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Ruling

Subject: Superannuation death benefits - Interdependency relationship

Issue

Question

Are the two beneficiaries of the Estate death benefits dependants of the deceased in accordance with section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answer

Yes.

This ruling applies for the following period

For the year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The deceased lived with both parents in the family home until the deceased's death, in the particular year.

The deceased was diagnosed as suffering from a medical condition.

Diagnosis was made for the deceased following a court ordered hospitalisation due to the deceased's particular behaviour..

Following a number of weeks hospitalisation and diagnosis, the deceased relied heavily on both parents to supervise medication and assist the deceased to attend periodic medical clinics.

The very nature of the deceased's illness largely incapacitated the deceased's ability to maintain close personal relationships in the usual manner. Due to the deceased's anti social behaviour the deceased had a small circle of friends.

The deceased did not own a vehicle nor was the deceased licensed to drive. On the occasions when the deceased was in employment, both parents would drive the deceased to work.

The parents transported the deceased to and from various medical appointments and attended family gatherings together and provided the deceased with physical, personal and emotional support.

Despite the emotional difficulties and extra demands placed on the deceased's parents, their concern for the deceased's welfare was paramount and they chose to keep the deceased in their direct care.

The nature of the deceased's illness diminished the parents capacity to engage in their own social network leaving them somewhat isolated.

Both parents provided the deceased with domestic support and personal care which included cooking meals, washing, ironing, shopping and house cleaning.

In addition to daily household duties and providing personal care and physical assistance for the deceased, the parents provided their adult child with emotional support.

The household expenses have been provided and show a total amount for the relevant income year and up to the date of the deceased's death. No contribution was made by the deceased.

The parents paid the household expenses, utilities and groceries and fully funded the deceased's day to day living expenses.

The deceased was receiving a disability pension per fortnight for the relevant income year. In addition to the disability pension, from 1 July in the relevant year up to the date of the deceased's death, the deceased received a small amount of wages.

The total income of the deceased's parents for the relevant periods has been provided.

A PAYG payment summary - superannuation lump death benefit for the recent income year was made to the deceased's estate (the Estate). The total amount is a taxable component-taxed element.

Both parents of the deceased are the only beneficiaries of the Estate.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27AAB.

Income Tax Assessment Act 1997 Ch3-Pt3-30-Div302.

Income Tax Assessment Act 1997 Section 302-195.

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 Subsection 302-200(3).

Income Tax Regulations 1936 Regulation 8A.

Reasons for decision

Summary

Both parents and the deceased had an interdependency relationship and are considered to be death benefits dependants of the deceased. Consequently, the superannuation death benefits will not be assessable to the trustee (or administrator) of the deceased estate.

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. 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.

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.

As the two beneficiaries cannot qualify under paragraphs (a) or (b) of the above definition, paragraphs (c) and (d) of section 302-195 of the ITAA 1997 need to be examined.

Interdependency relationship

Paragraph 302-195(c) of the ITAA 1997 of the definition of death benefits dependant refers to interdependency relationship.

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

Section 302-200(2) of the ITAA 1997 states:

All of the conditions in subsection 302-200(1) of the ITAA 1997, or alternatively both the condition in paragraph 302-200(1)(a) and the condition in subsection 302-200(2), must be satisfied for a person to be in an interdependency relationship with another person.

To assist in determining whether 2 persons have an interdependency relationship, 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 addition, paragraph 302-200(3)(b) of the ITAA 1997 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).

It is proposed to deal with each condition of subsection 302-200(1) of the ITAA 1997 in turn.

Close personal relationship:

The first requirement to be met is specified in paragraph 302-200(1)(a) of the ITAA 1997. It states that two persons (whether or not related by family) must have a close personal relationship.

A detailed explanation of subsection 302-200(1) of the ITAA 1997 is set out 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. This section dealt with interdependency relationships prior to 1 July 2007. In discussing the meaning of close personal relationship the SEM states:

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 (for example 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.

In the explanatory statement to the Income Tax Amendment Regulations 2005 (No. 7) which inserted former regulation 8A of the Income Tax Regulations 1936, it stated that:

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

A close personal relationship as specified in subsection 302-200(1) of the ITAA 1997 would not normally exist between parents and their children because there would not be a mutual commitment to a shared life between the two. In addition, the relationship between parents and their adult children would be expected to change significantly over time. It would be expected that the adult child would eventually move out and secure independence from their parents.

However, in this particular case, even though the deceased is an adult son of the parents, the facts show that the relationship between the deceased and both parents were far from being normal circumstances. Clearly the parents demonstrated their love and concern for the welfare of their adult child well beyond normal boundaries.

