When stepchildren miss out on inheritance

First published in the Financial Review on 4 November 2022.

An ATO ruling that excludes family members on the death or divorce of their natural parent seems arbitrary in a society where blended families are widespread.

For self-managed super fund trustees, the issue of how stepchildren are treated regarding superannuation death benefits would seem cut and dried.

Under the Superannuation Industry (Supervision) Act, death benefits can be paid only to a beneficiary meeting the definition of a dependant – spouse, child (natural child, adopted child or stepchild), or someone with whom the deceased person has an interdependency relationship.

Stepchildren have always been included in this definition. When the original SIS bill was tabled in 1993 by Labor treasurer John Dawkins, it defined a child to include “adopted, step or ex-nuptial”. And while the definition of a child was expanded in 2008 after amendments from the Same Sex Relationships Act, it did not alter the position of stepchildren.

But – there always seems to be a “but” in superannuation law – issues arise when someone wants to pass on some or all their superannuation benefits on death to a stepchild but the natural parent has pre-deceased or has divorced the person who is the step-parent. In these circumstances, the Australian Taxation Office says a stepchild is no longer entitled to receive benefits.

In ATO ID 2011/77, it says: “At common law, a child ceases to be stepchild of a step-parent when the relationship between the child’s natural parent and the step-parent ends, that is, on the death of the natural parent or the divorce of the natural parent from the step-parent.”

At first glance, that would seem to clarify the position. But not so. First, as an ATO ID is only an edited record of an ATO decision, it is not legally binding. It can be challenged. What this means is that trustees cannot pay out a deceased step-parent’s superannuation death benefit to a stepchild where divorce or death of the natural parent has occurred.

The inability to qualify as a child happens irrespective of any relationship that has developed between the step-parent and the stepchild. It’s not difficult to imagine situations where a stepchild is emotionally close to the step-parent, even though the natural parent of the stepchild is no longer in a relationship with the step-parent due to death or divorce.

So unless a stepchild meets another definition as a dependant, they will not be eligible to receive super death benefits from the deceased directly from the superannuation fund. Any benefits will have to be paid via the estate and that process can always be legally challenged.

The complications with stepchildren do not end here. In 2019, the Superannuation Complaints Tribunal upheld a decision to pay a death benefit to a stepchild where the natural parent’s relationship with the deceased had ended because of death.

The facts of the case were this. A fund member died and split the super death benefits between his youngest son and his stepdaughter. Despite the fact his spouse (the mother of the stepdaughter) had predeceased him, the trustee adhered to his request and made the payments accordingly.

The fund member’s two older natural children (the complainants) challenged the decision to pay the benefits to a stepdaughter (she was not financially dependent) as unfair and unreasonable because the trustee should not have treated the deceased member’s nomination as binding. Further complicating the matter was the fact that the stepdaughter, who lived overseas, had seen the deceased on just two visits to Australia.

The complainants wanted the death benefit split equally between the three biological children. But to highlight how complicated these cases can be, the youngest son supported the stepsister’s payment. In evidence presented to the SCT, he said she had provided emotional support to the deceased, while he provided financial support.

He said the eldest son and daughter “had not been part of the deceased member’s life for at least seven to five years” while the stepdaughter, while not physically in the same country, provided emotional support for him every day and was in a “loving relationship” with him. The trustee agreed and paid the benefit as instructed, and the SCT endorsed the decision. In this case, blood was not thicker than water.

The blended family, if not the norm, is certainly commonplace. The ATO ruling that stipulates a stepchild automatically ceases being a child on the death or divorce of their natural parent seems arbitrary in a society where a loving relationship with the step-parent might have been forged over many years. A review into what constitutes the “modern family” might be a good option.

Under Centrelink rules, someone who is receiving any government benefit can only gift $10,000 a year to a family member, with no more than $30,000 able to be gifted over five years.

Opinion piece written by
John Maroney, 
SMSF Association