Edited version of private ruling

Authorisation Number: 1011784571109

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Ruling

Subject: Death benefit - interdependency relationship

Question:

Was your client in an interdependency relationship with the deceased at the time of the death of the deceased in accordance with subsection 27AAB of the Income Tax Assessment Act 1936?

Advice/Answers:

Yes.

This ruling applies for the following period:

1 July 2006 to 30 June 2007

The scheme commenced on:

1 July 2006

Relevant facts:

Your client's older child (the deceased) was under 18 years of age.

The deceased completed year 12 and was to commence a university degree.

Your client's spouse passed away from an illness. At that time your client's younger child was still at school. Your client was on Centrelink payments.

The deceased deferred tertiary studies. The deceased was employed in the particular income year.

Your client and the deceased lived at the same address in the relevant income years.

The deceased was killed in an accident.

Your client received a death benefit superannuation payment from the deceased's superannuation fund.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Subsection 27A(1).

Income Tax Assessment Act 1936 Paragraph 27B(1A)(a).

Income Tax Assessment Act 1936 Paragraph 27B(1A)(b).

Income Tax Assessment Act 1936 Section 27AAA.

Income Tax Assessment Act 1936 Subsection 27AAA(2).

Income Tax Assessment Act 1936 Subsection 27AAA(4).

Income Tax Assessment Act 1936 Section 27AAB.

Income Tax Assessment Act 1936 Paragraph 27AAB(1)(a).

Income Tax Assessment Act 1936 Paragraph 27AAB(1)(b).

Income Tax Assessment Act 1936 Paragraph 27AAB(1)(c).

Income Tax Assessment Act 1936 Paragraph 27AAB(1)(d).

Income Tax Assessment Act 1936 Section 159SA

Reasons for decision

Summary

Your client was not in an interdependency relationship with the deceased at the time of death. As a result the superannuation death benefit payment is not tax free in your client's hands.

Detailed reasoning

Taxation of Death Benefits:

Paragraph (ba) of the definition of 'eligible termination payment' (ETP) in subsection 27A(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides, in part, that an ETP includes any payment made to a taxpayer from a superannuation fund by reason that another person was a member of the fund, where:

(i) the payment is made after the death of the other person;

…

(iii) the payment is made to the taxpayer otherwise than as trustee of the estate of the other person;…

On the basis of the facts provided, the payment made by the Superannuation Fund (Fund) to your client falls under this definition.

A death benefit ETP is further defined under subsection 27A(1) of the ITAA 1936 as an ETP that is a death benefit within the meaning of section 27AAA of the ITAA 1936. This section defines the types of payments that are treated as death benefit ETPs for the purpose of taxing ETPs and also provides for concessional treatment for death benefits paid in relation to dependants.

In the circumstances of this case, a paragraph (ba) ETP constitutes an Item 2 death benefit pursuant to subsection 27AAA(2) of the ITAA 1936. Consequently, subsection 27AAA(4) applies to treat the benefit concessionally where the death benefit is paid to a taxpayer who was the dependant of the deceased person at the time of the deceased person's death or at the time of the payment of the death benefit.

'Dependant' in Relation to the Death Benefit Payment:

For 'death benefit eligible termination payments' (death benefit ETPs) which are made after 30 June 2004, the term 'dependant' is defined in subsection 27A(1) of the Income Tax Assessment Act 1936 (ITAA 1936) as follows:

'dependant', in relation to a person (the first person), includes:

(a) in subparagraph (3)(a)(ii), subsections (5), (5C) and (7) and paragraph (12)(a):

(i) any spouse or former spouse of the first person; and

(ii) any child of the first person; and

(b) in any other case:

(i) any spouse or former spouse of the first person; and

(ii) any child, aged less than 18 years, of the first person; and

(iii) any person with whom the first person has an interdependency relationship.

The relevant part of the definition of dependant for the death benefit payment in this case is paragraph (b).

Furthermore, on the question of who is a dependant the Commissioner, at paragraph 41 of Taxation Ruling IT 2168, states that a person who does not fall within the specific inclusions of the definition, will only be a dependant if he or she was actually dependant upon the deceased for maintenance and support.

Your client is neither a spouse nor a former spouse of the deceased, nor a child of the deceased. Therefore, it must be established whether there was an 'interdependency relationship' between your client and the deceased as per subparagraph (b)(iii) of the above definition.

Alternatively, if an interdependency relationship cannot be established then a taxpayer will need to have been financially dependent upon the deceased in order to qualify as a dependant.

Interdependency relationship:

The term 'interdependency relationship' is defined in section 27A(1) as having the meaning given by section 27AAB of the ITAA 1936. Subsection 27AAB of the ITAA 1936 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) Subject to subsection (3), for the purposes of this Subdivision, if:

(a) 2 persons (whether or not related by family) satisfy the requirement of paragraph (1)(a);  and

(b) they do not satisfy the other requirements of an interdependency relationship under subsection (1);  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;

they have an 'interdependency relationship'.

Subsection 27AAB(3) of the ITAA 1936 prescribes that regulations may be made for the purposes of section 27AAB of the ITAA 1936.

Subregulation 8A(1) of the Income Tax Regulations 1936 (ITR 1936) specifies the matters that are, or are not, to be taken into account in determining whether two people have an interdependency relationship under subsections 27AAB(1) and (2) of the ITAA 1936 as follows:

(1) For paragraph 27AAB (3) (a) of the Act, the following matters are to be taken into account in determining whether 2 persons have an interdependency relationship or had an interdependency relationship immediately before the death of 1 of the persons:

(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;

(b) the existence of a statutory declaration signed by one of the persons to the effect that the person is, or (in the case of a statutory declaration made after the end of the relationship) was, in an interdependency relationship with the other person.

