Edited version of your written advice

Authorisation Number: 1051498049536

Date of advice: 22 March 2019

Ruling

Subject: Superannuation death benefits

Questions

Was the beneficiary the Deceased’s spouse, and therefore, a death benefit dependant for the purposes of section 302-195 of the Income Tax Assessment Act 1997 (ITAA)?

Will the discharge of the mortgage on the Deceased’s principal place of residence that was gifted to the Beneficiary be treated as a payment to a death benefit dependent for the purposes of the assessment of income of the Estate?

If the discharge of the mortgage isn't treated as being for the benefit of a death benefit dependant, will it be treated as if the beneficiaries of the estate of the Deceased (the Estate) proportionately benefited as opposed to being treated solely as income to which no beneficiary is presently entitled?

To the extent that superannuation death benefits are used to pay expenses of the Estate such as legal fees, accounting fees and taxes, will this income be treated as if the beneficiaries of the Estate proportionately benefited, as opposed to being treated solely as income to which no beneficiary is presently entitled?

Answer

No but was a death benefit dependent.

Yes.

N/A

To the extent that superannuation death benefits are used to pay expenses of the Estate, this income will be treated as if beneficiaries of the Estate proportionally benefited.

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 was diagnosed with a medical condition in 20XX.

The Deceased and the Beneficiary began a relationship in early 20XX.

The Deceased and the Beneficiary made a decision to move in together in the third quarter of 20XX when the lease would expire on the property the Beneficiary was renting in the same suburb.

By the third quarter of 20XX, the Deceased had become considerably more unwell and in order to protect the Beneficiaries child, they made a decision that she would not move in full time yet.

The Beneficiary continued to rent the house close by and every second week when her child was with her ex-spouse, they would stay with the Deceased.

During this week, they would sleep at the Deceased’s house, but would go to work during the day and their parents would care for the Deceased while they were at work.

Every second weekend, the Beneficiary would care for the Deceased (day and night).

In late 20XX, the Deceased and the Beneficiary became engaged to be married.

In early 20XX, the Deceased was advised that their illness was terminal.

From early 20XX, the Deceased needed 24 hour palliative care.

The Deceased’s parents came to their house and cared for them while the Beneficiary was not there (every second week when their child was in their care, and during the day on the weeks that they lived with the Deceased).

Both the Deceased’s parent and the Beneficiary were trained in administering pain relief for the Deceased. While caring for the Deceased, it was necessary to help them with their personal hygiene needs including assisting them with showering and toileting and generally ensuring that they were comfortable.

The Deceased was very weak and in their last months and was dependent on the care their parents and the Beneficiary provided.

For the last few weeks of the Deceased’s life, the Beneficiary took time off work and their ex-spouse took over full time care of their child to allow them to spend all their time with the Deceased.

During this time they lived full time at the Deceased’s house together with the Deceased’s parents as they were all caring for them in their final days.

The Beneficiary was listed as the Deceased’s next of kin (partner) on all hospital and medical forms.

The Beneficiary has confirmed that they and the deceased had a sexual relationship.

The Beneficiary and the Deceased kept relatively separate finances. They had separate bank accounts but the Deceased paid for expenses when they travelled.

The Deceased also transferred lump sum amounts to the Beneficiary to ‘top up’ their account if they were getting low.

The Beneficiary took a number of weeks off work during the last weeks of the Deceased’s life and they gave them money to help with their expenses during this time that they weren’t working.

The Deceased had booked an overseas trip for them both in 20XX, however, this later had to be cancelled due to the Deceased’s terminal diagnosis.

The Deceased and the Beneficiary didn’t own any assets together, or have any joint debts.

The Deceased and the Beneficiary referred to each other as their fiancé/fiancée after their engagement in late 20XX.

From a public perspective, and certainly to all acquaintances, they were very much in a de facto relationship and it was publicly known that they were engaged to be married. The Beneficiary’s Facebook page attests to the public aspect of their relationship.

If not for the Deceased’s ill health, the beneficiary would have been living full time with them from the third quarter of 20XX and they would have combined their finances. However, this did not eventuate due to the fact that the Deceased was dying and there was a need to shield the Beneficiary’s child from living with someone who was dying.

In their Will, the Deceased left their Principal Place of Residence (PPR) to the Beneficiary to provide financially for them and to give them a home of their own (rather than renting) to live in with their child. In addition, the Deceased gifted money to them.

The PPR had a mortgage on it which has now been discharged by a payment from the Estate Trust Account.

Subsequently, further monies were received into the Estate Trust Account, being proceeds of insurance policies (not held in superannuation).

