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Edited version of private advice

Authorisation Number: 1051820928515

Date of advice: 7 April 2021

Ruling

Subject: Taxation of superannuation death benefits

Question 1

Is a person, (the First Beneficiary) a death benefits dependant of a person who has died (the Deceased) in accordance with section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the death benefit payable by the Trustee Self-Managed Superannuation Fund (the Fund) non-assessable and non-exempt income in accordance with section 302-60 of the ITAA 1997?

Answer

No.

Question 3

Does the Trustee have to withhold any amount of income tax from the death benefit payable by the Trustee, as trustee of the Fund, to the First Beneficiary?

Answer

Yes.

Question 4

Is a person (the Second Beneficiary) a death benefits dependant of the Deceased in accordance with section 302-195 of the ITAA 1997?

Answer

No.

Question 5

Is the death benefit payable by the Fund non-assessable and non-exempt income in accordance with section 302-60 of the ITAA 1997?

Answer

No.

Question 6

Does the Trustee have to withhold any amount of income tax from the death benefit payable by the Trustee, as trustee of the Fund, to the Second Beneficiary?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased died in the 20XX-XX income year.

The First Beneficiary is a child of the Deceased aged over 18 years.

The Second Beneficiary is a child of the Deceased aged over 18 years.

For nearly twenty years, the Deceased was employed in several different roles both in Australia and overseas.

The Deceased lived with the Beneficiaries at various residences. For nearly 10 years, the Deceased lived alone while working overseas.

More than 10 years ago, the Deceased purchased a property (the First Property) intending that it would be an investment property.

Subsequently, the Deceased purchased another property (the Second Property) intending that it would be their principle place of residence.

The First Beneficiary

The First Beneficiary live with and was wholly supported by the Deceased while they attended school and university.

In or around 20XX, the First Beneficiary commenced full time employment.

Prior to this, the First Beneficiary lived with the Deceased when the Deceased moved interstate for work.

Just before they commended full time employment, the First Beneficiary moved out of the Second Property and into a rented apartment for which the Deceased paid the rent.

In the 20XX-XX income year, the Deceased moved into the rented apartment with the First Beneficiary and continued to pay the rent.

In the 20XX-XX income year, the Deceased and the First Beneficiary moved into the First Property.

The Deceased supported the First Beneficiary by providing accommodation, living expenses and other financial assistance with charge until the Deceased's death.

The First Beneficiary did not receive any Centrelink benefits for care provided to the Deceased.

The Second Beneficiary

The Second Beneficiary lived with and was wholly supported by the Deceased while they attended school and university.

In the 20XX-XX income year, the Second Beneficiary commenced full time employment.

In the 20XX-XX income year, the Second Beneficiary moved out of the Deceased's home and lived with their partner.

Until the Second Beneficiary moved out and started to live independently, the Deceased provided accommodation, living expenses and other financial assistance with charge.

In the 20XX-XX income year, the Second Beneficiary and their partner moved into the Second Property with the Deceased and the Deceased provided support to the Second Beneficiary on a similar basis as previously.

In the 20XX-XX income year, the Deceased moved interstate for employment while the First and Second Beneficiaries, along with the Second Beneficiary's partner, remained in the Second Property.

Subsequently, the Second Beneficiary and their partner moved out of the Second Property.

The Second Beneficiary did not receive any Centrelink benefits for care provided to the Deceased.

The Deceased's illness

In the 20XX-XX income year, the Deceased was diagnosed with a severe illness. The Deceased was advised that the condition was life-threatening and the prognosis was poor. The Deceased's health deteriorated rapidly, and they were unable to manage their health or financial affairs without assistance.

At the time of their diagnosis, the Deceased lived with the First Beneficiary to whom they provided accommodation, living expenses and other financial assistance even though the First Beneficiary was working full-time.

At the time of their diagnosis, the Second Beneficiary and their partner were living separately. The Second Beneficiary provided substantial care to the Deceased.

In the 20XX-XX income year, the Second Beneficiary and their partner terminated their lease in XXXX and moved into the First Property to provide full time care for the Deceased.

During this time, the Second Beneficiary and their partner did not pay any rent towards the First Property.

