Edited version of private advice

Authorisation Number: 1051733683090

Date of advice: 7 August 2020

Ruling

Subject: Superannuation death benefits

Question 1

Is Beneficiary 1 a death benefits dependant of the Deceased in accordance with section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997) by virtue of being in an interdependency relationship with the Deceased under section 302-200 just before they died?

Answer

Yes

Question 2

Is Beneficiary 2 a death benefits dependant of the Deceased in accordance with section 302-195 of the ITAA 1997 by virtue of being a dependant of the Deceased just before they died?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased died in late December 20XX at YY years of age.

Beneficiary 1 and Beneficiary 2 are the children of the Deceased.

The Deceased had a medical illness.

The Deceased was the sole member of the Fund; a regulated self-managed superannuation fund.

The trustee of the Fund has paid a lump sum benefit to the Deceased's estate. It is currently in the process of being distributed out of the Estate.

Beneficiary 1 and Beneficiary 2 are beneficiaries of the Deceased's Estate.The Deceased's will prescribed that the residuary estate (including superannuation benefits) to be transferred XX% to Beneficiary 1 and Beneficiary 2, XX% to the former spouse, and the remainder to charities.

In mid 20XX a hearing was held at the Victorian Civil and Administrative Tribunal (VCAT) in relation to the Deceased's attorney seeking rulings for the payment of an Amount each month to Beneficiary 1 and Beneficiary 2 during the Deceased's lifetime.

It was ruled that the financial assistance payments met the criteria set out in section 68 of the Powers of Attorney Act 2014 that the payments were provision of financial assistance to the Deceased's dependants.

The ruling also determined that Beneficiary 1 could continue to reside in the Deceased's property rent free as long as Beneficiary 1 pays utilities.

The Deceased provided continuous financial support to Beneficiary 1.

Beneficiary 1 lived with the Deceased and did not pay any rent or accommodation expenses to the Deceased.

Beneficiary 1 never resided separately from the Deceased until the Deceased was moved into a nursing home (around XX months prior to the death) due to the deterioration in medical illness and the subsequent need for professional help and care. Pursuant to the VCAT ruling Beneficiary 1 remained in the Deceased's home rent-free and only paid the utility expenses. The remaining expenses such as rates, owner's corporation fees, home and content insurance, and general maintenance were paid out of the Deceased's financial resources. Beneficiary 1 had intermittent employment. For the past few years Beneficiary 1 has worked part-time as an employee for a Company.

Throughout Beneficiary 1's life, the Deceased continued to meet the shortfall of Beneficiary 1's ongoing living expenses.

Whilst Beneficiary 1 received income from the part-time employment it was insufficient to meet the costs of living. Beneficiary 1's taxable income for the years ended 30 June 20XX, 20XX, and 20XX was under $XYZ each year. Consequently, Beneficiary 1 relied on the Deceased to meet basic living expenses.

During the last few years of the Deceased's life, Beneficiary 1 continued to provide domestic support and personal care to the deceased. The Deceased's illness restricted the Deceased's ability to perform everyday physical tasks, and as the Deceased's health declined, the Deceased required significant ongoing care and support.

Beneficiary 1 became the Deceased's carer and provided the following care;

·         Administering medications

·         Preparation of all meals

·         Personal care and hygiene

·         companionship, specifically as the Deceased's health deteriorated and the Deceased became 'lost' and disorientated.

·         Seeking home medical assistance

·         Researching the Deceased's illness and emerging treatments

·         Domestic tasks such as shopping, laundry and cleaning.

When the Deceased moved into the nursing home, Beneficiary 1 continued to provide the Deceased with ongoing companionship and emotional support. This was evident through;

·         Visiting the nursing home regularly (average 5 times per week)

·         Advising and assisting the nursing staff with the Deceased's care.

·         Accompanying the Deceased to nursing home activities,

·         Taking the Deceased to excursion outside of the nursing home.

Beneficiary 2 is unemployed and on unemployment benefits which covers the rent, but not much more. The Deceased financially supported Beneficiary 2 which enabled Beneficiary 2 to live independently.

Beneficiary 2 lived with the Deceased rent free until mid 20XX.

Since mid 20XX, Beneficiary 2 has lived in a rented apartment.

Throughout Beneficiary 2's life, the Deceased continued to meet the shortfall of Beneficiary 2's ongoing living expenses including;

·         Costs such as electricity and mobile phones

·         Household costs such as food and clothing, and

·         Local travel and entertainment.

