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Ruling

Subject: Death benefit - interdependency relationship

Question

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

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The deceased passed away during the 2009-10 income year.

You are they parent of the deceased.

You are aged more than 65 years.

You are the beneficiary of the deceased's estate.

The deceased suffered from numerous psychotic episodes from the age of 19 years old and was later assessed as having a drug induced mental illness.

The deceased's mental illness continued to create periods of instability throughout the remainder of their life and they had difficulty managing the activities of daily living.

You advise that the deceased was completely dependent on yourself, your late spouse and their brother.

When the deceased was not residing with you at your townhouse, you arranged temporary accommodation for them in various locations and assisted them financially for the related expenses including rent and utility bills.

You advised the deceased had a flat which was financed by yourself with the assistance of an entity (Entity 1) and the funds from the deceased's disability pension.

You advised that the deceased would live with you for approximately 4 days a week. The other three days of the week they would only return to their place of residence at night as they was with you during the day.

At the time of the deceased's death they was residing in their place of residence after having spent the day with you.

The deceased worked infrequently and had a low income. As a result, you provided ongoing financial support to the deceased throughout their life. This included payment for university fees, accommodation expenses including rent and utility bills whilst the deceased was living out of home, credit card debts, court fines, a mobile phone and phone bills, clothing, food, medical bills and counselling fees.

You and your late spouse often had to pay debts owing to third parties on the deceased's behalf.

You purchased a car for the deceased.

The deceased received a disability pension.

After your late spouse passed away during the 2007-08 income year, you began receiving the full age pension.

Both you and your late spouse had to take time off work to care and support the deceased when they was placed in a Psychiatric ward.

After another psychotic episode the deceased was placed in another psychiatric ward for seven weeks. It was at this time you left your job to care full time for the deceased.

You and your late spouse constantly attended to the needs of the deceased. An example of this is when you had to cut short a holiday in order to return home to be with the deceased.

The deceased relied on you to manage their day to day living including their medication, food and washing.

You were granted a Carer Allowance for the deceased during the 2006-07 income year.

You received a lump sum death benefit which has been subject to withholding tax.

The type of death benefit has been treated as non-dependent.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27AAB.
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 Assessment Act 1997 Ch3-Pt3-30-Div302.
Income Tax Regulations 1936 8A.
Income Tax Regulations 1997 302-200.01.
Income Tax Regulations 1936 8A(1).

Reasons for decision

Summary

It is considered that you, as the beneficiary, and the deceased had an interdependency relationship at the time of their death. Therefore, you are a death benefits dependant of the deceased.

Detailed reasoning

Division 302 of the Income Tax Assessment Act 1997 (ITAA 1997), which has replaced former section 27AAB of the of the Income Tax Assessment Act 1936, sets out the taxation arrangements that apply to the payment of superannuation death benefits that are made after 1 July 2007. 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 non assessable income and is non 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 persons spouse or former spouse; or

(b) the deceased persons 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

Under section 302-200 of the ITAA 1997 an interdependency relationship is defined as:

(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 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.

(3) The regulations may specify:

(a) 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

(b) circumstances in which 2 persons have, or do not have, an interdependency relationship under this section.

The regulations referred to above is regulation 302-200.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997). This regulation, which replaced former regulation 8A of the Income Tax Regulations 1936 (ITR 1936), states:

(1) For paragraph 302-200(3)(a) of the Act, this regulation sets out matters that are to be taken into account in determining whether 2 persons have an interdependency relationship.

(2) The matters are:

(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.

In order for a person to be able to claim that he/she has an interdependency relationship all of the conditions listed in subsection 302-200(1) of the ITAA 1997 must be satisfied. Alternatively, the conditions listed in subsection 302-200(2) must be met.

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:

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 (ES) 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.

However, in this particular case, even though the deceased was your adult child, the facts show that you constantly assisted the deceased. You accompanied the deceased when they was admitted psychiatric wards in various hospitals and provided the deceased with constant personal and emotional support. You eventually had to leave your job to become the deceased's full time carer.

