Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private ruling

Authorisation Number: 1011829065773

Ruling

Subject: superannuation death benefits - interdependency relationship

Question

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

Answer: Yes.

This ruling applies for the following period

For the year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

Since an early age, the deceased suffered from specific learning disabilities and behavioural problems including Attention Deficit Disorder.

As an adult, the deceased was diagnosed as suffering from a "globally impairing severe psychiatric disorder" and claimed to hear voices telling her to do certain actions.

This severe personality disorder manifested itself as obsessive/compulsive behaviour which caused her to "act out" her distress. There were incidents of making false reports to the police about car accidents, break-ins or involving herself with mimicking robberies in shops, threatening shopkeepers with a knife.

Under stress, her behaviour became more erratic. In the extreme, this included taking a baby from the mother-baby unit at a hospital where she had been admitted for treatment. These incidents resulted in her parents being called to sort out the problems, often with the police. This behaviour was constant throughout her life and continued until her death during the 2009-10 income year.

Apart from time spent in prison or in hospital care, the deceased lived with her parents in the family home until when she moved out to a unit.

This move was part of a process to instil some semblance of independent living under the recommendation of a funded disability support agency (the support agency).

Despite her parents securing the unit for her (including set up costs), she continued to spend the majority of the time at her parents' house. The support agency staff only worked approximately from 4.30pm to 8.30pm. Consequently on the majority of occasions, she would return to her parents' house to sleep as she was afraid of being on her own. Alternatively, when she did sleep at the unit, either one of her parents would stay overnight with her.

During this period, her dependence on her parents was such that any physical separation caused her to suffer great anxiety and so daily contact was always maintained. She also suffered from depression.

The deceased had been physically able to look after herself until the last two years prior to her death when, after having had three different operations, her health deteriorated and she required assistance from her parents.

On an ongoing basis, her parents paid her health insurance and made claims on her behalf. They also paid her car registration, insurance and repairs, medical specialist and inpatient admission costs plus shortfalls on two major surgical procedures in the last two years.

The deceased received a disability pension and rent assistance. Her rent was paid fortnightly. However, food and lodging were supplied by her parents constantly prior to and over the last two years without reimbursement.

Regularly there would be indiscriminate purchases, one such example was for a motor cycle for which she had no licence and no means to pay. She did not have the income to support these purchases and her parents would often have to pay these debts off on her behalf when they could not negotiate to cancel the purchases.

As her daughter's nominee for Centrelink, the deceased's mother was required to attend to interviews, phone contact etc with Centrelink and dealt with Medicare on her daughter's behalf. She was also signatory to her daughter's bank accounts and liaised with the bank about credit cards, limits, fees and repaying debts when they were out of hand.

The parents liaised with health professionals such as psychiatrists, surgeons, GPs and attended all appointments with her of a personal or financial nature.

Although supporting their daughter financially made their life difficult, at no time did they begrudge this. It was the incessant emotional support required they found most draining.

Neither of the parents were in receipt of a carer's allowance. Due to their age and ill health, they had made provisions for their daughter's future care by putting in place a legal arrangement (at their cost) with joint trustees.

The parents attended many seminars and courses run by various organisations on mental illness and borderline personality disorder, some of which were paid for by themselves.

More recent supporting documentation of the extensive emotional and financial support given by the parents came from the service co-ordinator of the support agency who was involved with their daughter's care for the past five and a half years.

As the deceased's mental health needs could be significantly more than the level of funding/support provided to her (between 8 to 24 hours per week), she required a lot of daily support and at times even more intensive support from her parents especially at times when her behaviour was unstable.

The parents assisted their daughter with meal preparation or at other times provided her meals which was at least 3 to 4 times per week. Whilst she was officially living out of home and had her own unit, funding received did not cover the full daily and overnight support which her parents gave her.

There were three superannuation payments that were paid to the Estate in August 2010 and October 2010.

A fourth payment was made by the trustees of a superannuation fund who accepted an interdependency relationship existed between the deceased and her parents resulting in the disbursement of that payment in August 2010.

The father of the deceased died in November 2010, therefore the amount paid to him prior to his death in respect of the fourth superannuation payment now forms part of his deceased estate.

