Edited version of your written advice

Authorisation Number: 1012737194733

Ruling

Subject: Death benefit - financial dependency

Question

Is the beneficiary a death benefits dependant of the deceased under section 302-195 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The deceased passed away during the 2012-13 income year.

The beneficiary, who is a parent of the deceased, is the only person entitled in distribution of the deceased's estate.

During the 2013-14 income year, a superannuation fund (Fund A) made a superannuation lump sum death benefit payment to the deceased's estate.

A PAYG payment summary from Fund A for the income year ended 30 June 2014 was provided. It detailed the lump sum payment as being made up of a taxable component - taxed element and a taxable component - untaxed element. The payment does not have a tax free component.

Later during the 2013-14 income year, another superannuation fund (Fund B) made a superannuation lump sum death benefit payment to the deceased's estate.

A PAYG payment summary from Fund B for the income year ended 30 June 2014 was provided. It detailed the lump sum payment as being made up of a taxable component - taxed element and a taxable component - untaxed element. The payment does not have a tax free component.

The following information in relation to the beneficiary's relationship with the deceased was provided:

• The beneficiary is a pensioner residing in an overseas country.

• The deceased was their only child.

• The deceased travelled to the overseas country and gave the beneficiary money on a number of occasions.

• The deceased had a bank account in the overseas country and the beneficiary would use funds from the account if they needed money.

• The deceased granted the beneficiary a permanent power of attorney which gave them the authority 'to make dispositions at [their] discretion with regard to pecuniary means' in the deceased's term deposit account.

The Australian Taxation Office (the ATO) has requested additional information in relation to the beneficiary's income, assets, account balances and expenses. The ATO also requested information about the total amount of funds that the beneficiary withdrew from the deceased's bank account and the amount of money the deceased provided to the beneficiary on each of the visits to the overseas country.

You were unable to provide the requested information and have requested that the ATO make the ruling based on the information provided in the application.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 302-10

Income Tax Assessment Act 1997 subsection 302-10(1)

Income Tax Assessment Act 1997 subsection 302-10(3)

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(1)

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 paragraph 302-195(1)(d)

Income Tax Assessment Act 1997 paragraph 302-200(1)(b)

Income Tax Assessment Act 1997 subsection 307-5(1)

Income Tax Assessment Act 1997 subsection 307-5(4)

Income Tax Assessment Act 1997 section 307-65

Income Tax Assessment Act 1997 section 307-70

Income Tax Assessment Act 1997 section 995-1(1)

Reasons for decision

Summary

The beneficiary is not a death benefits dependant of the deceased under section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997) as the beneficiary is not financially dependent on the deceased.

No part of the superannuation lump sum death benefits paid from either Fund A or Fund B to the trustee of the deceased's estate will be tax free as it is considered that the payments were not made in relation to a dependant.

Detailed reasoning

Superannuation death benefits paid to the trustee of a deceased estate

For superannuation death benefits paid after 1 July 2007, subsection 995-1(1) of the ITAA 1997 states that a 'superannuation death benefit' has the meaning given by section 307-5 of the ITAA 1997.

A superannuation death benefit is defined in subsection 307-5(4) of the ITAA 1997 as being a payment described in Column 3 of the table in subsection 307-5(1) of the ITAA 1997. A superannuation death benefit is described in Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997 as:

… A payment to you from a superannuation fund, after another person's death, because the other person was a fund member.

A superannuation lump sum is described in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream as defined in section 307-70 of the ITAA 1997.

In this case the deceased passed away during the 2012-13 income year. Prior to their death, the deceased was a member of both Fund A and Fund B.

Both Fund A and Fund B made a payment directly to the trustee of the deceased's estate during the 2013-14 income year. These payments were made because the deceased was a fund member. Hence these payments are superannuation benefits within the meaning of Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997.

These payments are thus superannuation death benefits as defined in subsection 307-5(4) of the ITAA 1997 and superannuation lump sums within the meaning of section 307-65 of the ITAA 1997. As the payments were made by Fund A and Fund B after 1 July 2007, the provisions of Division 302 of the ITAA 1997 apply.

Application of section 302-10 of the ITAA 1997

Section 302-10 of the ITAA 1997 deals with superannuation death benefits paid to the trustee of a deceased estate. Subsection 302-10(1) of the ITAA 1997 states:

This section applies to you if:

(a) you are the trustee of a deceased estate; and

(b) you receive a superannuation death benefit in your capacity as trustee.

