Edited version of your written advice

Authorisation Number: 1012846359555

Date of advice: 23 July 2015

Ruling

Subject: Death benefit - financial dependency

Question

Was the beneficiary a death benefits dependant of the deceased?

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 Beneficiary is a sibling of the Deceased.

The Deceased passed away in the 2013-14 income year.

The Beneficiary resides in a major city in a foreign country.

The Beneficiary, who is not of good health, has been unemployed for many years and has no spouse or children.

The Deceased physically provided cash for the Beneficiary. A portion of the cash would be saved.

There is no record of the cash transfers or for how many years they were made.

The Beneficiary had sole ownership of more than one term deposit. These were the Beneficiary's only non-cash assets and term deposit statements were provided.

The money in the term deposits have been accumulated from cash the Beneficiary received and saved from the Deceased over many years.

The interest from previous term deposits were reinvested into subsequent term deposits. This process of purchasing new term deposits once previous term deposits matured was repeated and ongoing.

It was stated that the Beneficiary's primary source of income is the interest received from term deposits.

The Beneficiary's accommodation is provided free of charge by another sibling.

The Beneficiary receives an annual welfare pension from the foreign government.

An itemised list of the Beneficiary's expenses for the income year prior to the Deceased's death and that up to the date of death was provided.

A partial distribution has been paid to the client from the Deceased's Estate.

Lump sum death benefit payments from the Deceased's superannuation fund were paid to the Deceased Estate in the 2014-15 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-195.

Income Tax Assessment Act 1997 Subsection 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.

Detailed reasoning

Death Benefits Dependant

Division 302 of the ITAA 1997 sets out the taxation arrangements that apply to the payment of superannuation death benefits. These arrangements depend on whether or not the person that receives the superannuation death benefit is a dependant of the deceased 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(1) of the ITAA 1997 states that the term 'death benefits dependant' has the meaning given by section 302-195.

Section 302-195 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.

In the Beneficiary's case, as paragraphs (a), (b) and (c) in subsection 302-195 of the ITAA 1997 do not apply, it must be determined whether the Beneficiary satisfies the definition of a death benefits dependant under paragraph (d), that is, whether the Beneficiary was financially dependent on the Deceased just before the Deceased's death.

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 this case, the point to be considered is whether the facts show the Beneficiary depended or relied on the financial support from the Deceased for the Beneficiary's day-to-day sustenance at the time of the Deceased's death.

Whilst the Deceased provided support for the Beneficiary's upkeep, this was not done in a formal sense. Support from the Deceased was neither regular nor continuous. Rather, the Deceased provided irregular amounts to the Beneficiary.

Whilst it is clear that the Deceased provided some financial support to the Beneficiary, at all relevant times the Beneficiary held assets which would have sufficiently met her daily basic necessities and expenses. The Deceased's financial support supplemented the Beneficiary's government pension and assets. At the time of death, it is considered the cash represented quality of life payments.

The fact that the Deceased gave the Beneficiary money does not mean that the Beneficiary was reliant on the Deceased's continuous contributions to maintain the Beneficiary's standard of living. Hence it cannot be said that the Deceased was the one who contributed all or a major amount of necessary financial support to the Beneficiary. That is, the Beneficiary was not substantially maintained or supported financially by the Deceased.

In view of the above it is considered that the Beneficiary was not financially dependent on the Deceased for the purposes of paragraph 302-195(1)(d) of the ITAA 1997. Accordingly, the Beneficiary is not a death benefits dependant of the Deceased.

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