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Authorisation Number: 1011671435512

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Ruling

Subject: Superannuation death benefits - dependant

Issue

Question

Will any part of the superannuation lump sum death benefit paid to the trustee of a deceased estate from a superannuation fund be tax-free under section 302-60 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answer

Yes.

This ruling applies for the following period

For the year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The deceased died intestate in a recent year.

In a certificate issued by a State Court confirms the date of the deceased's death and that administration of the deceased estate (the Estate) was granted by the Court to a parent of the deceased.

The deceased lived with the taxpayer (Beneficiary 1) for a year or two until the deceased's death.

In the recent year, the deceased and Beneficiary 1 became engaged and were due to be married.

The deceased and Beneficiary 1 initially resided together in a house owned by the deceased, their principal place of residence. In a particular year, for a period of a few months, they rented a house before returning to their principal place of residence.

During the period immediately prior to the deceased's death, while they were both employed, they both resided together as a couple in a rental property.

Under a State Act, Beneficiary 1 does not qualify as a de facto partner of the deceased as they did not live in a relationship for at least 2 years immediately prior to the deceased's death. Therefore, Beneficiary 1 has no entitlement to claim, by reference to the Act, in the deceased's Estate. However, the parent and sibling of the deceased, have entitlements to claim in the Estate.

Beneficiary 1 and the deceased's parent and sibling were advised by experienced legal practitioners that the circumstances of Beneficiary 1's marriage-like relationship with the deceased are such that the beneficiary has a sustainable claim to an entitlement in the Estate under a State Inheritance Act.

The deceased was a member of a number of superannuation funds.

The trustee of one Fund has resolved to pay a superannuation death benefit directly to Beneficiary 1 as the only "death benefit dependant" and "spouse" of the deceased and entitled to such direct payment.

The trustees of two other funds have determined that the rules of the funds require the trustees of those funds to pay a death benefit in respect to the death of the deceased to the deceased's Estate.

The total death benefits payable by the trustees of those superannuation funds will be in the vicinity of $1 million.

Beneficiary 1 disputes the decision made by the two funds in respect to the death benefits being made to the deceased's Estate and made a number of claims within the meaning of the State Inheritance Act regarding the beneficiary's entitlement in the Estate.

In the recent year, the X parties (who are the X number of beneficiaries of the Estate) negotiated an agreement to resolve claim or claims that Beneficiary 1 may have in respect of the Estate and entered into a Deed of Settlement ("Settlement Deed") whereby they agree that their respective claims, for entitlements in the intestate estate will be divided equally between the parties from the balance of the Total Asset Pool.

To avoid doubt, the parties intend for Beneficiary 1 to receive, in addition to the 1/3^rd of the balance of the Total Asset Pool, the amount in relation to the tax saving determined as a death benefits dependant of the deceased.

The deceased's parent and sibling both recognised that as the de-facto spouse, Beneficiary 1 is considered to be a death benefits dependant.

Relevant legislative provisions

Income Tax Assessment Act 1997 Chapter 3 Part 3-30 Division 302.

Income Tax Assessment Act 1997 Subdivision 302D

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1997 Section 302-60

Income Tax Assessment Act 1997 Section 302-195

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

Income Tax Assessment Act 1997 Paragraph 302-195(1)(a)

Income Tax Assessment Act 1997 Section 302-200

Income Tax Assessment Act 1997 Subsection 302-200(1)

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

Income Tax Assessment Act 1997 Section 960-255

Reasons for decision

Summary

Beneficiary 1 was in a de facto relationship with the deceased in the period immediately prior to the deceased's death, because they were living together as a couple on a genuine domestic basis. Therefore, Beneficiary 1 satisfies the requirements of a death benefits dependant.

Detailed reasoning

Superannuation death benefits paid to a trustee of a deceased estate

Under section 302-10 of the Income Tax Assessment Act 1997 (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.

This means that where a 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 to a dependant of the deceased, and the benefit is taken to be income to which no beneficiary is presently entitled.

Where a person that is not a dependant is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid to a non-dependant of the deceased to that extent, and the benefit is taken to be income to which no beneficiary is presently entitled.

Accordingly, in the present case, the payment from the superannuation funds paid to the trustee of the deceased estate is assessable to the trustee as income to which no beneficiary is presently entitled.

The superannuation death benefit will be treated concessionally if dependants of the deceased will benefit from the estate. 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. It will now be determined if Beneficiary 1 is a dependant of the deceased.

Death Benefits Dependant in relation to a Superannuation Death Benefit:

Subsection 995-1(1) of the ITAA 1997 states that the term 'death benefits dependant' has the meaning given by section 302-195. Subsection 302-195(1) of the ITAA 1997 defines a 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.

Under subsection 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.

De facto relationship:

Family relationships are clarified under section 960-255 of the ITAA 1997. The relationship between couples who are not married is treated in the same way as if they are legally married if one individual is the spouse of another because of the definition of spouse in subsection 995-1(1).

The definition of 'spouse' in subsection 995-1(1) of the ITAA 1997 is as follows:

spouse of a person includes a person who, although not legally married to the person, lives with the person on a genuine domestic basis as the person's husband or wife.

A deceased person's de facto spouse is therefore included in this definition of 'death benefits dependant' in paragraph 302-195(1)(a) of the ITAA 1997.