Relevant legislative provisions

Income Tax Assessment Act 1936 repealed section 27AAB.

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

Income Tax Assessment Act 1997 Section 302-10.

Income Tax Assessment Act 1997 Section 302-195.

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 Former Regulation 8A.

Income Tax Regulations 1997 Regulation 302-200.01

Income Tax Regulations 1997 Regulation 302-200.02

Reasons for decision

Summary

Both parents had an interdependency relationship with the deceased and are considered to be death benefits dependants of the deceased.

To the extent that they are expected to benefit from the superannuation death benefits paid to the Estate, the benefits are treated as if they had been paid to the trustee as a person who was a death benefits dependant of the deceased. Consequently, that part of the superannuation death benefits will not be assessable to the trustee.

Detailed reasoning

Superannuation death benefits

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 who receives the superannuation death benefit is a death benefits dependant of the deceased or not; and whether the amount is paid as a superannuation lump sum death benefit or a superannuation income stream death benefit.

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

Subsection 302-195(1) of the ITAA 1997 defines death benefits dependant as follows:

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

Interdependency relationship

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

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

Subsection 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), of the ITAA 1997 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 the regulations may specify the matters that are, or are not, to be taken into account.

In addition, 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.

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) Bill 2003 which inserted former section 27AAB of the Income Tax Assessment Act 1936 (ITAA 1936). This section dealt with interdependency relationships prior to 1 July 2007. In discussing the meaning of a close personal relationship, the SEM states:

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:

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 them. 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 was an adult daughter of the parents, the facts show that the relationship between the deceased and her parents were far from being under normal circumstances. Clearly the parents demonstrated their love and concern for the welfare of their daughter well beyond normal boundaries.

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

The nature of their daughter's severe personality disorder meant she had few friends. She relied heavily on her immediate and extended family for social and emotional support which her parents facilitated.

As the deceased could not be left on her own, her parents had the additional expense of having to take her with them on any occasions they did have an opportunity to go away.

Therefore, clearly a relationship over and above the usual familial relationship existed between the deceased and her parents, prior to, and at the time of 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 her parents prior to and at the time of her death.

For the above reasons, it is accepted that a close personal relationship existed between the deceased and her 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 the deceased lived with her parents in the family home up until her death, apart from when she was in gaol or in psychiatric care. Despite the move out of the family home to a unit, she had stayed spasmodically between the unit and the family home over a 27 month period prior to her death. As she feared being on her own in the unit, it meant either one of her parents would stay with her.

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 occasional employment, the parents fully funded their daughter's day to day living expenses which included groceries, food items, utilities, health insurance, credit card debts, car registration and insurance.

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:

The term 'personal care' is also discussed in 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 facts show the parents provided personal care in all facets of their daughter's life including liaising with health professionals such as psychiatrists, surgeons, GPs and attending all appointments with her of a personal or financial nature.

The deceased's parents assisted her with meal preparation or at other times provided her meals which was at least 3 to 4 times per week. Whilst she was officially living out of the family home and had her own unit, her parents provided her with emotional support and personal care which she needed constantly.

The deceased had been physically able to look after herself until the last two years prior to her death when, after having had three different operations, her health deteriorated and she required assistance from her parents.

The above coupled with the emotional support she received from her parents supports a finding of domestic support and personal care. Her parents did ensure the physical and emotional comfort of a person as envisaged by paragraph 2.16 of the SEM.

Consistent with both 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 deceased's parents provided the her with significant personal care up to the time of her death.

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 and 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 interdependency relationship.

The parents of the deceased may well satisfy this subsection given the deceased's psychiatric condition. However, since all the requirements of subsection 302-200(1) 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.

The taxation treatment of a superannuation death benefit paid to the Estate:

As the parents are considered to be death benefits dependants, the superannuation death benefits will be tax-free and is not included as assessable income to 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.

To the extent that a beneficiary of the Estate who was not a death benefits dependant of the deceased may benefit from the superannuation death benefits, that part is treated as if it had been paid to the trustee of the Estate as a person who was not a death benefits dependant.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).