Despite the difficulties of living with their adult child and the significant extra demands placed on them, their concern for their adult child's welfare was paramount and chose to keep their adult child in their direct care. This arrangement was not one of convenience but driven by safety, care and concern for the wellbeing of their adult child.

The nature of the deceased's illness and the deceased's anti social behaviour meant the deceased had a small circle of friends. This meant the deceased heavily relied on both parents for emotional support. Similarly, the deceased's illness diminished both parent's capacity to engage in their own social network leaving them somewhat isolated and relying on the deceased and each other for their own emotional support.

Therefore clearly a relationship over and above the usual familial relationship existed between the deceased and the deceased's parents, prior to, and at the time of the deceased's death. The deceased was highly dependent on the parents financially, emotionally and that care was provided on a continuing basis. It is clear there was a mutual commitment to a shared life between the deceased and both parents prior to and at the time of the deceased's death. .

For the above reasons, it is accepted that a close personal relationship existed between the deceased and the parents as envisaged by paragraph 302-200 (1)(a) of the ITAA 1997.

Cohabitation:

The second requirement to be met is specified in paragraph 302-200(1)(b) of the ITAA 1997, and states that two persons live together.

The facts show that the deceased and both parents were residing in the family home up until the time of the deceased's death.

Therefore the requirement specified in paragraph 302-200(1)(b) has been satisfied in this instance.

Financial support:

The third requirement to be met is specified in paragraph 302-200(1)(c) of the ITAA 1997, and states that one or each of these two persons provides the other with 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.

It is clear from the facts presented that the parents provided financial support. Although the deceased received a disability pension and occasionally employment income, the parents fully funded the deceased's day to day living expenses which included rent, groceries, food items and utilities.

In this instance, both the existence and the level of financial assistance provided by the parents to the deceased is established and it is not necessary to look at the level of financial support provided, but merely to establish that such support existed.

Consequently, it is considered that paragraph 302-200(1)(c) of the ITAA 1997 has been satisfied in this instance.

Domestic support and personal care:

The fourth requirement to be met is specified in paragraph 302-200(1)(d) of the ITAA 1997, and states that one or each of these two persons provides the other with domestic support and personal care. In discussing the meaning of domestic support and personal care, paragraph 2.16 of the SEM states:

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 services. Personal care services may commonly consist of assistance with mobility, personal hygiene and generally ensuring the physical and emotional comfort of a person.

The term 'personal care' is also discussed the New South Wales Supreme Court in Dridi v. Fillmore [2001] NSWSC 319. Master Macready stated, in regards to the term 'domestic support and personal care', that:

The expression [personal care] seems to be directed to a different level of reality such as assistance with mobility, personal hygiene and physical comfort. Such activities obviously however will include an element of emotional support…

The facts show the parents accompanied their adult child for medical appointments and attended family gatherings together. Both parents provided the deceased with domestic support and personal care which included cooking meals, washing, ironing, shopping and house cleaning.

Although not attending to the personal hygiene of the deceased, the additional emotional support provided by the parents supports a finding of domestic support and personal care. The parents did ensure the physical and emotional comfort of a person as envisaged by paragraph 2.16 of the SEM.

Consistent both with the ordinary meaning of the words 'domestic support and personal care' in the context of paragraph 302-200(1)(d) of the ITAA 1997, and with the meaning of these words as discussed in paragraph 2.16 of the SEM, it is considered that the parents provided the deceased with significant personal care services at this time.

On the facts provided, it is considered that the requirement in paragraph 302-200(1)(d) of the ITAA 1997 has been satisfied in this instance.

Application of subsection 302-200(2):

Essentially, this subsection ensures that where two people have a close personal relationship but because of the physical, intellectual or psychiatric disability of one or both of them, they do not satisfy one or more of the requirements in paragraphs 302-200(1)(b) to (d) of the ITAA 1997, they will still be considered to have an interdependent relationship.

The parents may well satisfy this subsection given the deceased's medical condition, however, since all the requirements of subsection 302-200(1) of the ITAA 1997 have been met, consideration of subsection 302-200(2) is not necessary in this instance.

The taxpayers are in an interdependency relationship with the deceased:

From the facts presented, it is clear that all of the requirements which are set out in subsection 302-200(1) of the ITAA 1997 have been satisfied in this case. Consequently it is considered that the parents and the deceased did have an interdependency relationship.

Therefore the parents are considered to be dependants of the deceased within the definition of death benefits dependant in section 302-195 of the ITAA 1997.

The taxation treatment of a superannuation death benefit

As the parents are considered to be death benefits dependants the superannuation death benefit will be tax-free and is not included as assessable income in the hands of the Estate. The amount ultimately distributed from the Estate to the parents as beneficiaries will not be taxable in their hands because the amount will represent a distribution of the corpus of the Estate.

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