Edited version of private advice

Authorisation Number: 1051795225241

Date of advice: 13 January 2021

Ruling

Subject: Death benefit dependants

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)?

Question 2

Is Beneficiary 2 a death benefits dependant of the Deceased in accordance with section 302-195 of the ITAA 1997?

Answers

Yes

No

This ruling applies for the following period:

Year ended 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

The Deceased passed away in late 2015.

The Estate subsequently received death benefits which are to be distributed between the beneficiaries of the Estate including Beneficiary 1 and Beneficiary 2.

At the time of death, the Deceased was living and working with Beneficiary 1 who claimed to be a de facto spouse and Beneficiary 2, an adult child.

Beneficiary 1 was not included in the Will of the deceased as their relationship had not commenced at the time it was written. After the death of the Deceased, the Deceased children contested Beneficiary 1's claim to be a spouse and Beneficiary 1 applied to the Court for the Estate to make provision.

Copies of affidavits provided to the Court by Beneficiary 1 and Beneficiary 2 have been provided.

Under a judicial ruling, Beneficiary 1 was found to be entitled to receive provision from the Estate by a Justice meaning that they were was found to have "standing" under s41(1) of the Succession Act 1981 (Qld).

You have advised in order to have standing, you must be a spouse, child or financial dependent of the deceased and it follows claims' to be a spouse has been affirmed by the Court.

In relation to Beneficiary 2, according to an affidavit provided by Beneficiary 2 to the Supreme Court of Queensland in late 2019 (the affidavit), the Deceased provided Beneficiary 2 with food and accommodation up to a period of approximately five years up to the date of the Deceased's death.

You have further advised it appears that Beneficiary 2 had been heavily reliant on the Deceased financially for most of their life and had only spent minimal periods of time living on their own which occurred mainly when they had been travelling.

Although Beneficiary 2 worked in the Deceased's business, you contend the following:

•         appeared to do this more as a way of helping out the Deceased and was only paid a minimal wage for services.

•         Based on the affidavit, it does not appear that Beneficiary 2's accommodation and food were reliant on them working in the Deceased business and would have been provided regardless.

You have further advised and this has also been stated by Beneficiary 2 in the affidavit , Beneficiary 2's income since the Deceased death appears to be minimal and from Beneficiary 2's weekly expenses suggest that they have been living a "hand to mouth" existence by working in exchange for food and/or accommodation. Beneficiary 2 does not appear to have been able to establish a permanent place of abode since the Deceased death giving further support to the fact that they were heavily dependent on the parent's support to maintain what would be considered a "normal' standard of living.

In response to our email seeking further information you have provided the following:

•         At the time the Deceased passed away, Beneficiary 2 says they were not receiving any other income or financial support from any other sources (including Centrelink) save for the minimal wages as was earning from the Deceased from working for them at the business. The Deceased paid for Beneficiary 2's share of household and living expenses.

•         Beneficiary 2 says they do not have any supporting invoices or receipts to provide as the period in question is now in excess of several years ago. Further, Beneficiary 2 says that as far as they can recall, they had no bills in their name as the bills were in the Deceased's name. Beneficiary 2's phone was pre-paid.

•         Beneficiary 2 instructs they did not possess any assets of value at the time the Deceased died. Beneficiary 2 says the most valuable asset would have been a computer. Beneficiary 2 did not have any liabilities either.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1997 Section 302-195

Income Tax Assessment Act 1997 Section 302-200

Income Tax Assessment Act 1997 Section 995 -1

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

Reasons for decision

Summary

Beneficiary 1 was a dependent of the Deceased under paragraph 302-195(1)(a) of the ITAA 1997.

An interdependency relationship as defined under subsection 302-200 (1) of the ITAA 1997 did not exist between the Deceased and Beneficiary 2.

Beneficiary 2 was not a dependent of the Deceased under paragraph 302-195(1)(a) 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) of the ITAA 1997 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.

Section 995 -1 of the ITAA 1997 defines a spouse as follows:

spouse of an individual includes:

(a)   another individual (whether of the same sex or a different sex) with whom the individual is in a relationship that is registered under a *State law or *Territory law prescribed for the purposes of section 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section; and

(b)   another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple.

In relation to Beneficiary 1 we are satisfied that Beneficiary 1 and the Deceased lived together in a genuine domestic basis and the definition of spouse has been met as we have considered:

a)    ATO income tax records for Beneficiary 1 that specified the Deceased as a spouse.

b)    the copy of the statutory declaration provided states the circumstances of their relationship was a de facto relationship. This was submitted as part of court proceedings.

c)    the findings of the court proceedings contained in the copy of the judicial ruling provided in your application, which outlined you have a relationship akin to a spouse.

