Edited version of private advice

Authorisation Number: 1051817808617

Date of advice: 1 April 2021

Ruling

Subject: Taxation of superannuation death benefits

Question 1

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

Answer

No.

Question 2

Is the death benefit non-assessable and non-exempt income in accordance with section 302-60 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased died in the 20XX-XX income year

The Beneficiary is a parent of the Deceased.

The Beneficiary divorced their spouse more than XX years ago.

The Beneficiary is in receipt of the aged pension and received no benefit payments for the care of the Deceased.

From 20XX, the Beneficiary and the Deceased lived together.

The Deceased suffered from several ailments and mental health conditions.

The Deceased worked until late 20XX, when they left work to focus on recovering their mental health.

The Beneficiary also suffered from mental illness.

While living together, the Beneficiary and the Deceased shared all financial expenses and household chores. The Beneficiary provided meals and accommodation to the Deceased and the Deceased paid for groceries and the Beneficiary's taxi expenses.

The Beneficiary received financial help from the Deceased to meet their basic needs from the time they moved in together until the Deceased's death.

The Deceased provided the Beneficiary with domestic support and personal care, including the following:

•         shopping, cleaning the house and laundry;

•         managing the household accounts; and

•         obtaining prescriptions and other items as needed.

The Beneficiary did not bank electronically and most transactions between the Beneficiary and the Deceased were in cash.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 302-140.

Income Tax Assessment Act 1997 section 302-145.

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 Beneficiary is 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 Beneficiary and the Deceased, nor was the Beneficiary a dependant of the Deceased, just before the Deceased died.

Therefore, the Benefit is not tax free in accordance with section 302-60 of the ITAA 1997.

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 Beneficiary is a parent of the Deceased, paragraphs 302-195(1)(a) and (b) of the ITAA 1997 do not apply. Therefore, to conclude that the Beneficiary is a death benefits dependant of the Deceased, it must be established that the Beneficiary had an 'interdependency relationship' with the Deceased or that they were a 'dependant' 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

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

A close personal relationship is generally one that involves a demonstrated and ongoing commitment to the emotional support and well-being of the two parties. Indicators of a close personal relationship may include the duration of the relationship and the degree of mutual commitment to a shared life.

Generally, a close personal relationship as specified in subsection 302-200(1) of the ITAA 1997 would not exist between a parent and child. This is because the relationship between a parent and child would be expected to change significantly over time and there would be no mutual commitment to a shared life between the two. However, where unusual and exceptional circumstances exist, a relationship between a parent and child may be treated as an interdependency relationship for the purposes of subsection 302-200(1) of the ITAA 1997.

While it is accepted that the Beneficiary and the Deceased had a close, loving relationship, the facts do not indicate a relationship between a parent and child that may be treated as an interdependency relationship for the purposes of subsection 302-200(1) of the ITAA 1997. There is nothing to indicate a level of commitment to a shared life or a level of care above what would normally be expected between family members. It is expected that family members would provide emotional support in difficult times. While the Beneficiary lived with the Deceased there is nothing to indicate a level of commitment to a shared life or a level of care above what would be normal or expected of an adult child living at home with a parent.

Consequently, while it is accepted that the Beneficiaries and the Deceased had a close parent/child relationship, it is not considered that a close personal relationship existed between the Beneficiaries and the Deceased as contemplated in paragraph 302-200(1)(a) of the ITAA 1997.

As all the conditions in subparagraph 3002-200(1) of the ITAA 1997 have not been satisfied, an interdependency relationship between the Deceased and the Beneficiary did not exist.

Therefore, to be a death benefits dependant of the Deceased, the Beneficiary must show that they were a 'dependant' of the Deceased just before they died under paragraph 302-195(1)(d) of the ITAA 1997.

Is the Beneficiary a dependant of the deceased?

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.

In the current case, we accept that the Deceased provided some financial support to the Beneficiary as the need arose. However, the point to be considered is whether the facts show that the Beneficiary depended or relied on that support to maintain their normal standard of living at the time of the Deceased's death.

Based on the evidence provided, we consider that the Beneficiary did not rely on a regular continuous financial support by the Deceased to maintain their normal standard of living. Rather, immediately before the Deceased's death, the Beneficiary's financial support came primarily from the aged pension, supplemented by the Deceased where necessary.

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

Tax treatment of a death benefits payment made to a non-dependant beneficiary

Section 302-140 of the ITAA 1997 provides that the tax-free component of a superannuation lump sum received by a non-dependant beneficiary is not assessable income and is not exempt income.

Section 302-145 of the ITAA 1997 provides that the taxable component of a superannuation lump sum received by a non-dependant beneficiary is 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 untaxed element in the fund does not exceed 30%.

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