The Deceased’s Last Will was provided which referred to the beneficiary.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1997 Section 302-195

Income Tax Assessment Act 1997 Subsection 302-195(1)

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(2)

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

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

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

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

Income Tax Regulations 1997 Subregulation 302-200.01(1)

Income Tax Regulations 1997 Subregulation 302-200.01(2)

Reasons for decision

Summary

For the purposes of section 302-10 of the ITAA 1997, the beneficiary is a death benefits dependant of the Deceased under paragraph 302-195(1)(c) of the ITAA 1997.

The discharge of the mortgage on the Deceased’s principal place of residence that was gifted to the Beneficiary can be treated as a payment to a death benefit dependent for the purposes of the assessment of income of the Estate.

To the extent that superannuation death benefits are used to pay expenses of the Estate such as legal fees, accounting fees and taxes, this income will be treated as if the beneficiaries of the Estate proportionately benefited.

Detailed reasoning

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 that receives the superannuation death benefit is a dependant of the deceased or not 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 302-195(1) of the ITAA 1997 defines death benefits dependant as follows:

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

(a) the deceased persons spouse or former spouse; or

(b) the deceased persons 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.

Section 995-1 of the ITAA 1997 provides that a 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 which is registered under *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.

In this case the parties did not register their relationship under State law or territory law, nor did they live together on a full time basis. While it is acknowledged the Deceased and the Beneficiary were engaged with the intention of marrying, at the time of the Deceased’s death the beneficiary was not a spouse of the Deceased and therefore (a) of the above definition does not apply.

As the Beneficiary is not a child of the Deceased (b) also does not apply. As such, paragraphs (c) and (d) of section 302-195 need to be examined.

Interdependency relationship

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

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

Two persons (whether or not related by family) have an interdependency relationship under this section if:

(a) they have a close personal relationship; and

(b) they live together; and

(c) one or each of them provides the other with financial support; and

(d) one or each of them provides the other with domestic support and personal care.

Section 302-200(2) of the ITAA 1997 states:

In addition, 2 persons (whether or not related by family) also have an interdependency relationship under this section if:

(a) they have a close personal relationship; and

(b) they do not satisfy one or more of the requirements of an interdependency relationship mentioned in paragraphs (1)(b), (c) and (d); and

(c) the reason they do not satisfy those requirements is that either or both of them suffer from a physical, intellectual or psychiatric disability.

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 conditions in subsection 302-200(2), of the ITAA 1997 must be satisfied for a person to be in an interdependency relationship with another person.

In this case, while the parties decided to live together in 20XX, this did not occur. The parties subsequently lived together for regular periods from early 20XX. However, as this was not a full time arrangement and the Beneficiary maintained a separate residence subsection 302-200(1)(b) has not been met. Therefore we must consider subsection 302-200(2) to determine if an interdependency relationship existed between the parties.

To assist in determining whether 2 persons have an interdependency relationship, paragraph 302-200(3)(a) of the ITAA 1997 states that 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.

Subregulation 302-200.01(2) of the Income Tax Regulations 1997 (ITR 1997) sets out matters that are to be taken into account in determining if 2 persons have an interdependency relationship:

(a) all of the circumstances of the relationship between the persons, including (where relevant):

(i) the duration of the relationship; and

(ii) whether or not a sexual relationship exists; and

(iii) the ownership, use and acquisition of property; and

(iv) the degree of mutual commitment to a shared life; and

(v) the care and support of children; and

(vi) the reputation and public aspects of the relationship; and

(vii) the degree of emotional support; and

(viii) the extent to which the relationship is one of mere convenience; and

(ix) any evidence suggesting that the parties intend the relationship to be permanent;

(b) the existence of a statutory declaration signed by 1 of the persons to the effect that the person is, or (in the case of a statutory declaration made after the end of the relationship) was, in an interdependency relationship with another person.

Subregulation 302-200.02(2) provides in the examples of care normally provided in a close personal relationship rather than by a friend or flatmate:

Significant care provided for the other person when he or she is unwell.

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) Act 2004 which inserted former section 27AAB of the ITAA 1936. In discussing the meaning of close personal relationship the SEM states:

2.12 A close personal relationship will be one that involves a demonstrated and ongoing commitment to the emotional support and well-being of the two parties.

2.13 Indicators of a close personal relationship may include:

● the duration of the relationship;

● the degree of mutual commitment to a shared life;

● the reputation and public aspects of the relationship (such as whether the relationship is publicly acknowledged).

2.14 The above indicators do not form an exclusive list, nor are any of them a requirement for a close personal relationship to exist.

