Many grandparents generously contribute to their grandchildren’s upbringing, often helping with things like school fees—an expense that can be substantial. But does paying for a grandchild’s education mean that a grandchild is able to directly receive a grandparent’s superannuation death benefits, and if so, are those benefits tax-free?
Clients regularly ask whether, when they die, they can leave their superannuation to their grandchildren. They may wish to do this directly from their superannuation fund if they think their Will may be challenged.
Superannuation law only allows death benefits to be paid directly from a super fund to the deceased’s estate, spouse, children, interdependents, or financial dependents.
As you can see, there is no express provision allowing a distribution to grandchildren directly. However, it is possible for a grandchild to receive superannuation death benefits directly if they fall within either of the last two categories, that is:
- They are a financial dependent on their grandparent; or
- Are in a relationship of interdependence with their grandparent.
The key factor is not the grandchild’s familial relationship with their grandparent, but their financial relationship.
SIS Dependants vs. Tax Dependants
As a starting point it is worth noting that superannuation is intended to provide financial security in retirement, and not to serve as an estate planning or inheritance strategy. Restricting who can receive super death benefits ensures that super remains consistent with its core purpose of supporting dependents who were financially reliant on the deceased.
When it comes to assessing if someone can receive your super death benefits, there are two key classifications: SIS dependants and tax dependants:
- The first classification deals with who can legally receive benefits directly from your super fund. A SIS dependant (as defined by the Superannuation Industry (Supervision) Act 1993) (the SIS Act) includes your spouse (current or de facto), child (including adult children), financial dependants, and interdependents. These individuals are eligible to directly receive super death benefits from your fund, subject to the fund’s governing rules.
- The second classification deals with how the death benefit will be subject to tax in the hands of the recipient. A tax dependant (as defined under the Income Tax Assessment Act 1997 (Cth)) (the ITAA) includes your spouses, de facto partners, children under 18, and interdependents. Adult children are not automatically tax dependants. Former spouses are included.
This distinction means that a SIS dependent may receive a death benefit directly from your super fund, but they will only receive it tax-free if they also qualify as a tax dependent. Importantly for our current purposes, both SIS and tax definitions include interdependents. This term is most important from a tax perspective, because if your grandchild qualifies an interdependent then they can receive your super death benefits tax-free.
If you want to know more about who can receive your super death benefits, speak to one of our experienced lawyers on 1300 654 590 or email us.
What constitutes financial dependency?
As noted above, a financial dependent can receive death benefits directly from a super fund, but they will not qualify for tax-free treatment.
The Courts have made various pronouncements on what amounts to financial dependence. The Courts look to whether:
- ‘… the evidence established that the alleged ‘dependant’ relied on or relies on another as the source wholly or in part of his or her existence… Questions of ‘scale of living’ do not enter into the matter in the absence of some such statutory enactment’: per Fullagher J in Fenton v. Batten[1949] ALR 69; [1948] VLR 422; and
- ‘…, the relevant financial support is that required to maintain the person’s normal standard of living and the question of fact to be answered is whether the alleged dependant was reliant on the regular continuous contribution of the other person to maintain that standard: per Senior Member Pascoe of the Administrative Appeals Tribunal (AAT) in Malek v. Federal Commissioner of Taxation[1999] AATA 678, 42 ATR 1203, 99 ATC 2294:
The ATO is the regulatory authority for self-managed super funds, and in this role has issued several private binding rulings clarifying how it will determine financial dependency in the case of grandchildren. The main question asked is: If the deceased’s financial support were removed, would the grandchild be able to meet their basic daily expenses? If the financial assistance simply enhances their standard of living rather than covering essential costs, this will not qualify as the relevant standard of support [PBR 40376].
According to the ATO, only fundamental expenses are relevant when determining financial dependence. The ATO has ruled that necessities such as food, shelter, and clothing meet the criteria [PBR 18688]. However, contributions toward entertainment, social outings, hobbies, or pocket money are considered non-essential and do not establish dependency [PBR 64085].
Certain education expenses may be included—public school fees have been accepted as relevant in some rulings [PBR 52530], but private school fees alone may not be sufficient. Interestingly, costs such as schoolbooks, lunches, and uniforms have been deemed irrelevant for dependency purposes.
Additionally, the ATO requires that financial support represents a substantial portion of the grandchild’s total financial needs. If the household mainly relies on welfare payments or another source of income, the grandparent’s contributions may not be enough to establish dependency. Contributions towards shared household costs, such as utilities or rent, are also pro-rated based on the number of occupants in the home [PBR 57857].
Another key requirement is consistency—the ATO expects financial assistance to be provided regularly and continuously rather than as a one-time or irregular payment. However, proving this can be difficult, as grandparents do not typically provide formal invoices or structured payments to their grandchildren. Cash payments into a grandchild’s account may not automatically demonstrate financial reliance, unless it is clear what the funds were used for.
If a grandchild can establish, they were a financial dependent of their grandparent, they are eligible to receive their grandparent’s superannuation death benefits direct from the super fund. However, this will not entitle them to receive the benefit tax-free.
Interdependency Relationships
As noted above, if a grandchild is in a relationship of interdependency with their grandparent they will be entitled to receive their grandparent’s super directly from the fund, and will also receive those benefits tax-free. This is the ideal outcome.
Section 10A of the SIS Act, states an interdependency relationship exists when two people have a close personal relationship, they live together, and one or each of them provides the other with significant financial, domestic, and emotional support.
In the case of a grandparent and grandchild, an interdependency relationship may be established if:
- The grandchild lived with the grandparent on a long-term basis;
- Either party provided daily care, financial support, and household assistance beyond occasional gifts or payments to the other party (or they did so mutually); and
- There was a mutual commitment to sharing life responsibilities, such sharing housework and care.
For a young grandchild it may be expected that these things are provided by the grandparent to the grandchild. However, the definition works both ways and also covers circumstances where a more mature grandchild provides support to an elderly grandparent.
The existence of an interdependency relationship requires clear evidence of cohabitation, financial reliance, and ongoing personal care. This may include rental agreements, financial statements, or statutory declarations confirming the nature of the relationship.
It is the duty of the trustees of the superfund to assess whether a grandchild qualifies as a SIS dependent before paying death benefits to a grandchild. The trustee of the fund also has the responsibility to withhold any necessary tax from a death benefit that is paid to someone who is not a tax dependent. Accordingly, in both cases, it is incumbent on the trustee of the super fund to determine the status of the recipient of the death benefit.
Determining if someone is a SIS and tax dependent is not simple and will depend on a careful weighing of all the relevant facts. If in doubt, we can assist you with an application for a Private Binding Ruling from the Commissioner.
How we can help
For super fund trustees, determining the proper SIS and tax status of the proposed recipients of super is essential in processing superannuation death benefit claims. While both financial dependents and interdependents may be eligible to receive benefits directly from the fund, only tax dependents receive the benefits tax-free.
If you would like to make financial provision for your grandchild from your superannuation or if you are a trustee of a super fund trying to determine if a grandchild is eligible to receive superannuation death benefits, speak to one of our experienced lawyers on 1300 654 590 or email us.
The information contained in this post is current at the date of editing – 28 March 2025.
