Edited version of private advice

Authorisation Number: 1051812182536

Date of advice: 1 April 2021

Ruling

Subject: Taxation of death benefit payment

Question 1

Is a person (the First Beneficiary) a death benefits dependant of a person who has died (the Deceased) in accordance with section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is a person (the Second Beneficiary) a death benefits dependant of the late Susan Ritchie (the Deceased) in accordance with section 302-195 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased died in the 20XX-XX income year.

The Beneficiaries are parents of the Deceased.

The Deceased never married and had no children.

The Deceased was diagnosed with a medical condition and commenced treatment.

As their condition worsened the Deceased was forced to reduce their working hours.

The Deceased lived in rented accommodation. Due to their illness the Deceased moved in with the Beneficiary.

The Beneficiaries provided financial support, domestic support and personal care to the Deceased in the following form:

•         managing their financial affairs by paying bills, settling their utilities and other services on the Deceased's rental property;

•         acting as the Deceased's enduring power of attorney and terminating their lease;

•         organising and transporting the Deceased to medical appointments.

•         liaising with doctors and district nursing to ensure appropriate support was being provided;

•         assisting the deceased with showering, personal grooming and dressing;

•         assisting with routine domestic duties such as shopping, laundry, ironing and vacuuming; and

•         providing meals and assisting with eating.

In the 20XX-XX income year, the Deceased's Superannuation Fund paid a death benefit payment to the deceased estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-195.

Income Tax Assessment Act 1997 Section 302-200.

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

Reasons for decision

Summary

The Beneficiaries are not a death benefits dependant of the Deceased because an interdependency relationship, as defined under section 302-200 of the ITAA 1997, did not exist between the Beneficiaries and the Deceased, nor were the Beneficiaries dependants of the Deceased, just before the Deceased died.

Detailed reasoning

Subsection 302-195(1) of the ITAA 1997 defines a death benefits dependant of a person who has died as:

(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 just before he or she died.

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

As the Beneficiaries are parents of the Deceased aged over 18, paragraphs 302-195(1)(a) and (b) of the ITAA 1997 do not apply. Therefore, to conclude that the Beneficiaries are death benefits dependants of the Deceased, it must be established that the Beneficiaries had an 'interdependency relationship' with the Deceased or that they were 'dependants' of the Deceased just before the Deceased died.

What is an interdependency relationship?

Subsection 302-200(1) of the ITAA 1997 states that two persons (whether or not related by family) have an interdependency relationship 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.

Subsection 302-200(3) of the ITAA 1997 provides that regulations may specify:

(a)  matters that are, or are not, to be taken into account in determining under subsection (1) or (2) whether 2 persons have an interdependency relationship; and

(b)  circumstances in which 2 persons have, or do not have, an interdependency relationship mentioned in paragraphs (1)(b), (c) and (d); and

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

Accordingly, all of the conditions in subsection 302-200(1) of the ITAA 1997, or alternatively subsection 302-200(2) of the ITAA 1997, must be satisfied for a person to be in an interdependency relationship with another person.

To that effect, regulation 302-200.01 of the Income Tax Assessment Regulation 1997 (ITAR 1997) states that in considering paragraph 302-200(3)(a) of the ITAA 1997, matters to be taken into account are (in this case):

•         the duration of the relationship; and

•         the ownership use and acquisition of property; and

•         the degree of mutual commitment to a shared life; and

•         the degree of emotional support; and

•         the extent to which the relationship is one of mere convenience; and

•         any evidence suggesting that the parties intend the relationship to be permanent.

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'.

This requirement is common to all of the tests specified in section 302-200 of the ITAA 1997 and regulation 302-200.02 of the ITAR 1997.

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 Income Tax Assessment Act 1936 (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 the Explanatory Statement to the Income Tax Amendment Regulations 2005 (No. 7) which inserted Regulation 8A into the ITR 1936, it stated that:

'It is not necessary for each of the listed circumstances to be satisfied in order for an interdependency relationship to exist. There are circumstances in which it would be inappropriate to consider certain matters. For example, it would not be relevant to consider whether there was a sexual relationship when determining whether an interdependency relationship existed between siblings.

Each of the matters listed is to be given the appropriate weighting under the circumstances. The degree to which any matter is met or is present or not, as the case may be, does not necessarily of its own accord, confirm or preclude the existence of an interdependency relationship

Generally speaking, it is not expected that children will be in an interdependency relationship with their parents.'

As stated above, the intention of the law is that a close personal relationship as specified in subsection 302-200(1) of the ITAA 1997 would not normally exist between parents and their children because there would not be a mutual commitment to a shared life between the two. In addition, an adult child's relationship with their parents would be expected to change significantly over time. It would be expected that the adult child would eventually move out and secure independence from their parents.