The Acts Interpretation Act 1901 (the AIA) which applies to all Acts of Parliament, has a reference to de facto partners in section 22A. Section 22A states the following:

For the purposes of a provision of an Act that is a provision in which de facto partner has the meaning given by this Act, a person is the de facto partner of another person (whether of the same sex or a different sex) if:

(a) the person is in a registered relationship with the other person under section 22B; or

(b) the person is in a de facto relationship with the other person under section 22C.

De facto relationships are further identified under subsection 22C(1) of the AIA as follows:

(a) are not legally married to each other; and

(b) are not related by family (see subsection (6)); and

(c) have a relationship as a couple living together on a genuine domestic basis.

Subsection 22C(2) of the AIA states:

In determining for the purposes of paragraph (1)(c) whether 2 persons have a relationship as a couple, all the circumstances of their relationship are to be taken into account, including any or all of the following circumstances (emphasis added):

· the duration of the relationship;

· the nature and extent of their common residence;

· whether a sexual relationship exists;

· the degree of financial dependence or interdependence, and any arrangements for financial support, between them;

· the ownership, use and acquisition of their property;

· the degree of mutual commitment to a shared life;

· the care and support of children;

· the reputation and public aspects of the relationship.

Furthermore, subsection 22C(3) of the AIA states:

no particular finding in relation to any circumstance mentioned in subsection (2) of the AIA is necessary in determining whether 2 persons have a relationship as a couple for the purposes of paragraph (1)(c).

The term 'de facto relationship' is similarly defined in section 4AA of the Family Law Act 1975 (FLA). The meaning of a de facto relationship is as follows

A person is in a de facto relationship with another person if:

(a) the individuals are not legally married to each other

(b) the individuals are not related by family (as defined), and

(c) having regard to all the circumstances of their relationship, they have a relationship as a couple living together on a genuine domestic basis.

The main issue in this case is determining if Beneficiary 1 and the deceased were a couple living together on a genuine domestic basis. This can be a difficult matter and Australian Courts consider all of the circumstances and utilise a number of factors that are appropriate to determine if there is a de facto relationship.

Considering the circumstances of Beneficiary 1 and the deceased against some of the indicators for a couple outlined in subsection 22C(2) of the AIA would indicate they were a couple. This is based on the following:

They had resided together for a period of just under two years. This would adequately satisfy paragraph 22C(2)(a) of the AIA regarding duration of the relationship.

Paragraph 22C(2)(b) of the AIA considers the nature of their common residence. A common residence infers that a couple are living together and sharing a household. In Hayes v. Marquis [2008] NSWCA 10; [2008] DFC 95-415; [2008] ALMD 5421; [2008] ALMD 5423 (Hayes v. Marquis) it was stated:

The expression "living together" in the context of the Act is to be understood as referring to sharing a home, that is to say, cohabiting or dwelling together. The test is an objective one. It involves assessing the nature and extent of the claimed common residence. The concept of "living together" in section 5(1)(b) requires two adult persons be seen as regarding the place or places in which they live as "their home". The dominant parameter will be whether or not the individuals concerned may be discerned to regard the premises in question as their home and in so doing to be acting reasonably:

Up until the date of the deceased's death, a period of just under two years, Beneficiary 1 and the deceased were living together in a common residence. Although the location of the common residence changed a number of times due to their employment, Beneficiary 1 and the deceased resided together for the whole period. This would adequately satisfy paragraph 22C(2)(b) of the AIA regarding common residence.

Paragraph 22C(2)(f) of the AIA looks at the degree of mutual commitment to a shared life. Beneficiary 1 and the deceased had been living together for a period just under two years. They had become engaged to be married in the recent year and had set the date for the marriage late in the same year. Clearly paragraph 22C(2)(f) of the AIA is satisfied.

Paragraph 22C(2)(h) of the AIA considers the reputation and pubic aspects of a relationship. Beneficiary 1 and the deceased were engaged to be married. They had lived together for a period just under two years. When employment opportunities arose away from their principal residence, they both moved together and lived together in the new location. The public perception of this relationship could only be construed as a couple.

The above factors also indicate the couple were living together on a genuine domestic basis. Although under the State Act Beneficiary 1 did not qualify as a de facto partner because they did not meet the 2 year requirement under the Act, the deceased's parent recognises the circumstances of Beneficiary 1's relationship with the deceased would give rise to a claim on the deceased's estate under the State Inheritance Act. Such a claim would only be possible if the relationship was a marriage-like one.

Therefore, for the purposes of subsection 995-1(1) of the ITAA 1997, Beneficiary 1 would be considered to be the de facto spouse of the deceased in the period immediately prior to the deceased's death. Consequently, Beneficiary 1 satisfies the requirements of a death benefits dependant specified in paragraph 302-195(1)(a) of the ITAA 1997. It is highly likely that Beneficiary 1 would also satisfy the requirements of paragraph 302-195(1)(c) of the ITAA 1997 (interdependency relationship) however there is no need to consider this.

The taxation treatment of a superannuation death benefits:

As Beneficiary 1 is considered to be a death benefits dependant the entitlement of the superannuation death benefits to Beneficiary 1 will be tax-free under section 302-60 of the ITAA 1997 and is not included as assessable income in the hands of the deceased Estate. The amount ultimately distributed from the Estate to Beneficiary 1 will not be taxable in the beneficiary's hands because the amount will represent a distribution of the corpus of the Estate.