While Beneficiary 2 did receive government assistance, it was not enough to meet the costs of living. Beneficiary 2's taxable income for the years ended 30 June 20XX, 20XX, and 20XX was under $XYZ per year. Consequently, Beneficiary 2 relied on the Deceased to assist with the basic living expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1997 Subsection 302-195(1)

Income Tax Assessment Act 1997 Paragraph 302-195(1)(a)

Income Tax Assessment Act 1997 Paragraph 302-195(1)(b)

Income Tax Assessment Act 1997 Paragraph 302-195(1)(c)

Income Tax Assessment Act 1997 Subsection 302-200(1)

Income Tax Assessment Act 1997 Paragraph 302-200(1)(a)

Income Tax Assessment Act 1997 Paragraph 302-200(1)(b)

Income Tax Assessment Act 1997 Paragraph 302-200(1)(c)

Income Tax Assessment Act 1997 Paragraph 302-200(1)(d)

Income Tax Assessment Act 1997 Subsection 302-200(2)

Income Tax Assessment Act 1997 Paragraph 302-200(2)(a)

Income Tax Assessment Act 1997 Paragraph 302-200(3)(a)

Income Tax Assessment Regulations 1997 Subregulation 302-200.01(2)

Summary

An interdependency relationship as defined under subsection 302-200 (1) of the ITAA 1997 existed between the Deceased and Beneficiary 1 just before the Deceased died.

Beneficiary 2 qualifies as a death benefits dependant in accordance with subsection 302-195(1) of the ITAA 1997 as they were a dependant of the Deceased just before they died.

Therefore, in relation to the death benefits paid to the estate of the Deceased to which Beneficiary 1 and Beneficiary 2 are entitled to receive, Beneficiary 1 and Beneficiary 2 are considered death benefit dependants of the Deceased as defined in subsection 302-195(1) of the ITAA 1997.

Detailed reasoning

Superannuation death benefits paid to the trustee of a deceased estate

A payment made by a superannuation fund to a deceased estate after the death of the deceased is assessed as a death benefit under section 302-10 of the ITAA 1997.

The taxation arrangements that apply to this superannuation death benefit are determined in accordance with the taxation arrangements that would otherwise apply to the person or persons otherwise intended to benefit from the estate.

For example, where a dependant of the deceased receives part, or all of, a superannuation death benefit and has benefited, or is expected to benefit, the trustee will not be subject to tax on that part of the benefit paid to the dependant as if it were paid to a dependant of the deceased.

Death benefits dependant

Subsection 302-195(1) defines a death benefits dependant as follows:

A death benefits dependant, of a person who has died, is:

(a)  the deceased person's spouse or former spouse; or

(b)  the deceased person's child, aged less than 18; or

(c)   any other person with whom the deceased person had an interdependency relationship under section 302-200 just before he or she died; or

(d)  any other person who was a dependant of the deceased person just before he or she died.

As Beneficiary 1 and 2 are children of the Deceased aged over 18, paragraphs 302-195(1)(a) and (b) of the ITAA 1997 do not apply. Therefore, to conclude that Beneficiary 1 and Beneficiary 2 are death benefits dependant of the Deceased, it must be established that they are either in an 'interdependency relationship' with the Deceased in accordance with paragraph 302-195(1)(c) or they are a person who was a dependant of the deceased person just before he or she died in accordance with paragraph 302-295(1)(d)

Beneficiary 1

What is an interdependency relationship?

Subsection 302-200(1) of the ITAA 1997 states that two persons (whether related by family) have an interdependency relationship if:

(a) they have a close personal relationship; and

(b) they live together; and

(c) one or each of them provides the other with financial support; and

(d) one or each of them provides the other with domestic support and personal care.

Subsection 302-200(2) of the ITAA 1997 states, in addition, 2 persons (whether related by family) also have an interdependency relationship under this section if:

(a)   they have a close personal relationship; and

(b)   they do not satisfy one or more of the requirements of an interdependency relationship mentioned in paragraphs (1(b), (c) and (d) and

(c)   the reason they do not satisfy those requirements is that either or both of them suffer from a physical, intellectual or psychiatric disability

Subsection 302-200(3) of the ITAA provides that the regulations may specify:

(a)  matters that are, or are not, to be taken into account in determining under subsection (1) or (2) whether 2 persons have an interdependency relationship; and

(b) circumstances in which 2 persons have, or do not have, an interdependency relationship

To that effect, regulation 302-200.01 of the Income Tax Assessment Regulation 1997 (ITAR 1997) states that in considering paragraph 302-200(3)(a) of the ITAA 1997, matters to be taken into account are all relevant circumstances of the relationship between the persons, including (in this case):

·         the duration of the relationship; and

·         the ownership use and acquisition of property; and

·         the degree of mutual commitment to a shared life; and

·         the degree of emotional support; and

·         the extent to which the relationship is one of mere convenience; and

·         any evidence suggesting that the parties intend the relationship to be permanent.

