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7. Large Deductible Contributions for Parents

This strategy is particularly effective for doctors who help support elderly parents who do not qualify for an n old age pension, whether due to the assets test or income test or the ten year residency rule. The parent is employed and/or made a director of the practice entity or service entity before 30 June 2010, and is then superannuated up $50,000 or if there are two parents $100,000.

The parents become members of the doctor’s SMSF.

Interest on any amounts borrowed to pay the contributions will be deductible in the hands of the payer, and the tax-free pension income will be used to pay the parent’s day to day living costs (and give them the human dignity attached to an independent source of income).

For this strategy to work without breaching the super law and/or attracting the anti-tax avoidance rules in Part IVA of the Tax Act it is important that:

if the practice derives personal services income, the parents are employees under the general law and are able to be superannuated by the practice;
the superannuation benefits are invested for the benefit of the parent member;
no lump sum benefits are paid; and
pension benefits commence on 1 July 2008 or soon after.

As a practical matter, one can imagine how a series of large deductible contributions could create estate planning concerns for the parents. This is particularly the case where the parent has other children, is in second marriage or some other complication exists.

A binding non-revocable death benefit notice, and perhaps a power of attorney, in favor of the child who paid the contributions, may ameliorate these concerns. This will make sure a poorly timed parental death does not muck things up too much. These documents mean you can make sure you have control of the money at all times and the amounts revert to you, and not your siblings, if your parent dies.

The ATO view

Superannuation contributions for related persons such as parents do not have to be arms length, and the ATO accepts that such contributions do not breach any other tax rules. The ATO’s views are expressed at:

Taxation Determination TD 2004/D82.