Recent ATO rulings for SMSFs 1 of 2: the child of a former husband or wife of a member is not a 'stepchild'

The ATO recently ruled that, for the purposes of being a 'stepchild' (and thus a 'dependant') under the regulations,[1] an individual is not a 'stepchild' of an SMSF member if the marriage of the individual's natural parent to the member ends before the death of the member. That is so regardless of whether the marriage ends due to divorce or the death of the individual's natural parent.[2]

 

Background to ruling

X was a member of a SMSF and married to Y.
Y was the natural parent of Z.
X and Y divorced.
X had not adopted Z under any state or territory law.

The question for the ATO was whether, after the divorce of X and Y, the child Z was a 'stepchild' (and thus a 'dependant') of X.

Cashing superannuation fund member's benefits in favour of dependants

An SMSF member's benefits must not be cashed in favour of a person other than the member, unless:

  • the member has died; and
  • the benefits are cashed in favour of the member's legal representatives or one or more of the member's dependants.[3]

Who is a 'dependant'?

'Dependant' is not defined in the regulations. It has the same meaning that it has in the Superannuation Industry (Supervision) Act 1993 (SIS Act), which means it includes the 'child' of any member.

'Child' is defined in the SIS Act as including a 'stepchild'. 'Stepchild' is not defined in the SIS Act or SIS Regs, and so has its ordinary meaning.

Why was a ruling required?

As 'stepchild' is not defined in the legislation, the ATO needed to rule on whether 'stepchild' in the SIS Act and SIS Regs includes former stepchildren of the SMSF member (that is, whether a person ceases to be the 'stepchild' of an SMSF member when the relationship between their natural parent and the member ends).

ATO reasoning

The ATO considered dictionary definitions of 'stepchild'. However, those definitions did not make clear whether a child remains the stepchild of another person after that person's relationship with their natural parent ends.

The ATO noted that, at common law, a child ceases to be a stepchild (and a parent a stepparent) when the relationship between the child's natural parent and the stepparent ends (either on divorce or the death of the natural parent). The ATO reviewed case law interpreting other legislation and found support for an interpretation of 'stepchild' in which the relationship between the stepchild and stepparent ends when the marriage that created it ends.

Outcome

The ATO ruled that the relationship of stepchild to stepparent ends when the marriage between the natural parent and the stepparent ends (whether on divorce or the death of the natural parent). Therefore the trustee of the SMSF could not treat Z as the stepchild of X for the purposes of determining X's dependants.

What about step-children of de facto relationships?

The ATO also ruled that the term 'stepchild' in the SIS Act is used only in relation to individuals who are legally married. Therefore the child of an SMSF member's de facto spouse is not a 'stepchild' for the purposes of the meaning of 'dependant'.

What does this ruling mean?

The ATO's ruling confirms that an individual will only be a 'stepchild' of a member when that member is legally married to the natural parent of that individual. If the natural parent dies, or the SMSF member and the natural parent divorce, then that individual is no longer the 'stepchild' - and thus no longer a 'dependant' - of that member.

Therefore for that individual to be a 'dependant' of the SMSF member, the individual must meet the meaning of 'dependant' through another element of that definition — for example, by being financially dependent on the member.

More information from Maddocks

For questions or more information about the above article, please call Maddocks in Melbourne (03 9288 0555) and ask for a member of the Superannuation Team.

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[1] Regulation 6.22 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR)

[2] ATO ID 2011/77

[3] Regulation 6.22 of the SISR