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Ruling

Subject: Superannuation death benefit - interdependency relationship

Question

Did an interdependency relationship exist between the taxpayer, and her child (the deceased) in accordance with section 302-200 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

For the year ended 30 June 2011

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

The taxpayer is the parent of the deceased.

The deceased was born in 19XX.

In the three years prior to the deceased's death, the parent was employed full time undertaking office duties.

· The taxpayer's taxable income for the 2006-07, 2007-08 and 2008-09 income years was $T1, $T2, and $T3 respectively.

The deceased attended secondary school in 2005 and 2006. From early 2009 until their death, they also pursued further education.

The deceased worked part time in the three years prior to their death.

· In the 2007-08 income year the deceased received a taxable income of $D1.

· In the 2006-07 income year the deceased received a taxable income of $D2.

· In the 2005-06 income year the deceased received a taxable income of $D3.

In mid June 2009 the deceased was killed in an accident.

The deceased was living with their parent until their death.

During the period in which the taxpayer and the deceased resided together, all of the deceased's financials were provided for by the taxpayer including accommodation, meals and clothing. The deceased was a full time student and was not receiving any government support payments.

The taxpayer states that in the three years prior to the deceased's death, the taxpayer relied on the deceased to perform all domestic duties to maintain the house including cleaning and all gardening and lawn maintenance as the taxpayer had previously suffered an injury which prevented the performance of these tasks. The deceased also provided general personal care for their parent.

The taxpayer states that since their relationship with the deceased was one of parent and child, they relied on each other for daily comfort, love and support.

In late 2010, a superannuation fund (the Fund) made a PAYG payment summary - superannuation lump sum to the taxpayer, showing the following components:

Taxable component:

Taxed element X

Untaxed element Y

Tax free component: Z

Total tax withheld W

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27AAB.

Income Tax Assessment Act 1997 Ch3-Pt3-30-Div302.

Income Tax Assessment Act 1997 Section 302-195.

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 Regulations 1936 8A.

Reasons for decision

Summary

It is considered that your client and the deceased did not have an interdependency relationship at the time of the deceased's death. Therefore, your client is not a death benefits dependant of the deceased. As your client is not considered to be a death benefits dependant the superannuation death benefit payable to your client will be included as assessable income.

Detailed reasoning

Superannuation death benefits

Division 302 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the taxation arrangements that apply to the payment of superannuation death benefits. These arrangements depend on whether the person that receives the superannuation death benefit is a dependant of the deceased or not and whether the amount is paid as a lump sum superannuation death benefit or a superannuation income stream death benefit.

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.

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.

Interdependency relationship

Under section 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.

Section 302-200(2) of the ITAA 1997 states:

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 the 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.

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 2 persons have an interdependency relationship under subsections 302-200(1) and (2). Paragraph 302-200(3)(b) states that the regulations may specify the circumstances in which 2 persons have, or do not have an interdependency relationship under subsections 302-200(1) and (2).

Regulation 302-200.01(2) of the Income Tax Regulations 1997 (ITR 1997) which has replaced former regulation 8A of the Income Tax Regulations 1936 (ITR 1936) states as follows:

(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, or alternately both the condition in paragraph 302-200(1)(a) and the condition in subsection 302-200(2), must be satisfied for the taxpayer to be able to claim that he or she has 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 Income Tax Assessment Act 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.

2.15 It is not intended that people who share accommodation for convenience (for example 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 former regulation 8A of the ITR 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, the relationship between parents and their adult children would be expected to change significantly over time. It would be expected that the adult child would eventually move out and secure independence from their parents.

The facts show that the taxpayer is the parent of the deceased. A close familial relationship existed between the taxpayer and the deceased prior to, and at the time of, the deceased's death. This however does not necessarily indicate that a close familial relationship existed for the purposes of the tax legislation.

No evidence was provided of a closeness of relationship between the taxpayer and the deceased and the deceased that goes beyond a normal parent/adult child relationship. Furthermore, there are no assets held jointly by the taxpayer and the deceased. Accordingly, there is nothing to indicate that the deceased's relationship with the taxpayer was such that it would be said that there was a mutual commitment to a shared life.

Therefore, it is considered that the relationship between the taxpayer and the deceased was one that a person would expect between a parent and their child, but it was not a closer personal relationship for the purposes of paragraph 302-200(1)(a) of the ITAA 1997.

Accordingly, the first requirement specified in paragraph 302-200(1)(a) of the ITAA 1997 has not been satisfied in this case.

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 the deceased and the taxpayer were residing together up to and at the time of the deceased's death.

Therefore the requirement specified in paragraph 302-200(1)(b) has 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.

It is clear from the facts presented, such as the taxpayer paying for accommodation, meals and clothing, that the taxpayer provided the deceased with financial support during the course of their relationship.

Consequently, it is considered that paragraph 302-200(1)(c) of the ITAA 1997 has 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.

Paragraph 302-200.02(2)(b) of the Income Tax Regulations 1997 state:

(b) 1 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.

The facts show that the deceased assisted the taxpayer in the performance of all domestic duties to maintain the house, including cleaning and gardening, whilst the taxpayer had physical injuries. The deceased also provided general personal care for the taxpayer. However, the examples provided by the taxpayer are only indicative of normal domestic support that a parent and a child would provide each other in a family household.

Notwithstanding the domestic duties performed by the deceased, there is no evidence in the facts provided of an amount of domestic support and personal care as discussed in paragraph 2.16 of the SEM such as personal care services. Therefore, it is considered that the deceased and the taxpayer have not satisfied the requirement of significant support and care set out in paragraph 302-200.02(2)(b) of the ITR 1997.

Therefore on the facts provided, it is considered that the requirement in paragraph 302-200(1)(d) of the ITAA 1997 has been not 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), (c) and (d) of the ITAA 1997, they will still be considered to have an interdependency relationship.

However, subsection 302-200(2) of the ITAA 1997 will only apply where the deceased and the taxpayer satisfy the requirement of paragraph 302-200(1)(a), in accordance with the terms of paragraph 302-200(2)(a).

Further, it should be noted that the reasons why the requirements in paragraphs 302-200(1)(b), (c) and (d) of the ITAA 1997 are not satisfied should arise from at least one of the persons in the relationship having a physical, intellectual or psychiatric disability which requires them to be in a special care facility or shared accommodation, for example a nursing home, medical facility etc. Clearly, this is not the situation in this case.

Consequently, as subsection 302-200(1)(a) of the ITAA 1997 has not been satisfied in the first instance, consideration of the other conditions is therefore not necessary.

Accordingly, subsection 302-200(2) of the ITAA 1997 does not apply in this instance.

Conclusion

As the taxpayer is considered not to be death benefit dependants, the death benefit superannuation payment from the Fund is assessable in the hands of the taxpayer.

Consequently, the taxable component of the death benefit payment is to be included in the assessable income of the taxpayer.

A tax offset will ensure that the rate of tax payable on the taxed element of the taxable component will not exceed 15% and that the rate of tax payable on the untaxed element of the taxable component will not exceed 30%.