples include same sex couples, an adult child residing with and caring for an elderly parent and sisters residing together.

In establishing whether such a relationship exists, all the circumstances of the relationship are considered, including (where relevant):

• The duration of the relationship

• Whether or not a sexual relationship exists

• The ownership, use and acquisition of property

• The degree of mutual commitment to a shared life

• The care and support of children

• The reputation and public aspects of the relationship (such as whether the relationship is publicly acknowledged)

• The degree of emotional support

• The extent to which the relationship is one of mere convenience, and

• Any evidence suggesting that the parties intend the relationship to be permanent*.

* 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.

It is not necessary for each of the listed circumstances to be satisfied for there to be an interdependency relationship. Each factor is to be given the appropriate weighting depending on the circumstances. These factors provide guidance to the trustees on what to look for in the relationship; however, the final decision is based on the facts of each case.

Close personal relationship

The regulations also deem a “close personal relationship” to be a situation where “one or each of them provides the other with support and care of a type and quality normally provided in a close personal relationship, rather than by mere friend or flatmate”[1] . An example may be where significant care is provided for the other person when they are unwell or suffering emotionally.

Interestingly, the Government does not expect adult children living at home with their parents to ordinarily meet the conditions of an interdependency relationship.

Conclusion

Trustees decide whether an interdependency relationship exists between two people. The existence of a statutory declaration should be only one of the factors taken into consideration by trustees and therefore it is important that evidence of financial support by either party exists, where parties are not separated by illness or temporarily living apart.