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Ruling

Subject: Superannuation Death Benefits - Interdependency

Question

Are the beneficiaries of the deceased estate death benefits dependents and therefore, is the superannuation death benefits payment tax-free?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2008

The scheme commences on:

1 July 2007

Relevant facts and circumstances

The deceased's children are the trustees and beneficiaries of the deceased estate.

The deceased moved out of the family in 200X after being diagnosed with an illness.

The deceased lived by themselves in a separate residence from 200X to 200Y.

The beneficiaries moved in with the deceased in 200Z to provide care and support.

The deceased solely owned a motor vehicle. The deceased and the beneficiaries did not own any assets jointly.

The deceased provided financial support to the beneficiaries by way covering the costs for food and groceries, clothing, medical expenses and so on. The deceased also purchased a vehicle for them.

The beneficiaries provided full time domestic support and personal care to the deceased from 200X until their death, while they were living with, and away from the deceased.

The domestic support and personal care provided to the deceased included transport to medical treatment appointments, assisting with medication, cooking, cleaning, laundering, shopping as well as bathing and providing a physically and emotionally comfortable environment for the deceased. This support and care required the beneficiaries to take additional time off from their employment.

Two superannuation death benefits payments were paid to the deceased estate, one a life insurance payment the other an accumulation payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 302-10

Income Tax Assessment Act 1997 subsection 302-10(1)

Income Tax Assessment Act 1997 subsection 302-10(2)

Income Tax Assessment Act 1997 section 302-60

Income Tax Assessment Act 1997 section 302-195

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(1)(d)

Income Tax Assessment Act 1997 subsection 302-200(2)

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

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

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

Reasons for decision

Summary

The beneficiaries of the deceased estate were in an interdependency relationship with the deceased just prior to the deceased's death and are therefore death benefits dependents as defined by the legislation. Consequently the superannuation death benefits payment is tax-free in the hands of deceased estate.

Detailed reasoning

For superannuation death benefits made after 30 June 2007, the term 'interdependency relationship' is defined in section 302-200 of the Income Tax Assessment Act 1997 (ITAA 1997), which has replaced former section 27AAB of the of the Income Tax Assessment Act 1936.

Interdependency relationship

Section 302-195 of the ITAA 1997 defines 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.

Section 302-200 of the ITAA 1997 states:

(1) Subject to subsection (3), for the purposes of this Subdivision, 2 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.

(2) 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 there requirements of an interdependency relationship mentioned in paragraphs (1)(b), (c) and (d); and

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

(3) The 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 under this section; and

(b) circumstances in which 2 persons have, or do not have, an interdependency relationship under this section.

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 determining whether two persons have an interdependency relationship under subsections 302-200(1) and (2) of the ITAA 1997.

Paragraph 302-200(3)(b) states that the regulations may specify the circumstances in which two 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 lists matters to be taken into account in determining whether two persons have an interdependancy relationship. This regulation states in part:

(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...

All of the conditions in subsection 302-200(1) of the ITAA 1997 must be satisfied to be able to claim that an interdependency relationship existed. It is proposed to deal with each condition 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.

In the explanatory statement to the Income Tax Amendment Regulations 2005 (No. 7) which inserted regulation 8A of the Income Tax Regulations 1936, it is stated that:

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

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.

However, the facts of this case show that the relationship between the deceased and the beneficiaries was more than that of a normal family relationship for an adult child living with their parents. The beneficiaries have each showed an ongoing commitment to the support and well-being of the deceased throughout their illness, continuing up until their death.

Therefore, it is accepted that a close personal relationship existed between the deceased and the beneficiaries as envisaged by paragraph 302-200(1)(a) of the ITAA 1997.

Cohabitation:

The second requirement to be met is specified in paragraph 302-200(1)(b) of the ITAA 1997, and states that two persons live together.

The facts show that deceased and both the beneficiaries lived together.

Therefore it is considered that the requirement specified in paragraph 302-200(1)(b) has been satisfied.

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.

Unlike the situation prior to 1 July 2004 where financial dependency (substantial support) needs to be satisfied, 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.

The deceased provided both the beneficiaries with financial support in the way of payments made to cover many of the day to day living costs, along with education expenses, medical expenses and private health insurance, as well as a vehicle for each beneficiary.

From these facts it is considered that the requirement specified in paragraph 302-200(1)(c) has been satisfied.

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.

As previously mentioned, the deceased and the beneficiaries lived together. The facts show that both the beneficiaries provided the deceased with significant domestic support and personal care, which included shopping, cooking, cleaning, laundering along with assistance with personal hygiene and physical and emotional comfort.

Therefore, it is accepted that domestic support and personal care was provided to the deceased as envisaged by paragraph 302-200(1)(d) of the ITAA 1997.

Conclusion

In this case all of the requirements for an interdependency relationship as defined in subsection 302-200(1) of the ITAA 1997 have been satisfied. Therefore the beneficiaries of the estate are death benefits dependents as defined in section 302-195 of the ITAA 1997.

Taxation consequences for 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/s intended to benefit from the estate.

This means that where a death benefit dependant of the deceased is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid directly to a death benefit dependant of the deceased.

Therefore, the payment is not included in the assessable income for the estate. The amounts ultimately distributed from the estate to the beneficiaries will not be taxable in their hands as the amounts will represent distributions of corpus of the estate.