The Second Beneficiary took significant amounts of leave as the Deceased underwent medical treatment.

The two Beneficiaries provided financial support, domestic support and personal care to the Deceased in the following form:

•         household shopping, cleaning, laundry, food preparation;

•         transport to medical and social appointments and engagements;

•         attending medical appointments and hospital admissions and arranging medical administrative materials;

•         managing the Deceased health insurance claims; and

•         emotional care and support.

As the Deceased's health deteriorated, they were wholly dependent on the personal care and support provided by the Beneficiaries who each took substantial time off work to care for the Deceased.

The Superannuation Fund

The Deceased was the only member of the Fund.

The Deceased made a binding death benefit nomination in respect of their death benefit, allocating 50% to each of the two Beneficiaries.

The payment has not yet been made by the Fund.

The Fund intends to make the payment directly to the Beneficiaries.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-60

Income Tax Assessment Act 1997 Section 302-140

Income Tax Assessment Act 1997 Section 302-145

Income Tax Assessment Act 1997 Section 302-195.

Income Tax Assessment Act 1997 Section 302-200.

Income Tax Assessment Regulations 1997 Regulation 302-200.01.

Taxation Administration Act 1953 paragraph 12-85(a).

Taxation Administration Act 1953 section 15-25.

Taxation Administration Act 1953 section 15-30.

Reasons for decision

Summary

The Beneficiaries are not death benefits dependant of the Deceased because an interdependency relationship, as defined under section 302-200 of the ITAA 1997, did not exist between the Beneficiaries and the Deceased, nor were the Beneficiary a dependant of the Deceased, just before the Deceased died. Therefore, the Benefit is not tax free in accordance with section 302-60 of the ITAA 1997.

The tax free component of the Benefit is tax free under section 302-140 of the ITAA 1997. The taxable component is assessable income under section 302- 145 of the ITAA 1997; it should be included in each of the Beneficiaries assessable income for the 20XX-XX income year.

The Trustee of the Fund is required to withhold from the taxable component of a superannuation lump sum death benefits made to the Beneficiaries pursuant to paragraph 12 of Schedule 1 Taxation Administration Act 1953 (TAA 1953).

Detailed reasoning

Subsection 302-195(1) of the ITAA 1997 defines a death benefits dependant of a person who has died as:

(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 just before he or she died.

*To find definitions of asterisked terms, see the Dictionary, starting at 995-1.

As the Beneficiaries 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 the Beneficiary is a death benefits dependant of the Deceased, it must be established that the Beneficiary had an 'interdependency relationship' with the Deceased or that they were a 'dependant' of the Deceased just before the Deceased died.

What is an interdependency relationship?

Subsection 302-200(1) of the ITAA 1997 states that two persons (whether or not 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(3) of the ITAA 1997 provides that 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 (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.

Close personal relationship

A close personal relationship is generally one that involves a demonstrated and ongoing commitment to the emotional support and well-being of the two parties. Indicators of a close personal relationship may include the duration of the relationship and the degree of mutual commitment to a shared life.

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. However, 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.

In this case, the facts do not indicate a relationship between a parent and child that may be treated as an interdependency relationship for the purposes of subsection 302-200(1) of the ITAA 1997. There is nothing to indicate a level of commitment to a shared life or a level of care above what would normally be expected between family members. It is expected that family members would provide emotional support in difficult times. There is no evidence to suggest that the First or Second Beneficiary and the Deceased were mutually committed to a shared life together. While both beneficiaries lived with the Deceased due to the Deceased's illness, there is nothing to indicate a level of commitment to a shared life or a level of care above what would be normal or expected of an adult child living at home with a parent.

Consequently, while it is accepted that the Beneficiaries and the Deceased had a close parent/child relationship, it is not considered that a close personal relationship existed between the Beneficiaries and the Deceased as contemplated in paragraph 302-200(1)(a) of the ITAA 1997.

Living together

The phrase 'live together' is not defined in the ITAA 1997 or ITAR 1997. 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 states as a requirement 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'.