2.15 It is not intended that people who share accommodation for convenience (e.g. flatmates), or people who provide care as part of an employment relationship or on behalf of a charity should fall within the definition of close personal relationship.

In this case the parties meet the requirements for a close personal relationship as envisaged by paragraph 302-200(1)(a) of the ITAA 1997 as the parties have demonstrated an on-going commitment to the emotional support and well-being of the one another indicated by:

● the relationship commenced in early 20XX and continued until the Deceased’s death in mid-20XX.

● the parties demonstrated a mutual commitment to a shared life when they made a decision to move in together in 20XX (albeit it did not occur due to ill health). It is evident the intention was not merely to share accommodation for convenience when they subsequently became engaged in late 20XX. The Deceased’s commitment to this decision is also evident in the wording in their Will:

- Subparagraph 8.11: This Will is made in contemplation of marriage or a Registered Relationship (or similar relationship that would otherwise have the effect of revoking this Will) with the Beneficiary is not conditional on such marriage or Registered Relationship taking place.

● the relationship between the parties was known to all acquaintances and it was publically known they were engaged to be married. The relationship was also publically acknowledged (Facebook status) and the Beneficiary was listed as the Deceased’s next of kin (partner) on all hospital and medical forms.

Living together:

The beneficiary and the Deceased intended to move in together in 20XX. However, this was put on hold because the beneficiary wanted to shield their child from the Deceased’s worsening illness. Nevertheless, an intermittent pattern of ‘living together’ was established on alternate weeks and then full time in the last stages of the Deceased’s life.

Subsection 302-200(2)(c) of the ITAA 1997 provides that 2 persons

● which do not satisfy one or more of the requirements of an interdependency relationship mentioned in paragraphs (1)(b), (c) and (d) of subsection 302-200(1)

● do have an interdependency relationship if they do not satisfy one or more of those requirements because one or both of them suffer from a physical, intellectual or psychiatric disability.

The Commissioner accepts that in this case:

● The beneficiary and the Deceased, would have been living together but for the deceased’s physical disability; and

● Had they been living together, they would have met the interdependency requirements

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.

There is evidence that the Deceased provided financial support to the beneficiary including directly transferring money to the beneficiary’s bank account on occasions when the beneficiary’s bank account balance was low.

Other times, to enable the couple to travel together, the Deceased bore most of the expenses in relation to such travel.

Had the Deceased’s deteriorating health not prevented the parties from merging their households one of the intended outcomes of cohabitation was for the Beneficiary to receive financial support by way of not having to pay rent. The Deceased guaranteed the beneficiary’s financial security through their will, by leaving their home and a substantial sum of cash to them.

Therefore the circumstances of the relationship between the parties meets the requirements of financial support under 302-200(1)(c).

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:

Domestic support and personal care will commonly be of a frequent and ongoing nature. For example, domestic support services will consist of attending to the household shopping, cleaning, laundry and like services. Personal care services may commonly consist of assistance with mobility, personal hygiene and generally ensuring the physical and emotional comfort of a person.

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 expression [personal care] seems to be directed to a different level of reality such as assistance with mobility, personal hygiene and physical comfort. Such activities obviously however will include an element of emotional support…’

In this case the Beneficiary provided substantial domestic support to the Deceased. The fact that the Deceased’s parents also provided domestic support for them does not diminish the beneficiaries input, instead this is seen as evident of the high level of care required due to the Deceased’s ill health.

Therefore the condition under paragraph 302-200(1)(d) of the ITAA 1997 has also been met.

The taxation treatment of the superannuation death benefits paid to the Trustee of the deceased estate:

The monies received from a superannuation fund which were paid to the Estate as a death benefit and used to discharge the mortgage over the Deceased’s principal place of residence will be treated as a payment to a death benefit dependent for the purposes of assessing the income 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.

The ATO’s interpretation of subsections (2) and (3) is that they operate to collectively give tax treatment to the entirety of a superannuation death benefit paid to a trustee of a deceased estate – effectively splitting the benefit into a ‘dependant’ component and ‘non-dependant’ component to give the tax treatment.

Where a gross amount of benefit that is notionally directed to a particular beneficiary is reduced by debts before being paid out, we view the gross benefit as still capable of characterisation as “benefitting” that beneficiary, and falling within (2) or (3), as it is part of the pool of money that is ultimately used to finalise the administration of the estate in their favour.

Therefore to the extent that superannuation death benefits are used to pay expenses of the Estate, this income will be treated as if beneficiaries of the Estate proportionally benefited

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