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Ruling

Subject: Death benefits dependancy

Question

Was the Deceased in an interdependency relationship with the Beneficiary in accordance with section 302-200 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The Deceased was over 65 years of age.

The Deceased passed away and probate was granted.

The Deceased's total income at the time of her death was approximately provided.

The Deceased resided in South Australia.

A trustee has been appointed as an executor and trustee of the Deceased's estate.

Administration of the Deceased's estate has not been completed.

The Deceased's estate has not yet received payment of any superannuation death benefits. The amount due to the Deceased's estate is from the Family Superannuation Fund.

According to the Deceased's Will the trustees are required to pay the proceeds of any superannuation fund, allocated pension fund or approved deposit fund held by the Deceased at the time of death into a Protective Trust (the Protective Trust), an all needs protective trust, for the sole benefit of the Beneficiary until her death.

The trustee of the Protective Trust is to apply the net income or allocated income or capital of the Protective Trust for the benefit of the Beneficiary to ensure that she has appropriate housing and accommodation and ample financial support and assistance to improve the quality of her life.

The Deceased's Will states that on the death of the Beneficiary, the balance of the Protective Trust is to be distributed in accordance with the balance of the remainder of the Deceased's estate.

Under the Deceased's Will the trustees may also distribute any net income, allocated net income or capital of the Protective Trust to the trustee of a Special Disability Trust (the Special Disability Trust) at their absolute discretion.

The terms of the Special Disability Trust are set out in a separate deed. On the death of the Beneficiary, any residue remaining in the Special Disability Trust is to be repaid to the donors of the trust. The Donors are the trustees of the Protective Trust.

The remaining beneficiaries of the Deceased's estate are the deceased's three other adult children who are not death benefits dependants of the Deceased.

The Beneficiary is almost 50 years of age.

The Beneficiary had a close personal relationship with the Deceased but was unable to live with her due to her intellectual and physical disability.

The Beneficiary was born with cerebral palsy.

The Beneficiary resided with her father in South Australia. She now lives there permanently as she has the right to occupy the residence under her late father's Will.

The Beneficiary was receiving a pension at the time of the Deceased's death.

At the time of the Deceased's death the Beneficiary had bank deposits.

The Deceased received no financial support from the Beneficiary prior to or at the time of death.

The Deceased provided substantial support to the Beneficiary while she resided with the Beneficiary. The beneficiary provided no support to the deceased due to her medical condition.

The Beneficiary now has a carer for 7-8 hours per day which is provided by Disability SA.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27AAB

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).

Income Tax Regulations 1936 Regulation 8A

Income Tax Regulations 1997 Regulation 302-200.01(2)

Reasons for decision

Summary

It is accepted that the Beneficiary was a dependant of the Deceased, in the period prior to and at time of the Deceased's death as they had a close personal relationship. Therefore the superannuation death benefit is not assessable income and is not exempt income.

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.

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 the beneficiary is a dependant of the deceased.

Section 302-195 of the ITAA 1997 defines death benefits dependant as follows:

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

· the deceased persons spouse or former spouse; or

· the deceased persons child, aged less than 18; or

· any other person with whom the deceased person had an interdependency relationship under section 302-200 just before he or she died; or

· any other person who was a dependant of the deceased person just before he or she died.

Interdependency relationship

The term interdependency relationship is defined in section 302-200 of the ITAA 1997. Section 302-200 of the ITAA 1997 states:

Subject to subsection (3), for the purposes of this Subdivision, 2 persons (whether or not related by family) have an 'interdependency relationship' if:

· they have a close personal relationship; and

· they live together; and

· one or each of them provides the other with financial support; and

· one or each of them provides the other with domestic support and personal care.

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

· they have a close personal relationship; and

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

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

The regulations may specify:

· 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

· 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,above, 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. Regulation 302-200.01(2) of the Income Tax Regulations 1997 (ITR 1997) states as follows:

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

· the duration of the relationship; and

· whether or not a sexual relationship exists; and

· the ownership, use and acquisition of property; and

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

· the care and support of children; and

· the reputation and public aspects of the relationship; 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;

All of the conditions in subsection 302-200(1) of the ITAA 1997, or alternately both the condition in paragraph 302-200(1)(a) and the condition in subsection 302-200(2), of the ITAA 1997 must be satisfied for you to be able to claim that you had an interdependency relationship. 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:

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.

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).

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

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 of the Income Tax Regulations 1936, it 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.

In this case, the Deceased is the parent of the Beneficiary. Clearly a familial relationship existed prior to, and at the time of the Deceased's death.

