Super Dealings in the Brady Family
The Step Children Conundrum
Families – sometimes you can’t live with them, but you wouldn’t be living without them. As social demographics adjust and non-nuclear families are becoming more and more prevalent, the so-called ‘solutions’ from a legislative standpoint create some interesting outcomes. An important consideration in super death benefit planning is ensuring death benefit proceeds get paid to the desired beneficiary with the least potential chance for a challenge.
It’s widely known that children are defined as SIS dependants but many people do not recognise the constraints within which the definition of child is constructed. One of the more recent discussions in TechConnect has been on whether the definition of ‘child’ for the purposes of the Superannuation Industry (Supervision) Act 1993 (SIS Act), and how this interacts with step-children.
Traditionally, a common law precedent established that the step-child relationship ceases when the relationship connection between the natural parent and the step-parent is broken. The two most common causes of the breakdown of this relationship are death or divorce. Even at this stage we have a legal oddity in that a separated, but not divorced, couple would not have broken the link, and thus the child of one is still a step-child of the other partner.
When the SIS Act was introduced, it included its own definition of ‘child’ for the purpose of understanding who is a dependant under section 10, which deals with definitions. Child was originally defined as follows:
‘Child’, in relation to a person, includes an adopted child, a step-child or an ex-nuptial child of the person
Step-child is not further defined, and thus the common law view of step-child continued. This means that on the death of the natural parent, the step child relationship is broken and the step-child would no longer be considered a SIS dependant, and thus would not be able to receive a death benefit payment from super.
Outside the step-child issue, the original definition of child also had some other large holes, such as children of same-sex relationships (where at most one person is the biological parent, and ‘adoption’ may not be considered appropriate) or the equivalent of a step-child in a de-facto relationship.
To attempt to remedy this, in 2008 the Same Sex Relationships (Equal Treatment in Commonwealth Laws – Superannuation) Bill 2008 was introduced to make a range of amendments to various Acts to ensure the definition of spouse is sufficiently clear to include same sex couples. Alongside this, the definition of child under SIS was also adjusted to make it clear that the child of a same sex relationship, even if not biologically related to both parents, is considered the child of the relationship. The Bill was drafted with the below definition of child:
‘Child’, in relation to a person, includes:
an adopted child, a step child or an ex nuptial child of the person; and
if, at any time, the person was in a relationship as a couple with another person (whether the persons are the same sex or different sexes)—a child who is the product of the person’s relationship with that other person.*
This seems to be clearly inclusive of children of same sex relationships, and whilst we have some guidance around the second limb (in that a child can only be considered a product of the relationship if there is a natural connection to one of the partners). However, there is still a definitional issue around whether a child is a ‘product of a relationship’ particularly where the child is the biological product of a previous relationship.
In fact, the Explanatory Memoranda explicitly state that a child, who is the product of a person‘s previous relationship, and who is brought into the person‘s current relationship, is not a child of the person‘s current relationship. As to whether there would be any way a child could become the product of the current relationship in such a circumstance would be a very interesting legal question to see debated.
However, before the Act was passed there were a number of amendments made, including the definition of child. As passed, and as currently written in SIS, the definition of child is as per the following:
‘Child’, in relation to a person, includes:
an adopted child, a stepchild or an ex nuptial child of the person; and
a child of the person’s spouse; and
someone who is a child of the person within the meaning of the Family Law Act 1975.
Once again the first limb is unchanged, however the second limb is now a lot clearer. The ambiguity of ‘the product of the relationship’ has been removed, and simply replaced with a statement that a child includes “a child of the person’s spouse”
At first principles, using a standard construction of the second limb it would seem that a step-child would fall within the definition of ‘a child of the person’s spouse’ – however, the spousal relationship, whether by marriage or the broader definition of spouse, is deemed to end on death. One of the benefits of the ‘product’ definition would have been that a child could potentially remain a product of the relationship, even if the relationship was no longer in force.
The new definition still seems clear when looking further. The Explanatory Memoranda does not discuss the topic of stepchildren on death explicitly – in fact it focuses on ensuring that children of same sex or defacto couples should be treated as stepchildren, generally defined as a ‘child of a husband or wife by a former union’. The explanation also includes the following statement.
These definitions are inclusive and do not limit who is a stepchild for the purposes of the relevant Act.
However, there is yet another hurdle.
In 2011, three years after the amendment had been passed, the ATO issued Interpretative Decision 2011/77. Rather than clarifying the issue, the ID explicitly addresses the question as to whether a stepchild is still a child under the definition of SIS on death of the natural parent, after the breakdown of the new relationship. Unsurprisingly, the ATO have found that a stepchild is not a dependant under SIS on death of the natural parent, however, how they arrived at the outcome is worth review.
The ATO’s methodology seems to be based on the idea that stepchild has been defined in common law as ceasing on death of the natural parent. Additionally, the ATO draw on Superannuation Complaints Tribunal decisions which discuss the breakdown of the step-relationship on death and divorce separately. Those SCT decisions were however based on the original definition of child, and could not consider the updated definition. The decision also explicitly addresses the second limb of the definition, with the following commentary.
Furthermore, having regard to the construction of the definition of 'child' in subsection 10(1) of the SISA, the Commissioner considers that the term 'stepchild' in paragraph (a) is only used in relation to individuals who are legally married. This is because paragraph (b) of the definition, which refers to 'a child of the person's spouse', would apply to a child of a natural parent in a defacto relationship.
This seems to be indicating that the second limb simply operates as a function to include children which would otherwise not be considered step-children due to the absence of a legal marriage between the spouses, which seems to be saying the definition of step-child is limited, and cannot be extended to the second limb.
One argument which has been put to us in clarifying the status of a step-child is by looking at the definition of step-parent under the Family Law Act, which explicitly continues after the death of the parent in relation to a child. However, this is not a reliable construction of a definition as there is nothing which indicates a step-relationship has to be equal in both directions.
Another interesting point is that legislation in Victoria and Queensland around succession and intestacy are taking steps to developing the rights of step-children when it comes to the death of the natural parent. In the case of Queensland, the Succession Act 1981 is explicit in confirming that, so long as the marriage subsisted when the natural parent died, the child is still a step-child from a family provisioning standpoint. Victoria’s approach is more broad and open for judiciary consideration. Whilst there is no formal acknowledgement of step-children, the Victorian approach gives the court the power to construct a duty for the step-parent to have provided for their ex-step-child – and importantly the Victorian courts are applying this power in cases where the step-child relationship has broken down.
At this stage it appears as though step-children cannot be considered as dependants for the purposes of SIS upon the death of the natural parent. In those cases where the step-child remains with their step-parent, and that familial relationship endures, there would appear to be a failing of the SIS definition of child – ironically one which may have been addressed under the more convoluted definition of ‘production of the relationship’ as the amending Act originally introduced.
Rob Camilleri, Blue Sky Financial Planning
Disclaimer: This document has been prepared for general information purposes only and not as a specific advice to any particular person. Any advice contained in this documents is General Advice and does not take into account any person’s investment objectives, financial situation and particular needs. Before making any investment decision based on this advice, you should consider, with or without the assistance of an adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances.