Edited version of your written advice

Authorisation Number: 1051481550791

Date of advice: 13 February 2019

Ruling

Subject: Superannuation death benefits

Question

For the purposes of section 302-10 of the Income Tax Assessment Act 1997 (ITAA 1997), are the beneficiaries of a deceased estate (the Beneficiaries) death benefits dependants of a person who has died (the Deceased) under paragraph 302-195(1)(d) of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Deceased died in the 2018 calendar year after a serious illness.

The Deceased was a member of a complying superannuation fund (the Fund).

About 10 years ago, the Deceased entered into a de-facto relationship with a person (the Former Partner).

The Beneficiaries are the Former Partner’s natural children from a previous relationship. Just before the Deceased died, the Beneficiaries were under 18 years of age.

The Deceased and the Former Partner purchased a house together and from that time the Deceased, the Former Partner and the Beneficiaries lived together until the Deceased and the Former Partner separated in 2015.

The Beneficiaries did not have a relationship with their other parent. They did not see them nor receive any financial assistance from them.

The Deceased did not adopt the Beneficiaries, however they treated them as their children and maintained financial responsibility for them until their [Deceased’s] death.

After the Deceased and the Former Partner separated in 2015, the Deceased maintained joint financial responsibility for the Beneficiaries. The Deceased set up a joint bank account with the Former Partner and made monthly payments to assist with the day-to-day living expenses of the Beneficiaries.

In 2016, the Deceased and the Former Partner agreed that rather than making the regular monthly payments into their joint account, the Deceased would top up the account as required and would pay directly for the Beneficiaries’ expenses such as:

● school uniforms;

● private school fees; and

● mobile phone bills

During the period from 2016 to their death, the Deceased assumed parental responsibility for the Beneficiaries and shared joint custody and financial responsibility for them by:

● maintaining a joint Medibank Private Family Health cover which contributed towards their medical expenses;

● purchasing new mattresses and beds for them to use in their new home;

● purchasing their clothing, shoes and taking them on holidays;

● contributing towards the holidays they took with the Former Partner;

● having them stay with them every weekend until they became too ill and needed palliative care; and

● providing for them in their last Will which was made a few months before their death.

In the 2018-19 income year, the Fund paid a superannuation death benefit to the trustee of the Deceased’s Estate.

Relevant legislative provisions

All references are to the ITAA 1997 unless otherwise stated

Reasons for decision

Summary

For the purposes of section 302-10, the Beneficiaries are death benefits dependants of the Deceased under paragraph 302-195(1)(d).

Detailed reasoning

Section 302-10 sets out the tax treatment of superannuation death benefits paid to the trustees of a deceased estate. It states:

302-10(2) To the extent that 1 or more beneficiaries of the estate who were *death benefits dependants of the deceased have benefited, or may be expected to benefit, from the *superannuation death benefit:

(a) the benefit is treated as if it had been paid to you as a person who was a death benefits dependant of the deceased; and

(b) the benefit is taken to be income to which no beneficiary is presently entitled…

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1.

In accordance with section 302-60, a superannuation lump sum that a person receives because of the death of a person of whom they were a death benefits dependant is not assessable income and is not exempt income. That is, it is tax free.

Meaning of death benefits dependant

Subsection 995-1(1) states that death benefits dependant has a meaning given by section 302-195.

In accordance with subsection 302-195(1), a death benefits dependant of a deceased 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.

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1.

Under subsection 995-1(1), the child of an individual includes any of the following:

(a) the individual's *adopted child, stepchild or exnuptial child;

(b) a child of the individual's *spouse;

(c) someone who is a child of the individual within the meaning of the Family Law Act 1975.

Adopted child of a person is defined in subsection 995-1(1) to mean someone the person has adopted:

(a) under a ^*State law or ^*Territory law about adoption of children; or

(b) under a ^* foreign law about adoption of children, if the adoption would be recognised as valid under a State law or Territory law.

In accordance with subsection 995-1(1), spouse of an individual includes:

(a) another individual (whether of the same sex or a different sex) with whom the individual is in a relationship that is registered under a *State law or *Territory law prescribed for the purposes of section 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section; and

(b) another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple.

Section 4 of the Family Law Act 1975, as far as relevant, states:

"child "

(a) in Part VII, includes an adopted child and a stillborn child; and …

Based on the above, the Beneficiaries are not children of the Deceased for the purposes of subsection 302-195(1) because:

● they were not adopted by the Deceased; and

● the Former Partner was not the Deceased’s spouse just before they died.

Consequently, the Beneficiaries will be death benefits dependants of the Deceased only if it can be established that they were dependants of the Deceased just before they [the Deceased] died.

Meaning of ‘dependant’

The term ‘dependant’ is not defined in the ITAA 1997, therefore its meaning is to be determined according to the ordinary meaning of the word having regard to the context in which it appears.

According to the Macquarie Dictionary, a ‘dependant’ is:

1. someone who depends on or looks to another for support, favour, etc 2. a person to whom one contributes all or a major amount of necessary financial support…

According to the CCH Macquarie Concise Dictionary of Modern Law, a ‘dependant’ is defined as being ‘a person substantially maintained or supported financially by another’.

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.

Based on the above, in determining whether a person is a dependant for the purposes of paragraph 302-195(1)(d) it is necessary to establish the actual level of financial support that was provided to that person by the deceased. Where the level of financial support provided to a person is substantial then that person can be regarded as a dependant. If the level of financial support is insignificant or minor, then the person cannot be regarded as a dependant.

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 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 to maintain their normal standard of living.

In the current case, it is clear that the Deceased provided financial support to the Beneficiaries; that support was substantial and that the Beneficiaries depended on that support. This view is based on the fact that the Deceased shared custody of the Beneficiaries and assumed parental responsibility (including financial support) for them until their [Deceased’s] death, and also provided for them after their death.

In view of the above, the Beneficiaries were financially dependent on the Deceased just before they died. Therefore, the Beneficiaries are dependants of the Deceased under paragraph 302-195(1)(d). As such, they are death benefits dependants of the Deceased for the purposes of section 302-10.

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