Edited version of private ruling

Authorisation Number: 1011696713182

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Ruling

Subject: Taxation treatment of superannuation death benefit

Question 1

Are you a death benefits dependant of your child in accordance with subsection 302-195(1) of the Income Tax Assessment Act 1997?

Answer

No.

Question 2

Is any part of the superannuation lump sum death benefit paid by an Australian superannuation fund to you, a non-resident of Australia, subject to tax in Australia?

Advice/Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The deceased passed away in the income year.

The deceased was your only child.

The deceased resided with you and your spouse overseas from their childhood until they immigrated to Australia.

The deceased was employed by a number of employers in various occupations from the time they immigrated to Australia . The deceased was also a university student.

The deceased became an Australian citizen in a previous income year.

The deceased's death they were unemployed and received no unemployment benefits.

The deceased occasionally provided financial assistance to you and your spouse as per their mood and at their convenience. You and your spouse did not keep any systematic account of these payments the deceased made to you.

The payments you and your spouse received from the deceased are, for the most part, payments of a sporadic nature which were not made for necessities and that you were fully reliant upon your spouse's income to meet your daily needs and basic necessities.

The deceased owned no assets either in Australia or overseas, and they did not hold any assets jointly with another person, during the income years.

As the deceased was not married, they did not provide financial help to any other person.

You lived overseas during the period the deceased resided in Australia, and at the time of the deceased's death.

You are not a resident of Australia for tax purposes.

Prior to their death the deceased provided you with personal care which was as usual between a parent and child. In return you provided them with similar personal care.

During the period the deceased was a resident of Australia, they travelled twice to visit you and your spouse. During these visits the deceased provided financial assistance to you and your spouse. Also during these visits, the deceased displayed affection for you and your spouse.

You are fully dependent on your spouse. You have had no income of your own throughout your life. You have not held a bank account or any investment account in your own name in any year.

You have not owned any assets anywhere in any year either solely or jointly with another person.

Your spouse was a Government employee until his retirement. Your spouse receives a pension of and has no other income.

The deceased was a member of a complying superannuation fund (the Fund). The deceased nominated you as a beneficiary of their accrued benefits in the Fund.

After the deceased's death you sought to access the deceased's accrued benefits in the Fund.

A superannuation lump sum death benefit was paid in respect of the deceased by the Fund in the income year. A PAYG payment summary-superannuation lump sum for the income year discloses that the death benefit was paid to you. The PAYG Payment Summary also shows the entire payment as a taxed element of a taxable component. Australian income tax was withheld from the lump sum payment.

After receiving the death benefit you and your spouse opened a joint bank account overseas and the payment was deposited in this joint account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 302-145(1).

Income Tax Assessment Act 1997 Subsection 302-145(2).

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 Paragraph 302-195(1)(b).

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

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

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 307-5(1).

Income Tax Assessment Act 1997 Section 307-65.

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

Reasons for decision

Summary

An interdependency relationship did not exist between you and the deceased prior to their death. This is because from the time the deceased immigrated to Australia until the time of their death, you and the deceased did not live together. In addition, you were not financially dependent upon the deceased prior to and at the time of their death. Consequently, it is considered that you are not a death benefits dependant of the deceased.

The taxable component-taxed element of the superannuation death benefit is assessable income in your hands in the income year. Although you a non-resident of Australia, this taxable component is subject to income tax in Australia in this income year, and you are liable to pay income tax on this amount. However, a tax-offset will apply to limit the rate of tax that is payable on the taxable component.

Detailed Reasoning

Division 302 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to superannuation death benefits paid from complying superannuation funds after 1 July 2007, and governs the taxation treatment of superannuation lump sum death benefits received by death benefits dependants and non-dependants. The term 'death benefits dependant' is defined in subdivision 302-D of the ITAA 1997.

Superannuation lump sum

A superannuation lump sum is described in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream.

The table contained in subsection 307-5(1) of the ITAA 1997 identifies the different types of superannuation benefits. One such payment is a superannuation death benefit. A superannuation death benefit is described in Column 3 of the table in subsection 307-5(1) of the ITAA 1997 as:

… A payment to you from a superannuation fund, after another person's death, because the other person was a fund member.

The deceased died in the 2009-10 income year. Prior to their death the deceased was a member of a superannuation fund (the Fund). The Fund is a complying superannuation fund.

As a result of the deceased's death, a superannuation lump sum death benefit was paid by the Fund in respect of the deceased in the income year.

A PAYG payment summary-superannuation lump sum for the income year dated the same day discloses that the death benefit was paid directly to you. The deceased nominated you as a beneficiary of their accrued benefits in the Fund. The Payment Summary also shows the entire payment as a taxable component-taxed element.

The lump sum benefit was paid by the Fund after the deceased's death, because the deceased was a fund member. Therefore the death benefit is a superannuation death benefit within the meaning of subsection 307-5(1) of the ITAA 1997.

The death benefit is subject to relevant taxation on a superannuation benefit under the provisions of the ITAA 1997. As the death benefit was paid by the Fund after 1 July 2007, the provisions of Division 302 of the ITAA 1997 apply to the benefit.

'Death Benefits Dependant' in relation to the 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 of the ITAA 1997. 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.

As you are the parent of the deceased, neither paragraph 302-195(1)(a) nor paragraph 302-195(1)(b) of the ITAA 1997 is relevant. Rather your death benefits dependency must be established in accordance with either paragraph 302-195(1)(c) of the ITAA 1997 (interdependency relationship), or paragraph 302-195(1)(d) of the ITAA 1997.

Interdependency relationship

Subsections 302-200(1) and 302-200(2) of the ITAA 1997 state:

(1) 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.

