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Ruling

Subject: Superannuation death benefits - financial dependency

Questions:

1. Are the beneficiaries financial dependants of the deceased at the time of the death of the deceased in accordance with the definition of dependant in accordance with section 302-195 of the Income Tax Assessment Act 1997?

2. Is any part of the two superannuation death benefits to be included in each of the beneficiary's assessable income in the 2009-10 income year?

Answers:

1. Yes

2. No

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

· The deceased was a young adult child.

· Beneficiary A and Beneficiary B are the parents of the deceased.

· The deceased lived with both Beneficiaries prior to and at the time of the deceased's death at the family home.

· The deceased died intestate in the 2008-09 income year.

· The deceased's parents have 2 other children. The deceased is the youngest of the children. The elder child lives with his partner. The middle child lives with the parents in the family home. The middle child has a medical condition and is not working. The middle child is receiving Centrelink benefits. Both of the elder children manage their own financial affairs.

· Beneficiary A is an age pensioner.

· Beneficiary B 's income was used to support the family expenses and the repayment of the mortgage. Beneficiary B had a stroke in 2006 and has been unable to work since then.

· The deceased decided to defer his studies to financially help out the beneficiaries by entering into the workforce after the stroke of Beneficiary B.

· The deceased was working in the 2007-08 and 2008-09 income years and his wages were deposited into Beneficiary B's bank account for the purpose of contributing to the household expenses and the mortgage.

· The beneficiaries paid an amount per week to the deceased for his lunch. The beneficiaries organised transportation to and from work for the deceased.

· The deceased does not own any assets.

· The deceased was a member of two superannuation funds (Fund A and Fund B).

· The beneficiaries lodged a claim with both superannuation funds for payment of death benefits.

· In the second quarter of the 2009-10 income year, a gross superannuation death benefit was made to Beneficiary B by Fund B. Tax was withheld from this payment. Subsequently, the trustee of Fund B has determined that Beneficiary B was in an interdependency relationship with the deceased and therefore a death benefit dependant. In the last quarter of the 2009-10 income year, the trustee of Fund B refunded the tax withheld to Beneficiary B.

· In the second quarter of the 2009-10 income year, Fund A paid superannuation death benefits to the deceased's parents as beneficiaries of the deceased's estate. Tax was withheld from each of the payments.

· The beneficiaries are recipients of Centrelink benefits. They have no other income.

· The beneficiaries have a joint mortgage with a commercial bank.

· The beneficiaries own 2 old model motor vehicles.

· The beneficiaries' household expenses for the last few years have been roughly the same, the expenses mainly include fortnightly mortgage repayments, electricity bills, rates and food etc.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 995-1.

Income Tax Assessment Act 1997 Section 302-195.

Income Tax Assessment Act 1997 Section 302-200.

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

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

Income Tax Assessment Act 1997 Subsection 302-200(3).

Income Tax Assessment Act 1997 Section 302-60.

Income Tax Assessment Regulations 1997 Regulation 302-200.01.

Reasons for decision

Summary of decision

It is considered that the beneficiaries were financially dependent on the deceased at the time of the deceased's death. Therefore the beneficiaries are considered to be dependants of the deceased within the definition of 'death benefit dependant' in section 302-195 of the Income Tax Assessment Act 1997.

Detailed reasoning

Division 302 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the taxation arrangements that apply to the payment of 'superannuation death benefits' that are made after 30 June 2007. These arrangements depend on whether the person that receives the superannuation death benefit is a dependant of the deceased or not and whether the amount is paid as a 'lump sum superannuation death benefit' or a superannuation income stream death benefit.'

Where a person receives a superannuation death benefit and that person was a dependant of the deceased, it is not assessable income and is not exempt income.

Subsection 995-1 of the ITAA 1997 states that the term 'death benefits dependant' has the meaning given by section 302-195. Section 302-195 of the ITAA 1997 defines '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.

Under section 302-200(1) of the ITAA 1997 an 'interdependency relationship' is defined as:

Two persons (whether or not related by family) have an interdependency relationship under this section 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.

Section 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 of them suffer from a physical, intellectual or psychiatric disability.