In this case, the Deceased was the daughter of both Beneficiaries. It is clear that a close and loving family relationship existed prior to, and at the time of the Deceased's death. The Deceased lived with the Beneficiaries for a short period of time May 20XX to the time of her death in August 20XX.

In typical circumstances, while a parent and child would likely remain an important part of each other's lives, it would be expected that this relationship would change over time. Prior to her death, the Deceased lived on her own and was employed as a Nurse, with her hours being reduced gradually as her condition worsened and treatment continued.

Prior to living with the Beneficiaries, the Deceased had lived on her own for a time.

As the Deceased lived with the Beneficiaries just before her death, it is still considered that she had begun to live a predominantly independent life from the Beneficiaries. Accordingly, the Deceased's relationship with the Beneficiaries was such that it cannot be said that there was a mutual commitment to a shared life.

In respect of emotional support, requests were made but no supporting evidence of any emotional support was supplied.

It is not doubted that a loving and supportive relationship existed between the Beneficiaries and the Deceased. However, although there are some aspects of a 'close personal relationship' evident between the Deceased and your client, it is considered that overall, the relationship between them is not of the type envisioned by the legislation.

Accordingly, the first requirement specified in paragraph 302-200(1)(a) of the ITAA 1997 has not been satisfied in this case.

As all the conditions of subsection 302-200(1) of the ITAA 1997 must be satisfied for an interdependency relationship to exist, based on the above, an interdependency relationship between the Beneficiaries and the Deceased did not exist in this case because it has not been established that the Beneficiaries and the Deceased had a close personal relationship just before the Deceased died.

Consequently, the Beneficiaries are not a death benefits dependant of the Deceased as defined in section 302-195 of the ITAA 1997.

Are the Beneficiaries dependants of the deceased?

A person may also qualify as a death benefits dependant where they were a dependant of the deceased person just before he or she died, per paragraph 302-195(1)(d) of the ITAA 1997.

Therefore, we will now consider whether the Beneficiaries were financially dependant on the Deceased.

According to the Macquarie Dictionary (2000 multimedia edition), 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) 180 CLR 199, per Chief Justice Barwick).

Senior Member Fayle of the Administrative Appeals Tribunal (AAT), in Case [2000] AATA 8, in considering the definition of 'dependant' in relation to former section 27AAA of the 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 dependant 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, beyond a level of subsistence, then the person should not be characterised as a dependant in terms of paragraph 302-195(1)(d) of the ITAA 1997.

In the case of Aafjes v Kearney (1976) 180 CLR at page 207 Gibbs J cited the High Court case of Kauri Timber Co (Tas) Pty Ltd v Reeman (1973) 128 CLR 77 at pages 188-189, and further clarified uncertainty concerning dependency noting:

'...but it does not follow from it that a person who in fact receives some support from one person cannot properly be said to be wholly dependant on another. It is not the mere fact of receipt of support but the dependence or reliance upon another to provide it that matters.' [Emphasis added]

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 their 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, 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, 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 Re Malek v. Commissioner of Taxation (Cth) Case [1999] AATA 678 (Malek), Senior Member Pascoe 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 their 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, the evidence supplied by the taxpayer was able to demonstrate that the financial support received from their 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.

That dependency involves more than the mere receipt of support, but also reliance on it, was affirmed by Hamilton J in Griffiths v Westernhagen [2008] NSWSC 851, [58]:

'For a relationship of dependency to be established, there must be more than the mere giving of money. Rather there must be a relationship where one party relies on the other for what is required for their ordinary living.'

The tenor of the case law noted above refers to a level of dependency to maintain the dependant's ordinary living (Griffiths v Westernhagen), normal standards of living (Malek's case) and relying on another as a means of subsistence (Kauri Timber Co (Tas) Pty Ltd).

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.

In this case, the point to be considered is whether the facts show the Beneficiaries depended or relied on the earnings of the Deceased to maintain his ordinary standard of living at the time of the Deceased's death.

The evidence provided shows that the Beneficiaries did not rely on the Deceased to supplement their living expenses.

Further, relevantly, ATO Interpretative Decision 2014/22 Income Tax: death benefits dependant- adult child caring for a terminally ill parent (ATOID 2014/22) considered the scope of paragraph 302-195(1)(d), stating:

The definition of death benefits dependant in paragraph 302-195(1)(d) does not stipulate the nature or degree of dependency, but it is generally accepted that this refers to financial dependence and it is a condition that must exist in relation to the taxpayer at the time of the deceased's death.

The facts do not indicate that the Beneficiaries were financially dependant on the Deceased for maintenance and support at the time of the Deceased's death.

Accordingly, the condition in paragraph 302-195(1)(d) of the ITAA 1997 has not been established.

Conclusion

As the Beneficiaries were not financially dependant on the Deceased, nor in an interdependency relationship with the Deceased, just before their death, the Beneficiaries are not a death benefits dependant as defined under section 302-195 of the ITAA 1997.

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).