All the conditions already specified in subsection 302-200(1) of the ITAA 1997 or alternatively in subsection 302-200(2), must be satisfied for a person to be in an interdependency relationship.

Close personal relationship

In accordance with regulation 302-200.02 of the ITAR 1997, two persons have an interdependency relationship if they satisfy the requirements of paragraphs 302-200(1)(a) to (c) of the ITAA 1997 and one or each of them provides the other with support and care of a type and quality normally provided in a close personal relationship, rather than a mere friend or flatmate. For example, significant care provided to another person when they are unwell or when they are suffering emotionally.

The expression 'close personal relationship' is not defined in the ITAA 1997. However, the meaning of the term is discussed in the Supplementary Explanatory Memorandum (SEM) to the Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004 which inserted former section 27AAB of the Income Tax Assessment Act 1936 (ITAA 1936). According to the SEM:

2.12 A close personal relationship will be one that involves a demonstrated and ongoing commitment to the emotional support and well-being of the two parties.

2.13 Indicators of a close personal relationship may include:

·         the duration of the relationship;

·         the degree of mutual commitment to a shared life;

·         the reputation and public aspects of the relationship (such as whether the relationship is publicly acknowledged).

2.14 The above indicators do not form an exclusive list, nor are any of them a requirement for a close personal relationship to exist.

2.15 It is not intended that people who share accommodation for convenience (e.g. flatmates), or people who provide care as part of an employment relationship or on behalf of a charity should fall within the definition of close personal relationship.

Furthermore, in the explanatory statement (ES) to the Income Tax Amendment Regulations 2005 (No.7), it states that:

Generally speaking, it is not expected that children will be in an interdependency relationship with their parents.

Generally, a close personal relationship as specified in subsection 302-200(1) of the ITAA 1997 would not exist between a parent and child. This is because the relationship between a parent and child would be expected to change significantly over time and there would be no mutual commitment to a shared life between the two.

While the statement in the ES does not absolutely preclude a child from being in an interdependency relationship with a parent it does suggest that it will only exist where there are aspects to the relationship that go beyond what would usually be observed in such a situation. Where unusual and exceptional circumstances exist, a relationship between a parent and child may be treated as an interdependency relationship for the purposes of subsection 302-200(1) of the ITAA 1997.

Given that the Deceased was an adult parent at the time of death, the Deceased and Beneficiary 1 had of course known each other for some time. However, the 'duration of a relationship' in and of itself is not sufficient to categorize a relationship as 'close and personal.' The other considerations must also be taken into account.

Of importance in this case are the related matters outlined in paragraphs (iv), (viii) and (ix) of subregulation 302-200.01(2) of the ITAR 1997.

You have advised that Beneficiary 1 and the Deceased lived in a Property together until the Deceased moved into an aged care facility. Beneficiary 1 continued to reside at the Property whilst the Deceased was in care and also after his passing. Beneficiary 1 was 46yo at the time of the Deceased passing and up to that time had never personally owned his own home or lived anywhere else

The facts in this case indicate that the relationship between the Deceased and Beneficiary 1 was beyond a normal familial relationship.

Specifically, the facts provided in this case indicate that there was a mutual commitment to a shared life between the Deceased and Beneficiary 1.

Beneficiary 1 and the Deceased enjoyed a close personal relationship. Beneficiary 1 and the Deceased had lived together during Beneficiary 1's entire lifetime and had no plans to vacate the home. There was an intention that both Beneficiary 1 and the Deceased were committed to a shared life together.

Beneficiary 1's ongoing emotional and domestic support and personal care indicated that their relationship was not of mere convenience. Therefore, it is considered that a close personal relationship existed between Beneficiary 1 and the Deceased as contemplated in paragraph 302-200(1)(a) of the ITAA 1997.