(2) For paragraph 27AAB (3)(b) of the Act, 2 persons have an interdependency relationship if:

(a) they satisfy the requirements of paragraphs 27AAB (1) (a) to (c) of the Act; and

(b) one or each of them provides the other with support and care of a type and quality normally provided in a close personal relationship, rather than by a mere friend or flatmate.

Examples of care normally provided in a close personal relationship rather than by a friend or flatmate

1. Significant care provided for the other person when he or she is unwell.

2. Significant care provided for the other person when he or she is suffering emotionally.

...

(5) For paragraph 27AAB (3)(b) of the Act, 2 persons do not have an interdependency relationship if 1 of them provides domestic support and personal care to the other:

(a) under an employment contract or a contract for services; or

(b) on behalf of another person or organisation such as a government agency, a body corporate or a benevolent or charitable organisation.

All of the conditions in subsection 27AAB(1), or alternately both the condition in paragraph 27AAB(1)(a) and the condition in subsection 27AAB(2), must be satisfied for the taxpayers to be able to claim that they had an 'interdependency relationship' with the deceased person at the time of the deceased persons death. It is proposed to deal with each condition in turn.

Close personal relationship:

The first requirement to be met is specified in paragraph 27AAB(1)(a) of the ITAA 1936. It states that two persons (whether or not related by family) must have a 'close personal relationship'.

A detailed explanation of subsection 27AAB(1) of the ITAA 1936 is set out in the Supplementary Explanatory Memorandum (SEM) to the Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004 which inserted section 27AAB.  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.

2.15 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 this case your client and the deceased were a parent and child and obviously had a close familial relationship. Your client and the deceased provided emotional support to each other particularly because your client had lost their spouse and the deceased lost a parent. The deceased also relied on your client, the parent for well-being as the deceased was legally a minor.

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

Generally speaking, it is not expected a child will have an interdependency relationship with their parents.

A child would not normally have an interdependency relationship with their parents as a child's relationship with their parents would be expected to change significantly over time. It would be expected that the child would eventually move out and secure independence from their parents.

You have advised that your client was on Centrelink payments and the deceased deferred tertiary studies in order to provide financial and domestic support to your client and the deceased's younger sibling.

While it is accepted that the deceased deferred tertiary studies in order to help the family, the deceased was working and earning income. With time the family members would all have come to terms with the deceased's parent's death and the deceased would have eventually become independent from the remaining parent.

Therefore the situation is such that there is nothing decisively different from the situation the deceased was in with the remaining parent and one where a young adult child may be living at home while working.

In this case it is considered that the relationship between your client and the deceased was one that a person would expect between parents and their child, but it was not a close personal relationship for the purposes of paragraph 27AAB(1)(a) of the ITAA 1936.

Accordingly, the first requirement specified in paragraph 27AAB(1)(a) of the ITAA 1936 has not been satisfied.

Cohabitation:

The second requirement to be met is specified in paragraph 27AAB(1)(b), and states that two persons live together.

The facts show that the deceased was living with your client at the time of death.

It is considered that the requirement specified in paragraph 27AAB(1)(b) has been satisfied in this instance.

Financial support:

The third requirement to be met is specified in paragraph 27AAB(1)(c) of the ITAA 1936, 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 27AAB(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 assisted with household expenses such as buying food, petrol and paying bills. The deceased had held a job to ease the financial situation.

There is also the normal expectation that parents will provide food, clothing and shelter for their minor children. It is clear from the facts presented that the deceased paid for some of the household expenses.

Consequently, it is considered that paragraph 27AAB(1)(c) of the ITAA 1936 has been satisfied in this instance.

Domestic support and personal care:

The fourth requirement to be met is specified in paragraph 27AAB(1)(d) of the ITAA 1936, and states that one or each of these two person 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 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 [2001] 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…

In this case the deceased deferred tertiary studies to provide domestic support to your client and the younger sibling. Your client provided domestic support to their children.

Your client was the sole parent because the deceased had just lost the other parent a short time before the deceased also died. Your client, the younger child and the deceased had to survive and support each other. Therefore the deceased provided your client and the sibling with emotional support.

There is also an expectation, in ordinary circumstances, that parents would provide a substantial amount of care to their children. As well as the concern for their children that most parents have, parents are under a legal obligation to ensure the welfare of their minor children. Among other things the parents of a child have a legal obligation to:

· provide food, clothing and shelter; and

· protect their children from risk to their personal safety and health.

In this case this kind of care was provided and your client provided substantial emotional support to the deceased up until the time of death which occurred a short time after the other parent died.

Consequently it is considered that the requirement in paragraph 27AAB(1)(d) of the ITAA 1936 has been satisfied in this instance.

Conclusion

As discussed above, all the requirements which are set out in subsection 27AAB(1) of the ITAA 1936 have not been satisfied in this case. Consequently it is considered that the deceased (who is related to your client by family) did not have an 'interdependency relationship' with your client in the period prior to and at the time of death.

Therefore the ETP death benefit will not be tax-free in your client's hands.

Tax treatment of the death benefit

On the basis of the above, the death benefit ETP is included in your client's assessable income for the 2006-07 income year under subsection 27B(1) of the ITAA 1936.

However, the tax offset in section 159SA of the ITAA 1936 will apply to ensure that the rate of tax payable will not exceed 15% plus Medicare levy on the taxed element of the post-June 83 component and 30% plus Medicare levy on the untaxed element of the post-June 83 component.