(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 those requirements is that either or both of them suffer from a physical, intellectual or psychiatric disability.

The requirement in paragraph 302-200(1)(b) of the ITAA 1997 is the two persons (whether or not related by family) live together. The facts of the case indicate you and the deceased did not live together prior to and at the time of their death and had not done so since the deceased immigrated to Australia. Accordingly, the requirement specified in paragraph 302-200(1)(b) of the ITAA 1997 has not been satisfied and it is not necessary to consider the other requirements of subsection 302-200(1). Therefore you cannot qualify as a death benefit dependant under subsection 302-200(1) of the ITAA 1997.

An 'interdependency relationship' can also be established if the requirements in paragraph 302-200(1)(a) and the conditions in subsection 302-200(2) of the ITAA 1997 are satisfied. Subsection 302-200(2) of the ITAA 1997 ensures that where two people have a close personal relationship but because of the 'physical, intellectual or psychiatric disability' of one of both of them, they do not satisfy one or more of the requirements in paragraphs 302-200(1)(b), (c) and (d) of the ITAA 1997, they will still be considered to have an 'interdependency relationship'.

The facts indicate the reason the deceased was not living with you and your spouse overseas did not arise as a result of a physical, intellectual or psychiatric disability of either the deceased or you. Accordingly, it is considered the requirements set out in subsection 302-200(2) of the ITAA 1997 have not been met and therefore you were not in an 'interdependency relationship' with the deceased prior to and at the time of his death. Therefore you cannot qualify as a death benefit dependant under subsection 302-200(2) of the ITAA 1997.

Financial Dependency

Where a person does not meet the definition of death benefits dependant in paragraph 302-195(1)(a), paragraph 302-195(1)(b) or paragraph 302-195(1)(c) of the ITAA 1997, the death benefits dependency of the person must be established in accordance with paragraph 302-195(1)(d) of the ITAA 1997.

For you to be considered to be a death benefits dependant of the deceased, it is necessary to examine whether you were financially dependent upon the deceased.

According to The Macquarie Dictionary (2001, revised 3^rd edition, The Macquarie Library Pty Ltd NSW and [Multimedia], version 5.0.0, 1/10/2001) one meaning of the term dependant is:

a person to whom one contributes all or a major amount of necessary financial support.

In The Butterworths Australian Legal Dictionary (1997, Reed International Books Australia Pty Ltd trading as Butterworths) a dependant is defined as being:

a person who depends on another, wholly or substantially, for his or her survival, maintenance or financial support.

In both of these dictionary definitions the emphasis is on the fact that the financial support or maintenance is substantial.

The courts have also placed an emphasis on the fact that the financial support or maintenance had to be substantial. In determining whether a person is a dependant, the courts have found that it was necessary to establish the actual level of financial support that was provided to that person by the deceased. This is because dependence was assessed on the basis of the actual fact of dependence or reliance on the earnings of another for support. The courts have also held that being a dependant referred to a financial dependency, to an extent that one person relied on another to maintain their normal standard of living. This issue is a question of fact.

It is the Commissioner's view that dependence occurs where a person is wholly or substantially maintained financially by another person. In this context, where the level of financial support provided to a person is substantial then that person can be regarded as a dependant. Where a person's income is sufficient to cover their basic needs, they will not normally be considered to be financially dependant on another.

As noted above, you were the parent of the deceased who was an adult child at the time of their death. The point which has to be considered is whether you 'depended or relied on' the deceased's earnings for your day to day sustenance at the time of their death.

You have no income of your own. You are fully dependent on your spouse who was previously a Government employee and is retired. Your spouse receives a pension.

The deceased occasionally provided financial assistance to you and your spouse as per their mood and at their convenience. The deceased also provided financial assistance when they visited you and your spouse overseas prior to their death.

As noted in the facts, no records were kept of the payments the deceased made to you and your spouse. You explained the lack of records by stating the financial transactions between the deceased and his parents were not refundable. Nothing provided demonstrates the financial support you received from the deceased was substantial. Further, the payments you and your spouse received from the deceased shows that for the most part they were payments of a sporadic nature which were not made for necessities and that you were fully reliant upon your spouse's income to meet your daily needs and basic necessities.

Essentially, the payments the deceased made to you and your spouse supplemented your spouse's income and represented 'quality of life' payments. Therefore the payments cannot be considered to be substantial financial support. In this light, there is no evidence to indicate you were financially dependant on the deceased prior to and at the time of his death and therefore you are not a death benefits dependant of the deceased within the meaning of paragraph 302-195(1)(d) of the ITAA 1997.

As you are not a death benefits dependant in accordance with subsection 302-195(1) of the ITAA 1997, the provisions of subdivision 302-C of the ITAA 1997 will apply to tax the superannuation death benefit you received from the Fund.

Taxation of the superannuation death benefit

Subsection 302-145(1) of the ITAA 1997 provides that where a person receives a superannuation lump sum from an Australian complying superannuation fund and the recipient was not a death benefits dependant of the deceased, the taxable component of the lump sum is assessable income in the recipient's hands.

For the purposes of subsection 302-145(1) of the ITAA 1997, the fact the recipient may not be a resident of Australia for tax purposes is not relevant.

As noted above, the entire amount of the superannuation death benefit is a taxable component-taxed element. Accordingly this amount is assessable income in your hands and is subject to tax in Australia in the income year.

This is notwithstanding that you are not a resident of Australia for tax purposes.

However, a tax-offset under subsection 302-145(2) of the ITAA 1997 will apply to ensure that the rate of tax payable on the taxable component-taxed element will not exceed 15%. To obtain this tax-offset, you will need to lodge an Australian income tax return for the income year, and disclose this death benefit in your return.