The degree of support outlined in your contentions must be considered in accordance with paragraph (vii) of subregulation 302-200.01(2) of the ITAR 1997. It is acknowledged that the degree of emotional support provided by the Beneficiary to the Deceased is significant and goes beyond the level of emotional support that would typically be expected in a relationship between a parent and child. As such, a consideration of paragraph (vii) of subregulation 302-200.01(2) of the ITAR 1997 sufficiently differentiates the situation in this case from others involving a parent and child

In view of the above it is considered that whilst a close familial relationship existed between Beneficiary 1 and the Deceased, it was a close personal relationship as envisaged by paragraph 302-200(1)(a) of the ITAA 1997.

Accordingly, paragraph 302-200 (1)(a) of the ITAA 1997 has been satisfied with respect to Beneficiary 1.

Living together

The phrase 'live together' is not defined in the ITAA 1997 or accompanying regulations. According to the Macquarie Dictionary, the term 'live' means to dwell or reside. The term 'reside' is defined as the action of dwelling in a particular place permanently or for a considerable time.

Therefore, as paragraph 302-200(1)(b) of the ITAA 1997 requires that the persons live together, it is considered in the context of the provision, that the living arrangements must have some degree of permanency.

In determining if the persons live together it is relevant to have regard to 'the degree of mutual commitment to a shared life' and 'any evidence suggesting that the parties intend the relationship to be permanent'.

Beneficiary 1 had never resided separately from the Deceased until the Deceased needed to be moved into a nursing home due to the deterioration in his Alzheimer's and need for professional care. But for the deterioration in health Beneficiary 1 and Deceased would have remained living together. Consequently, paragraph 302-200(1)(b) of the ITAA 1997 has been satisfied.

Financial support

Financial support under paragraph 302-200 (1) (c) is satisfied if some level (not necessarily substantial) of financial support is being provided by one person (or each of them) to the other, for example providing support for a person's household and/or medical expenses.

In this case, the facts indicate that such financial support was provided to Beneficiary 1 by the Deceased to meet his day-to day living expenses, including food and accommodation and the payment approved by VCAT.

Therefore, the requirement specified in paragraph 302-200(1)(c) of the ITAA 1997 has been met.

Domestic support and personal care

Domestic support and personal care will commonly be of a frequent and ongoing nature. For example, domestic support services will consist of attending to the household shopping, cleaning, laundry and like activities. Personal care service may consist of assistance with mobility, personal hygiene and generally ensuring the physical and emotional comfort of a person.

Applying the above to the present facts, it is accepted that Beneficiary 1 provided the Deceased with domestic support and personal care as required under paragraph 302-200(1)(d) of the ITAA 1997.

It is therefore considered that the requirement in paragraph 302-200(1) (d) of the ITAA 1997 have been satisfied in this instance.

Conclusion

Beneficiary 1 is considered to be in an interdependency relationship with the Deceased just before they died as all of the conditions specified in subsections 302-200(1) of the ITAA 1997 have been met.

Therefore Beneficiary 1 is a death benefits dependent of the Deceased for the purposes of section 302-195 of the ITAA 1997.

Beneficiary 2

Financial dependency

A person may also qualify as a death benefits dependant where they were a dependant of the deceased person just before he or she died, per paragraph 302-195(1)(d) of the ITAA 1997.

Therefore, we will now consider whether Beneficiary 2 was a financial dependant of the Deceased.

According to the Macquarie Dictionary (2000 multimedia edition), one meaning of the term dependent is 'a person to whom one contributes all or a major amount of necessary financial support'.

In the CCH Macquarie Concise Dictionary of Modern Law, a dependent is defined as being 'a person substantially maintained or supported financially by another'.

In both dictionary definitions the emphasis is on the fact that the financial support or maintenance is substantial. In determining whether a person is a dependant it is necessary to establish the actual level of financial support that was provided to that person by the deceased. This is because dependence is assessed on the basis of the actual fact of dependence or reliance on the earnings of another for support. This is a question of fact (Aafjes v. Kearney (1976) 180 CLR 199, per Chief Justice Barwick).

Senior Member Fayle of the Administrative Appeals Tribunal (AAT), in Case [2000] AATA 8, in considering the definition of 'dependant' in relation to former section 27AAA of the ITAA 1936 stated:

The Act is primarily concerned with commercial and financial matters. An Act relating to the imposition assessment and collection of tax upon incomes. As such, a question of dependency should be construed within that context. The relevant question in this sense is whether the applicants were financially dependant on their son at the relevant time.