As the payments in this case were superannuation death benefits received from Fund A and Fund B by the trustee of the deceased estate, section 302-10 of the ITAA 1997 will apply to the trustee of the estate.

Under section 302-10 of the 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.

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 as if it were paid to a dependant of the deceased, and the benefit is taken to be income to which no beneficiary is presently entitled.

Where a person that is not a dependant is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid to a non-dependant of the deceased to that extent, and the benefit is taken to be income to which no beneficiary is presently entitled.

Accordingly, in the present case, the payments from Fund A and Fund B paid to the trustee of the deceased's estate are assessable to the trustee as income to which no beneficiary is presently entitled.

The superannuation death benefit will be treated concessionally if a dependant of the deceased will benefit from the estate. 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.

It will now be determined if the beneficiary in this case is a dependant of the deceased.

Death benefits dependant in relation to the superannuation death benefit

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

Under paragraph 302-200(1)(b) of the ITAA 1997 an 'interdependency relationship' requires that the two persons live together. However, the beneficiary did not live with the deceased prior to the date of death.

The facts of the case thus rule out the beneficiary being a death benefits dependant of the deceased on the basis of paragraph 302-195(1)(a), 302-195(1)(b) or 302-195(1)(c) of the ITAA 1997.

Therefore, in order for the beneficiary to be a death benefits dependant of the deceased, dependency under paragraph 302-195(1)(d) of the ITAA 1997 will need to be established.

Financial dependency

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 (Aafjes v. Kearney (1976) 8 ALR 455, Barwick CJ at 456).

In Case [2000] AATA 8, (2000) 43 ATR 1273, Senior Member Fayle, in considering the definition of dependant in relation to section 27AAA of the Income Tax Assessment Act 1936 (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) 47 ALJR 184; [1972-73] ALR 1266; (1973) 128 CLR 177 at 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] AATA 678, 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 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'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 a person 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 the current case, it is clear that the deceased provided some financial support to the beneficiary, as you have advised that the deceased gave money to the beneficiary on a number of occasions when they visited the overseas country and has given the beneficiary access to their bank account.

In order to establish whether the level of financial support provided in this case is so substantial that the beneficiary can be regarded as a dependant, the ATO requested additional information in relation to the beneficiary's income, assets, account balances and expenses. The ATO also requested information about the total amount of funds that the beneficiary withdrew from the deceased's bank account and the amount of money the deceased provided to the beneficiary on each of the visits to the overseas country.

However, you were unable to provide the requested information and have requested that the ATO make the ruling based on the information provided in the application.

On the information provided alone, it is not possible to establish that the beneficiary was substantially maintained financially by the deceased. The fact that the deceased gave the beneficiary money and gave them access to their bank account does not mean that the beneficiary was reliant on the deceased's continuous contributions to maintain their standard of living. For example, it may have been the case that the deceased's contributions were simply quality of life payments and that the beneficiary was maintained primarily by their state pension or some other form of income.

As it is not possible to establish that the beneficiary was financially dependent on the deceased, the condition under paragraph 302-195(1)(d) of the ITAA 1997 is not satisfied. As the beneficiary also does not satisfy any of the other conditions under paragraphs 302-195(1)(a), 302-195(1)(b) or 302-195(1)(c) of the ITAA 1997, the beneficiary is not a death benefits dependant of the deceased.

The tax treatment of the superannuation death benefits

As previously mentioned, where the trustee of a deceased estate receives a superannuation death benefit in their capacity as a trustee:

• if a dependant of the deceased is expected to receive part or all of the benefit, it is subject to tax as if it were paid to a dependant, and

• if a person who is a non-dependant is expected to receive part or all of the benefit, it is subject to tax as if it were paid to a non-dependant.

In both cases, the benefit is taken to be income to which no beneficiary is presently entitled.

The taxable component of a superannuation lump sum paid to a non-dependant is included in assessable income, with a tax offset to ensure that the rate of tax on the element taxed in the fund does not exceed 15% and that the rate of tax on the element untaxed in the fund does not exceed 30%. This is in accordance with section 302-145 of the ITAA 1997.

In this case, as the beneficiary is a non-dependant beneficiary of the deceased, the superannuation benefits will be taxed as explained above, in the hands of the estate.

The amounts of each death benefit which will be distributed from the estate to the beneficiary as a non-dependant will not be taxable in their hands. Each of these amounts will represent distributions to the beneficiary of the corpus of the deceased's estate.

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