The Beneficiary was born with a medical condition and the Deceased provided substantial support to the Beneficiary while they resided with the Beneficiary. Therefore, clearly a relationship over and above the usual familial relationship existed between the Beneficiary and the Deceased, prior to, and at the time of the Deceased's death. The Beneficiary was highly dependent on the Deceased and care was provided on a continuing basis. It is reasonable to assume that given the circumstances, the relationship would not have changed significantly over time.

The facts show that there was a mutual commitment to a shared life between the Beneficiary and the Deceased prior to and at the time of the Deceased's death.

Therefore, it is accepted that a close personal relationship existed between the Deceased and the Beneficiary 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 third edition of the Macquarie Dictionary (2000 multimedia edition) in its definition of 'live' lists:

live together, ... cohabit.

The Macquarie Dictionary defines 'cohabit' as:

to dwell or reside in company or in the same place.

The Macquarie Dictionary further defines 'dwell' as:

to abide as a permanent resident.

The facts show that the Beneficiary was not living with the Deceased.

It is considered that the requirement specified in paragraph 302-200(1)(b) has not been satisfied in this instance.

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.

You provide that the Deceased received no financial support from the Beneficiary. Consequently, it is considered that paragraph 302-200(1)(c) of the ITAA 1997 has not been satisfied in this instance.

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 case Dridi v. Fillmore 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…

You provide that the Deceased provided substantial support to the Beneficiary while she resided with the Beneficiary and the Beneficiary provided no support to the Deceased.

On the facts provided, it is considered that the requirement in paragraph 302-200(1)(d) of the ITAA 1997 has been satisfied in this instance.

Application of subsection 302-200(2):

Essentially, this subsection ensures that where two people have a close personal relationship, however, because of the physical, intellectual or psychiatric disability of one or both of them, they do not satisfy one or more of the requirements in paragraphs 302-200(1)(b) to (d) of the ITAA 1997, they will still be considered to have an interdependent relationship.

In this case, there is a close personal relationship between the Deceased and the Beneficiary. However, some requirements in paragraphs 302-200(1)(b) to (d) of the ITAA 1997 have not been met due to the Beneficiary's medical condition. Accordingly, subsection 302-200(2) operates to establish an 'interdependency relationship'.

The beneficiary is a dependant in relation to the superannuation death benefit:

As the Deceased and the Beneficiary have an close personal relationship and some requirements under paragraphs 302-200(1)(b) to (d) of the ITAA 1997 have not been met due to the Beneficiary's medical condition it is considered an 'interdependency relationship' exists.

In this case, according to the Deceased's Will the trustees are required to pay the proceeds of any superannuation fund, allocated pension fund or approved deposit fund held by the Deceased at the time of death into the a all needs protective trust (the Protective Trust) for the sole benefit of the Beneficiary until her death.

The trustee of the Protective Trust is to apply the net income or allocated income or capital of the Protective Trust for the benefit of the Beneficiary to ensure that they have appropriate housing and accommodation and ample financial support and assistance to improve the quality of their life.

The Deceased's Will states that on the death of the Beneficiary, the balance of the Protective Trust is to be distributed in accordance with the balance of the remainder of the Deceased's estate.

Under the Deceased's Will the trustees may also distribute any net income, allocated net income or capital of the Protective Trust to the trustee of a special disability trust (the Special Disability Trust) at their absolute discretion.

The terms of the Special Disability Trust are set out in a separate deed. On the death of the Beneficiary, any residue remaining in the Special Disability Trust is to be repaid to the donors of the trust. The Donors are the trustees of the Protective Trust.

The remaining beneficiaries of the Deceased's estate are the deceased's other adult children who are non-death benefits dependants of the Deceased.

Based on the facts of this case, the Commissioner considers that the payment represents a payment for the benefit of a dependant of the Deceased as:

· the Productive Trust into which the payment will be made is for the sole benefit of the Beneficiary;

· the payment of monies to non-dependant beneficiaries represents a remote possibility as it relies upon the Beneficiary's death;

· payments may also be made to the Special Disability Trust for the Beneficiary; and

· payment of residues from the Special Disability Trust are only made on the death of the Beneficiary.

Conclusion

Accordingly, it is accepted that the Beneficiary was a dependant of the Deceased, in the period prior to and at time of the Deceased's death. Therefore, the Beneficiary is considered to be a dependant of the deceased for the purposes of subsection 302-200(1) of the ITAA 1997.

As discussed above, 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.