Where the level of financial support provided to a person is substantial then that person can be regarded as a dependant. So, a financial dependant is a person to whom another person contributes all or a major amount of necessary financial support. If the level of financial support is insignificant or minor, beyond a level of subsistence, then the person should not be characterised as a dependant in terms of paragraph 302-195(1)(d) of the ITAA 1997.

In the case of Aafjes v Kearney (1976) 180 CLR at page 207 Gibbs J cited the High Court case of Kauri Timber Co (Tas) Pty Ltd v Reeman (1973) 128 CLR 77 at pages 188-189, and further clarified uncertainty concerning dependency noting

...but it does not follow from it that a person who in fact receives some support from one person cannot properly be said to be wholly dependent on another. It is not the mere fact of receipt of support but the dependence or reliance upon another to provide it that matters. [Emphasis added]

In the Victorian Supreme Court case of Fenton v. Batten [1949] ALR 69; [1948] VLR 422, Justice Fullager made the following comments regarding dependency:

The word dependant is, in a true sense a technical term. If the evidence established that the alleged dependant relied on or relies on another as the source wholly or in part of his or their existence then dependence is established. Questions of scale of living do not enter into the matter in the absence of some such statutory enactment.

These comments made in Fenton v. Batten when read in the context with the facts established in that case, confirm the definition of dependant contained in the CCH Macquarie Dictionary of Modern law and the meaning quoted above from the Macquarie Dictionary.

In the full High Court case of Kauri Timber Co. (Tas) Pty Ltd v. Reeman (1973) 128 CLR 177, Justice Gibbs (as he then was) in speaking of previous cases on the issue of dependency stated that:

The principle underlying these authorities is the actual fact of dependence or reliance on the earnings of another for support that is the test.

Handing down the decision in Re Malek v. Commissioner of Taxation (Cth) Case [1999] AATA 678 (Malek), Senior Member Pascoe further clarified the meaning of the word dependant, stating:

In my view, the question is not to be decided by counting up the dollars required to be spent on the necessities of life for [Mrs Malek], then calculating the proportion of those dollars provided by the [son] and regarding their as a dependant only if that proportion exceeds 50%...In my view, the relevant financial support is that required to maintain the persons normal standard of living and the question of fact to be answered is whether the alleged dependant was reliant on the regular continuous contribution of the other person to maintain that standard.

In Malek, the evidence supplied by the taxpayer was able to demonstrate that the financial support received from their deceased son had been significant. The son had accepted responsibility for mortgage repayments, maintenance and other expenses of the unit in which the taxpayer lived.

That dependency involves more than the mere receipt of support, but also reliance on it, was affirmed by Hamilton J in Griffiths v Westernhagen [2008] NSWSC 851, [58]:

For a relationship of dependency to be established, there must be more than the mere giving of money. Rather there must be a relationship where one party relies on the other for what is required for their ordinary living.

The tenor of the case law noted above refers to a level of dependency to maintain the dependant's ordinary living (Griffiths v Westernhagen), normal standards of living (Malek's case) and relying on another as a means of subsistence (Kauri Timber Co (Tas) Pty Ltd).

If the financial support provided merely supplements the person's income and represents quality of life payments, then it would not be considered substantial support.

In this case, the point to be considered is whether the facts show Beneficiary 2 depended or relied on the earnings of the Deceased to maintain his ordinary standard of living at the time of the Deceased's death.

At the time of the Deceased's death, Beneficiary 2 was unemployed and was relying on government assistance as well as the Deceased to support him in his day-to day expenses.

On the 8 June 2016 a hearing was held at the Victorian Civil and Administrative Tribunal (VCAT) in relation to the deceased's attorney seeking rulings for the payment of monetary support each month to Beneficiary 1 and Beneficiary 2 during the deceased's lifetime.

The support from the Deceased was regular and continuous. The financial support provided did not merely supplement Beneficiary 2's income, rather it maintained basic living standards.

Therefore, it can be said that the Deceased was the one who contributed all or a major amount of necessary financial support to Beneficiary 2. Beneficiary 2 was substantially maintained or supported financially by the Deceased.

Conclusion

In view of the above it is considered Beneficiary 2 was financially dependent on the Deceased at the time of the Deceased's death, within the meaning in paragraph 302-195(1)(d) of the ITAA 1997.

Therefore, Beneficiary 2 is a death benefits dependant as defined under section 302-195 of the ITAA 1997.