KJSbwGrandparents are often very generous in their support of their grandchildren. Sometimes that is a matter of choice. Sometimes, a matter of necessity. The issue of whether a grandchild is financially dependent upon a grandparent can be relevant in many areas of the law.

It is quite common theses days for grandparents to wish to pass their death benefit superannuation entitlements to their grandchildren . The ability to demonstrate the financial dependency of the grandchild is very relevant in this context.

In order to pay a superannuation death benefit to a grandchild, and for the grandchild to receive it tax-free, the grandchild needs to establish financial dependency upon the grandparent.

Financial dependency is a matter of fact and in each particular situation needs to be individually assessed. Case law suggests that financial dependency can arise even when the financial assistance provided was to enable the grandchild to maintain a standard of living higher than the necessities of life. Not surprisingly, the ATO takes a less generous approach.

The ATO position is that financial dependency occurs where the grandchild is wholly or substantially maintained financially by the grandparent. The following points are drawn from published rulings issued by the ATO –

  • If the financial support provided merely supplements the grandchild’s income and represents “quality of life” payments, it would not be considered substantial support;
  • issues of quality of life and enjoying a reasonable standard of living are irrelevant for the purposes of determining dependency;
  • paying for social outings, medication, pocket money, entertainment and sporting costs will not be sufficient;
  • amounts spent on luxury items such as entertainment rather than child’s day to day living expenses are not relevant;
  • payment of private school fees are not of themselves evidence of financial dependency but when coupled with other factors such as payment of necessary food, shelter and clothing expenses can be relevant to the issue of dependency; and
  • the financial support must be regular.

Often the biggest single issue to overcome to establish dependency is lack of proper records. Retaining evidence of expenditure on a grandchild will always be critical to proving financial dependency.

At Everingham Solomons we can assist you with all your estate planning including situations involving complex structures such as superannuation funds because Helping You is Our Business.

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