While, in this case, the Beneficiaries and the Deceased lived together for a considerable time, there is no evidence of mutual commitment to a shared life. Although the Beneficiaries and the Deceased provided each other with normal day to day support for people sharing a living space, they each lead independent lives with their own work. Also, while it may have been convenient for the Beneficiaries to live with the Deceased and be supported financially, domestically and emotionally, there is nothing to indicate that it was expected that they would do so permanently. In fact, there were periods when the Beneficiaries did not live with the Deceased.

As all the conditions of subsection 302-200(1) of the ITAA 1997 must be satisfied for an interdependency relationship to exist, based on the above, an interdependency relationship between you and the Deceased did not exist in this case because it has not been established that:

•         you and the Deceased had a close personal relationship just before the Deceased died;

•         you lived together; or

•         one or each of you provided the other with domestic support and personal care.

Consequently, the Beneficiaries are not a death benefits dependant of the Deceased as defined in section 302-195 of the ITAA 1997.

As all the conditions in subparagraph 3002-200(1) of the ITAA 1997 have not been satisfied, an interdependency relationship between the Deceased and the Beneficiary did not exist.

Therefore, to be a death benefits dependant of the Deceased, the Beneficiary must show that they were a 'dependant' of the Deceased just before they died under paragraph 302-195(1)(d) of the ITAA 1997.

Are the Beneficiaries dependants of the deceased?

Meaning of 'dependant'

According to the Macquarie Dictionary, a 'dependant' is:

1.one who depends on or looks to another for support, favour, etc 2. a person to whom one contributes all or a major amount of necessary financial support.

Butterworth's Australian Legal Dictionary defines 'dependant' as 'a person who depends on another, wholly or substantially'.

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 her existence then dependence is established. Questions of scale of living do not enter into the matter in the absence of some such statutory enactment.

In Case [2000] AATA 8, (2000) 43 ATR 1273; 2000 ATC 129, Senior Member Fayle in considering the definition of dependant in relation to section 27AAA of the Income Tax Assessment Act 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 dependent on their son at the relevant time.

Handing down the decision in Re Malek v. Federal Commissioner of Taxation Case [1999] AATA 678; (1999) 42 ATR 1203, (1999) 99 ATC 2294, Senior Member Pascoe of the Administrative Appeals Tribunal (AAT) 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 her as a dependant only if that proportion exceeds 50%...In my view, the relevant financial support is that required to maintain the person's 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.

Relevantly, ATO Interpretative Decision 2014/22 Income Tax: death benefits dependant- adult child caring for a terminally ill parent (ATOID 2014/22) considered the scope of paragraph 302-195(1)(d), stating:

The definition of death benefits dependant in paragraph 302-195(1)(d) does not stipulate the nature or degree of dependency, but it is generally accepted that this refers to financial dependence and it is a condition that must exist in relation to the taxpayer at the time of the deceased's death.

The facts do not indicate that the Beneficiaries were financially dependent on the Deceased for financial maintenance and support at the time of the Deceased's death. Rather, each had their own respective incomes.

Consequently, the Beneficiaries are not considered to be dependants of the Deceased within the scope of paragraph 302-195(1)(d) of the ITAA 1997.

Tax treatment of a death benefits payment made to a non-dependant beneficiary

Section 302-140 of the ITAA 1997 provides that the tax-free component of a superannuation lump sum received by a non-dependant beneficiary is not assessable income and is not exempt income.

Section 302-145 of the ITAA 1997 provides that the taxable component of a superannuation lump sum received by a non-dependant beneficiary is assessable income, with a tax offset to ensure that the rate of tax on the element taxed in the fund does not exceed 15% and that the rate of tax on the untaxed element in the fund does not exceed 30%.

Withholding obligations for superannuation lump sums

Paragraph 12-85(a) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) states that an entity must withhold an amount from a superannuation lump sum payment.

In accordance with section 15-25 and 15-30 of Schedule 1 to the TAA 1953, the Commissioner has issued a Schedule 12- tax table for superannuation lump sums.

This schedule should be used if a superannuation lump sum payment is made to an individual.

Table A of Schedule 12 sets out the withholding rates for superannuation lump sums.

The Trustee of the Fund will need to calculate the withholding amounts for the lump sum payments to be made to each of the Beneficiaries.