Paragraph 302-200(3)(a) of the ITAA 1997 states that the regulations may specify the matters that are, or are not, to be taken into account in determining whether 2 persons have an interdependency relationship under subsections 302-200(1) and (2) of the ITAA 1997. Paragraph 302-200(3)(b) states that the regulations may specify the circumstances in which 2 persons have, or do not have an interdependency relationship under subsections 302-200(1) and (2) of the ITAA 1997. Regulation 302-200.01(2) of the Income Tax Regulations 1997 (ITR 1997) states as follows:

a) all of the circumstances of the relationship between the persons, including (where relevant):

(i) the duration of the relationship; and

(ii) whether or not a sexual relationship exists; and

(iii) the ownership, use and acquisition of property; and

(iv) the degree of mutual commitment to a shared life; and

(v) the care and support of children; and

(vi) the reputation and public aspects of the relationship; and

(vii) the degree of emotional support; and

(viii) the extent to which the relationship is one of mere convenience; and

(ix) any evidence suggesting that the parties intend the relationship to be permanent; and

b) the existence of a statutory declaration signed by 1 of the persons to the effect that the person is, or (in the case of a statutory declaration made after the end of the relationship) was, in an interdependency relationship with the other person.

All of the conditions in subsection 302-200(1) of the ITAA 1997, or alternately both the condition in paragraph 302-200(1)(a) and the condition in subsection 302-200(2), of the ITAA 1997 must be satisfied for the taxpayer to be able to claim that he/she has an interdependency relationship.

In this case, the beneficiaries and the deceased were parents and a young adult child and obviously had a close familial relationship prior to, and at the time of the deceased's death.

Given that the deceased was a young adult child at the time of death, the deceased and the beneficiaries had of course known each other for some time. The facts also show that the relationship between the deceased and both beneficiaries was a normal familial relationship for a person living with their parents. Whilst both the deceased and the beneficiaries may have intended to remain an important part of each others lives, it is reasonable to assume that the relationship would have changed significantly over time.

Accordingly, it is ruled that the beneficiaries were not in an 'interdependency relationship' with the deceased in the period before the deceased died and at the time of the deceased's death.

For payments made after 30 June 2007, if an interdependency relationship cannot be established, dependency based on financial dependency will need to be established.

Therefore we will now consider whether the beneficiaries were financially dependent on the deceased.

According to the Macquarie Dictionary, one meaning of the term 'dependant' 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 'dependant' 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 (Aafies v. Kearney 8 ALR 455, Barwick CJ at 456).

In Case [2000] AATA 8, 43 ATR 1273, Fayle SM in considering the definition of 'dependant' in relation to 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 considered to be 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, then the person cannot be regarded as a dependant.

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.

These comments made in Fenton v. Batten when read in the context with the facts established in that case, would tend to 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] (1973) 47 ALJR 184; [1972-73] ALR 1266; (1973) 128 CLR 177 at (CLR) 180, 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 Malek v. Federal Commissioner of Taxation 42 ATR 1203, 99 ATC 2294 (Malek's Case), 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.

In Malek's Case, the evidence supplied by the taxpayer was able to demonstrate that the financial support received from her 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.

Taking into account all of the above, it is considered that financial dependence occurs where a person is wholly or substantially maintained financially by another person. The point to be considered is whether the facts show that the taxpayers depended or relied on the earnings of the deceased for their day to day sustenance.

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. What needs to be determined is whether or not the person would be able to meet their daily basic necessities (shelter, food, clothing, etc.) without the additional financial support.

In this case, the beneficiaries were the parents of the deceased. Hence the point to be considered is whether the facts show that the beneficiaries 'depended or relied on' the earnings of deceased for their day to day sustenance at the time of the deceased's death.

The facts show that the beneficiaries are the aged parents of the deceased whose only income comes from Centrelink pensions.

The beneficiaries have a joint mortgage from a commercial bank, which they are struggling to meet since Beneficiary B give up working after having a stroke in late 2006.

The deceased provided substantial financial support to the beneficiaries by depositing his wages into his mother's bank account to cover the mortgage, household and food expenses.

Given the above, it is considered the beneficiaries' were reliant on the deceased's regular continuous contributions towards their living expenses and mortgage repayments over the last couple of years until the deceased's death.

In view of the above, the beneficiaries claim that they were financially dependent on the deceased at the time of the deceased's death have been substantiated and therefore they are considered to be dependants of the deceased with the definition of 'death benefit dependant' in section 302-195 of the ITAA 1997.

The taxation treatment of superannuation death benefits

As the beneficiaries are considered to be death benefit dependants the superannuation death benefits will be tax-free and therefore not included as assessable income under section 302-60 of the ITAA 1997.

Refund of the total tax withheld

In order to receive a refund of the tax withheld from Fund A, each of the beneficiaries is required to lodge their income tax return for the 2009-10 year.

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