In a letter written by the deceased in 20XX it states 'without you there would be no me' which indicates your constant care provided the deceased with security and comfort.

Therefore clearly a relationship over and above the usual familial relationship existed between you and the deceased, prior to, and at the time of the deceased's death. The deceased was highly dependent on you emotionally and that 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 commitment to a shared life between you 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 yourself as envisaged by paragraph 302-200 (1)(a) of the ITAA 1997.

Living together:

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 (2001 multimedia edition) in its definition of live lists:

24. live together,  ...  cohabit.

The Macquarie Dictionary defines cohabit as:

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

The Macquarie Dictionary further defines dwell as:

1. to abide as a permanent resident.

The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, 2001, revised 3^rd edition, The Macquarie Library Pty Ltd, NSW, is 'to dwell permanently or for a considerable time; having one's abode for a time', and according to the Compact Edition of the Oxford English Dictionary (1987), is 'to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live in or at a particular place'. 

The facts show that the deceased occupied a flat at the time of their death. Prior to this they was living in the family home.

However, the facts also indicate that in order for you to care for them, the deceased was living with you four days a week and for the remaining three days would only return to their flat at night. As the deceased was spending the majority of time with you, it can be considered you were living together prior to their death.

Consequently, it is considered that the requirement in paragraph 302-200(1)(b) of the ITAA 1997 is satisfied.

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) of the ITAA 1997 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 that you provided financial support by way of payment of university fees, accommodation expenses including rent and utility bills whilst the deceased was living out of home, credit card debts, court fines, a mobile phone and phone bills, clothing, food, medical bills and counselling fees.

The facts also state that you purchased a car and settled various debts outstanding to third parties on the deceased's behalf.

In this instance, both the existence and the level of financial assistance provided by you to the deceased is established and it is not necessary to look at the level of financial support provided, but merely to establish that such support existed.

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.

The ES provides the following comment in respect of domestic support and personal care as envisaged by paragraph 302-200(1)(d) of the ITAA 1997:

The preparation of a meal or assistance with medication when a person is unwell would not normally of itself satisfy this provision. More likely the kind of care and support normally provided in a close personal relationship would extend to constant care (for example, overnight), attending medical appointments with the person or the provision of personal and physical assistance where required.

The facts show that you provided substantial domestic support and personal care to the deceased from the period he was diagnosed with their mental illness until the date of the deceased's death.

Both you and your late spouse had to take significant time off work to be with, care for and support the deceased on various occasions. This occurred, for example, when they was placed in various psychiatric wards for significant periods of time.

Further, you state that you had to eventually leave your job in order to care full time for the deceased.

In a letter, it states you and your late spouse constantly attended to the needs of the deceased. An example of this is when you had to cut short a holiday in order to return home to be with the deceased. The letter also stated that the deceased would often call you 20 times a day and you would have to go to him whenever you thought they may suicide.

It was also noted that you were in receipt of carers payments. You were entitled to these payments because you were caring full time for the deceased.

Consistent both with the ordinary meaning of the words 'domestic support and personal care' in the context of paragraph 302-200(1)(d) of the ITAA 1997, and with the meaning of these words as discussed in paragraph 2.16 of the SEM, it is considered that you provided the deceased with significant personal care services at this time.

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 but 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.

However, since all the requirements of subsection 302-200(1) of the ITAA 1997 have been met, consideration of subsection 302-200(2) is not necessary in this instance.

Conclusion:

From the facts presented, it is clear that all of the requirements set out in subsection 302-200(1) of ITAA 1997 have been satisfied in this case. Consequently, it is considered that you and the deceased did have an interdependency relationship.

Therefore you are considered to be a dependent of the deceased within the definition of death benefits dependent in section 302-195 of the ITAA 1997.

Taxation treatment of a superannuation death benefit:

As you are considered to be a death benefit dependent, the superannuation death benefit will be tax free and is not included in your assessable income for the year ended 30 June 2011.

In this case, you may be entitled to a refund of some or all of the tax withheld. To make a claim you will need to complete and lodge a tax return for the 2010-11 income year showing the amount of tax withheld and enclose a copy of this private ruling with the return.