Paragraphs 302-195(1)(a) and (b) of the ITAA 1997 therefore applies to Beneficiary 1 and they are considered a death benefits dependant.

Beneficiary 2

Paragraphs 302-195(1)(a) and (b) of the ITAA 1997 do not apply to Beneficiary 2. Therefore, to conclude that Beneficiary 2 is a 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) of the ITAA 1997.

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 or not 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 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) of the ITAA 1997, 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:

o   the duration of the relationship;

o   the degree of mutual commitment to a shared life;

o   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 a parent of Beneficiary 2 at the time of death, the Deceased and Beneficiary 2 had of course known each other for some time. However, the 'duration of a relationship' in and of itself is not sufficient to categorise 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.

The information provided advises that, Beneficiary 2 and the Deceased lived at the same residence until the Deceased's death.

The facts in this case indicate that the relationship between the Deceased and Beneficiary 2 was not beyond a familial relationship.

Specifically, the facts provided in this case do not indicate that there was a mutual commitment to a shared life between the Deceased and Beneficiary 2 and Beneficiary 2 and the Deceased enjoyed a close personal relationship.

Based on the facts provided in the affidavit, the Deceased provided support by way of assisting Beneficiary 2 to meet food and rent commitments indicating that their relationship were one of mere convenience. Therefore, it is considered that a close personal relationship did not exist between Beneficiary 2 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 Deceased to Beneficiary 2 is significant however this does not go beyond the level of emotional support that would typically be expected in a relationship between a parent and child. It is noted that Beneficiary 2 maintained a considerable amount of independence by travelling around Australia and earning wages albeit a portion was withheld by the Deceased for rent and food and other bills of Beneficiary 2. As such, a consideration of paragraph (vii) of subregulation 302-200.01(2) of the ITAR 1997 does not sufficiently differentiate 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 2 and the Deceased, they were not in 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 not been satisfied with respect to Beneficiary 2.

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'.

The affidavit signed by Beneficiary 2 confirms they lived with the Deceased from 19XX till the Deceased passed away in 2015.

The evidence provided confirms a commitment to reside together to support the Deceased running a business and assist in the living expenses of Beneficiary 2. 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 affidavit supports the claim that financial support was provided to Beneficiary 2 by the Deceased to meet day-to day living expenses, including food and accommodation.

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 not accepted that Beneficiary 2 and the Deceased provided each other 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 has not been satisfied in this instance.

Conclusion

Beneficiary 2 cannot be in an interdependency relationship with the Deceased just before they died as all the conditions specified in subsections 302-200(1) of the ITAA 1997 have not been met.

Therefore, we need to consider if Beneficiary 2 is a death benefits dependent of the Deceased for the purposes of section 302-195 of the ITAA 1997 by virtue of satisfying paragraph 302-195(1)(d) of the ITAA 1997.

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 based on the 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 dependent 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 199 at page 207 Gibbs J cited the High Court case of Kauri Timber Co (Tas) Pty Ltd v Reeman (1973) 128 CLR 177 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.

The point to be considered is whether the facts show Beneficiary 2 relied on the earnings of the Deceased to maintain an ordinary standard of living at the time of the Deceased's death.

Based on the information provided including the affidavit signed by Beneficiary 2, it is accepted that the Deceased provided financial support (re daily cost of living expenses, i.e. food and rent etc.) to Beneficiary 2.

Beneficiary 2 has no assets and lived with Beneficiary 1. The support from the Deceased was regular and continuous. Whilst it is accepted Beneficiary 2 relied on the Deceased for what is required for their ordinary living, the financial support provided however supplemented the income of Beneficiary 2, rather than maintaining basic living standards.

In relation to Beneficiary 2, financial assistance provided immediately before the Deceased passed away was a result of Beneficiary 2 having to assist with the running of the Deceased's business. Beneficiary 2 continued to work, albeit in a reduced capacity. In addition, whilst Beneficiary 2 received reduced wages from the Deceased, the affidavit signed by Beneficiary 2 states this was due a part of the wages being withheld to account for expenses of Beneficiary 2 such as rent and food. The evidence does not support that Beneficiary 2 needed financial support from the Deceased to maintain his standard of living.

Conclusion

In view of the above, it is determined that Beneficiary 2 was not 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 not a death benefits dependant, as defined under section 302-195 of the ITAA 1997.