FROM SMSF TO BLOODLINE WEALTH PROTECTION: A GRANDFATHER’S FINAL WISH FOR HIS GRANDSON
- Grant Abbott
- Mar 19
- 4 min read
Part Two - The Grandfather’s Dilemma: How to Secure SMSF Benefits for Liam
Grant’s Top Five Strategies
A Testamentary Trust (TT) via his Will - receiving the SMSF death benefits in line with the estate planning lawyer’s advice and partitioning for Liam in a Super Proceeds Trust.
A Family Protection Trust (FPT) - withdrawing his benefits from his SMSF now and gifting then to a newly established FPT for Liam.
A strategic SMSF Will – this will direct his SMSF benefits into a Special Purpose SMSF Death Benefits Trust (DBT) for Liam.
A pension SMSF Will – this will establish an accounts-based pension for Liam and will last until the funds run out
Reversionary pension: commencing a SMSF pension for himself with a reversion to be paid to Liam on his death.
As we will see, while a testamentary trust is a common legal tool, it is not the strategy for John due to a guaranteed family provisions claim, as such, the FPT and the SMSF route offer a far superior wealth protection strategy.
But before we get there, in terms of the SMSF, we must first answer an important SMSF question.
Is Liam a Dependent Under Superannuation and Taxation Laws?
The Superannuation Industry (Supervision) Act 1993 (SIS Act) and the Income Tax Assessment Act 1936 (ITAA) determine who qualifies as a dependent for the purpose of receiving tax-free superannuation death benefits.
Both the SIS Act and the ITAA deal specifically with spouses and children but NOT grandchildren. To determine if the SIS Act allows a payment from the fund directly to Liam tax free, we must establish that Liam is a financial dependant of John.
· What is Financial Dependancy?
One of the critical issues when structuring SMSF death benefit strategies is whether the intended recipient qualifies as a dependent under the SIS Act and ITAA. Two landmark cases—Malek v FC of T and Faull v Superannuation Complaints Tribunal—have helped shape the understanding of financial dependence, which is crucial in determining whether death benefits can be received tax-free.
a) Malek v FC of T [1999] AATA 678 - Financial Dependence Through Regular Contributions
The Malek case revolved around Antoine Malek a young adult who passed away with superannuation benefits. He was single, had no children, and lived with his widowed mother, Mrs. Malek.
Key Facts of the Case
Mrs. Malek was receiving a disability support pension of $153 per week.
Antoine regularly contributed $258 per week to support her living expenses, including food, mortgage payments, taxi fares, medical expenses, and bills.
Legal Argument
The Administrative Appeals Tribunal (AAT) considered the regularity and necessity of Antoine’s contributions to his mother in determining dependence.
The AAT reviewed case law on financial dependence and cited Gibbs J in Kauri Timber Co (Tas) Pty Ltd v Reeman (1973) 128 CLR 177:
"One person is dependent on another for support if they rely on that person to maintain their normal standard of living, even if they could have supported themselves from another source."
Decision
The Tribunal ruled that Mrs. Malek was financially dependent on her son Antoine because she relied on his continuous and regular contributions to maintain her lifestyle.
As a result, Mrs. Malek was entitled to receive Antoine’s superannuation death benefits tax-free.
Implications for SMSFs
A parent, grandparent, aunt, uncle or friend providing regular and ongoing financial support to another person may be considered, depending on the facts, to be a financial dependant of the provider.
Ongoing and substantial contributions (e.g., school fees, rent, a family allowance or other living expenses) may establish dependency under both the SIS Act and the ITAA.
b) Faull v Superannuation Complaints Tribunal (1999Faull v Superannuation Complaints Tribunal [1999] NSWSC 1137) - Partial Financial Dependence Counts
The Faull case extended the principle by confirming that even partial financial dependence is enough to qualify as a superannuation dependent.
Key Facts of the Case
Llewellyn Faull, a 19-year-old, died unexpectedly.
His mother, Mrs. Faull, was employed and earning $30,000 per year.
Llewellyn contributed $30 per week to her as board and lodging.
Legal Argument
The case questioned whether $30 per week was enough to establish financial dependence.
The Tribunal considered whether Mrs. Faull was "relying" on this payment for her standard of living.
Decision
The Tribunal ruled that financial dependence does not require total reliance—even partial dependence qualifies.
Since Llewellyn’s contributions augmented his mother’s income, she was deemed financially dependent.
Therefore, she was entitled to his superannuation benefits tax-free.
Implications for SMSFs
Even small, consistent payments can establish dependency.
If a grandparent provides regular school fee payments, medical costs, or allowances to a grandchild, that child may qualify as a financial dependent.
c) Application to John’s Case – Grandfather Supporting His Grandson
Applying Malek and Faull’s cases to John and Liam’s case, we can argue:✅ John has been paying $1,500 per month for Liam’s private school fees.✅ This is a substantial and ongoing contribution.✅ Liam’s mother (Kate) earns an income, but Liam relies on John’s financial support for education and living standards.
Therefore, Liam should qualify as a financial dependent under the SIS Act and the ITAA, allowing John to:
Directly pay a pension or lump sum to Liam via a SMSF Will.
Provide for Liam as a reversionary pension beneficiary in his pension
Bypass the estate completely, avoiding family provision claims from his father and aunt.
Prevent his children from accessing Liam’s SMSF inheritance.
By leveraging these landmark cases, John’s SMSF strategy shields his wealth from legal challenges and ensures it remains within his bloodline.
It is strongly advised that an ATO Private Binding Ruling be sought arguing the above.
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