Edited version of your private ruling

Authorisation Number: 1012170974342

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Superannuation death benefits

Question:

Was the sole beneficiary of the deceased estate a financial dependant of the deceased at the time of the death of the deceased in accordance with the definition of 'dependant' under subsection 302-195(1) of the Income Tax Assessment Act 1997?

Answer:

No

This ruling applies for the following period

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

The deceased passed away during the middle of the 2010-11 income year without leaving a will.

The deceased never married and was the sole parent of the beneficiary, the deceased's only child. The beneficiary was an adult at the time of the deceased's death and was working as a trade apprentice.

You have advised that all the assets of the Estate, after the extinguishment of relevant liabilities, have been distributed to the sole beneficiary.

You state that the sole beneficiary is not a death benefits dependant of the deceased under either paragraph 302-195(1)(a) or paragraph 302-195(1)(b) of the ITAA 1997.

As noted above, the sole beneficiary's family consisted only of the beneficiary and the deceased, who was the beneficiary's mentor as well as the beneficiary's parent. The sole beneficiary often confided in the deceased and sought the deceased's advice for major life decisions. Both parties considered themselves to be a tight family unit, as most of the sole beneficiary's extended family reside outside of a capital city except for one relative.

The sole beneficiary never lived away from home before the deceased's death, and the beneficiary was living at the deceased's residence at the time of the deceased's death. As such, the deceased and the sole beneficiary were living together at all times before the deceased's death.

In the 2008-09 and 2009-10 income years and in the period from 1 July 2010 until the deceased's death, the deceased was gainfully employed in an occupation.

Details of the deceased's net assessable income (after tax) for the 2008-09, 2009-10 and 2010-11 income years respectively were obtained from records held by the Australian Taxation Office (ATO).

Prior to, and at the time of, the deceased's death the sole beneficiary suffered from a medical condition and required regular specialist medical treatment. Also at this time, the sole beneficiary was employed as a trade apprentice, and was studying for the apprenticeship at an educational institution.

The sole beneficiary was required by their employers to have a motor vehicle as they worked at different jobs throughout the metropolitan area of a capital city. The travel allowance the sole beneficiary received was not sufficient to cover the running and maintenance costs of the motor vehicle.

At the time of deceased's death, the sole beneficiary had not owned any real estate, and you state that the beneficiary was not in a financial position to acquire their own home.

Details of the beneficiary's net assessable income (after tax) were obtained in the 2008-09, 2009-10 and 2010-11 income years respectively from records held by the ATO. The sole beneficiary received no other non-taxable income in these income years.

You state that, at the time of the deceased's death, the beneficiary had a particular average weekly income after tax and provided an approximate per annum figure. The beneficiary's average weekly expenses were a certain amount (i.e. a particular per annum figure). The balance of which was contributed towards household expenses on an ad-hoc basis. This resulted in a weekly surplus income of an approximate amount.

The beneficiary had no substantial savings. Since the death of the deceased, the beneficiary increased their working hours to be able to provide themself with food and to cover additional costs such as rates, electricity and telephone whilst the estate was administered.

The deceased was responsible for meeting all the mortgage payments on their home and the payment of all household expenses including rates, insurance, electricity, telephone, food, etc. The deceased provided the sole beneficiary with clothing, food and housing. The deceased also paid for the sole beneficiary's private health insurance through the deceased's health fund.

The sole beneficiary's income covered the running costs of the sole beneficiary's motor vehicle, mobile phone and some incidental expenses. The deceased provided the sole beneficiary with financial assistance with the registration, insurance, service and other maintenance costs of the sole beneficiary's motor vehicle.

The deceased provided meals to the sole beneficiary. The deceased supported the sole beneficiary domestically by cleaning the house and doing the sole beneficiary's laundry. In return, the sole beneficiary was responsible for looking after the gardens and performing repairs to the house.

The deceased and the sole beneficiary served as the primary emotional support for each other.

In the 2010-2011 income year, a superannuation lump sum death benefit was paid in respect of the deceased by a superannuation fund trustee. A PAYG payment summary-superannuation lump sum for the 2010-11 income year dated the same day discloses that the death benefit was paid to the Estate, and that no tax was withheld from the death benefit. The PAYG payment summary further shows that the death benefit was made up of a tax-free component and a taxable component - taxed element.

In the 2011-12 income year, two superannuation lump sum death benefits were paid in respect of the deceased by another superannuation fund trustee.

The PAYG payment summaries-superannuation lump sum for each death benefit paid in the 2011-12 income year disclose that each death benefit was paid to the Estate, and that no tax was withheld from either benefit.

Each PAYG payment summary further shows that these benefits were made up of a taxable component - taxed element and a taxable component - untaxed element.

The sole beneficiary has used a portion of these death benefits to extinguish the mortgage on the family home, and is now using the remaining balance of the benefits to compliment their income.

You have provided details of the deceased and the beneficiary's expenses for the three years prior to date of death. It is noted that the beneficiary paid for their own food at both work and the educational institution. The deceased paid for the beneficiary's car registration and insurance

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 302

Income Tax Assessment Act 1997 Section 302-60

Income Tax Assessment Act 1997 Section 302-140

Income Tax Assessment Act 1997 Subsection 302-145(1)

Income Tax Assessment Act 1997 Subsection 302-145(2)

Income Tax Assessment Act 1997 Subsection 302-145(3)

Income Tax Assessment Act 1997 Section 302-195

Income Tax Assessment Act 1997 Subsection 302-195(d)

Income Tax Assessment Act 1997 Section 302-200

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 Paragraph 302-200(3)(a)

Income Tax Assessment Act 1997 Paragraph 302-200(3)(b)

Income Tax Regulations 1936 Regulation 8A

Income Tax Regulations 1997 Regulation 302-200.01(2)

Reasons for decision

Summary

The sole beneficiary was not a financial dependant of the deceased at the time of the death of the deceased and therefore not a dependant of the deceased for the purposes of the legislation.

Detailed Reasoning

Superannuation death benefits

Under section 302-10 of the Income Tax Assessment Act 1997 (ITAA 1997), the taxation arrangements for superannuation death benefits paid to a trustee of a deceased estate are determined in accordance with the taxation arrangements that would otherwise apply to the person or persons otherwise intended to benefit from the estate. However, as the benefit is taken to be income to which no beneficiary is presently entitled, any taxation liability lies with the trustee of the deceased estate and not the beneficiary or beneficiaries who ultimately benefit from the estate.

This means that where a dependant of the deceased is expected to receive part or all of a superannuation death benefit, it will be subject to tax in the hands of the trustee as if it were paid directly to the dependant of the deceased.

Where a person who is not a dependant is expected to receive part or all of a superannuation death benefit, it will be subject to tax in the hands of the trustee as if it were paid directly to a non-dependant of the deceased to that extent.

Accordingly, in the present case, the payment from a complying superannuation (the fund) paid to the trustee of the deceased estate is assessable to the trustee as income to which no beneficiary is presently entitled. The extent to which the trustee is subject to tax will be determined on whether or not the sole beneficiary of the estate is a dependant of the deceased. If the sole beneficiary is determined to be dependant of the deceased, then the superannuation death benefit is not assessable income and is not exempt income of the estate.

Section 302-195 of the ITAA 1997 defines 'death benefits dependant' as follows:

A death benefits dependant, of a person who has died, is:

· the deceased person's spouse or former spouse; or

· the deceased person's child, aged less than 18; or

· any other person with whom the deceased person had an interdependency relationship under section 302-200 just before he or she died; or

· any other person who was a dependant of the deceased person just before he or she died.

As noted above it can be seen that a deceased person's spouse, former spouse, or the deceased person's child who is under the age of 18 years would be considered to be a dependant.

However, any other person with whom the deceased person had an interdependency relationship under section 302-200 of the ITAA 1997 or any other person who was a dependant of the deceased person, just before they died, will also be considered a dependant.

The term 'interdependency relationship', applies to a relationship that existed between the deceased and another person at the time of the deceased's death.

The trustee of the deceased estate had applied for a private ruling in respect of interdependency relationship between the deceased and the sole beneficiary. In the notice of the private ruling the trustee of the deceased estate was advised that the Commissioner did not consider that an interdependency relationship existed between the deceased and the sole beneficiary.

Where all the requirements under subsections 302-200(1) and (2) of the ITAA 1997 have not been satisfied, consideration must be given under subsection 302-195(d) as to whether a person was financially dependent on the other person just before they died.

Financially dependent

On the question of who is a dependant, paragraph 41 of Taxation Ruling IT 2168 states that a person who does not fall within the specific inclusions of the definition, will only be a dependant, if he or she was actually dependent upon the deceased taxpayer for maintenance and support.

Accordingly, a child of the deceased who is over 18 years of age must demonstrate that he or she was actually 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 (1976) 180 CLR 199; (1976) 454; (1976) 8 ALR 455; [1976] 50 ALJR WCR (NSW) 18; [1976] HCA 5, Chief Justice Barwick at (ALR) 456).

In Case [2000] AATA 8, (2000) 43 ATR 1273; (2000) 2000 ATC 129; [2000] AATA 8, Senior Member Fayle of the Administrative Appeals Tribunal (AAT) in considering the definition of 'dependant' in relation to former 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.

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) 128 CLR 177; (1973) 47 ALJR 184; [1972-73] ALR 1266; [1973] HCA 8 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 (1999) 42 ATR 1203, (1999) 99 ATC 2294; [1999] AATA 678 (Malek), Senior Member Pascoe of the 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, 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.

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, et cetera) without the additional financial support.

Hence the point to be considered is whether the person 'depended or relied on' the earnings of the deceased for their day to day sustenance at the time of the deceased's death.

In the case at hand, the sole beneficiary was employed as a trade apprentice and had net assessable income (after tax) of specified amounts in the 2008-09, 2009-10 and 2010-11 income years, respectively. The beneficiary received no other non-taxable income in these income years.

On the facts presented, it is considered that the beneficiary has failed to establish their dependency upon the deceased, at least insofar as the 2009-10 and 2010-11 income years are concerned. The information provided, in conjunction with the information provided in the beneficiary's 2008-09, 2009-10 and 2010-11 income tax returns, show that the beneficiary would not have been substantially dependent upon the deceased sometime before and at the time of death.

The Commissioner does not consider that a person who is gainfully employed and in receipt of a net assessable income (after tax) of a specified amount at the time of death can claim to be financially dependent on another person. A person in receipt of salary and wages in such amounts would not be reliant upon another for their day to day sustenance. As in Case [2000] AATA 8, referred to above, it is considered that the beneficiary's financial support came primarily from their employment as a trade apprentice and not from the deceased, this would indicate that the beneficiary was not dependant on the deceased for subsistence. The beneficiary would still have been able to meet their day to day living expenses without the deceased's financial support.

The comments of Justice Fullager in the case of Fenton v Batten (above) clearly state that questions of scale of living do not enter into the question of dependency. The records from the deceased's income tax returns held by the Tax Office show that the deceased's net assessable income (after tax) was substantial in the 2008-09, 2009-10 and 2010-11 income year respectively. The fact that the deceased earned more income allowed the beneficiary to enjoy a higher standard of living such as spending the beneficiary's own earnings on entertainment expenses without the worry of having to pay for rent, board but only share a small portion of some household expenses including food, this does not mean that the beneficiary was in fact dependent upon the deceased.

In addition, the financial support provided to the beneficiary by the deceased in the 2009-10 income year and up to the date of death in the 2010-11 income year merely supplemented the sole beneficiary's income and represented 'quality of life' payments, and thus cannot be considered to be substantial support. This is regarded as part of a normal domestic arrangement and does not represent any dependency relationship, particularly since the income tax legislation does not acknowledge any partial dependency.

In view of the above, the beneficiary's claim that they were financially dependant on the deceased before and at the time of the deceased's death has not been substantiated and therefore the beneficiary is not considered to be a dependant of the deceased within the definition of 'dependant' in subsection 302-195(1) of the ITAA 1997. Consequently, the death benefit payments will be assessable according to its components to the trustee of the deceased estate for the 2010-11 and 2011-12 income years.

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).