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Ruling

Subject: Superannuation death benefits - Interdependency relationship

Question

Did an interdependency relationship exist between the taxpayer, who is the joint beneficiary with their spouse of the Estate of their 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:

For the year ended 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The taxpayer is the parent of the deceased and the trustee of the Estate.

The taxpayer is the joint beneficiary of the Estate with their spouse.

The deceased first moved out of home when they were 17 years old.

From 2002, the deceased was living in the family home with their parents until their death. They arrived home with no money, no assets and no job.

During this time the deceased was fully supported until they found a job. From the time they were employed, the deceased paid board and for this, their parents cooked their meals, cleaned their clothes and living areas in their home and supplied many necessities. The deceased also assisted with the telephone bills.

The deceased's parents also provided moral and emotional support in dealing with their ups and downs in life. In addition to daily household duties and providing personal care and physical assistance for the deceased, the taxpayer provided their adult child with emotional support. You have stated that the deceased suffered from a mental illness and often became violent as a result of this illness and alcohol abuse.

In addition, often the taxpayer and their spouse would stay up at night to support the deceased who had difficulty sleeping. Both would also drive and wait for the deceased to attend specialist appointments in relation to their mental issues.

You state that the deceased had made previous attempts on their life and finally took their own life.

A Superannuation Fund according to you incorrectly made a death benefit payment to the deceased Estate. The Superannuation Fund refused to reissue the death benefit payment and stated that the same outcome could be achieved once the trust and individual returns were lodged. The accountant has since generated the return for the trust, but requested that the taxpayer seek a Private Ruling.

To date both the taxpayer and their spouse have received two separate death benefit payments. They were both paid as tax free payments as they were found to qualify under the interdependency relationship.

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 had an interdependency relationship at the time of the deceased's death. Therefore, your client is a death benefits dependant of the deceased. As your client is considered to be a death benefits dependant the superannuation death benefit payable to your client will be tax-free and is not included as assessable income in the hands of the Estate

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.

However, in this particular case, even though the deceased is an adult son of the taxpayer, the facts show that the deceased resided in the family home from 2002 up until the time of their death and the taxpayer prepared all the deceased's meals, cleaned their clothes and supplied many necessities. You have also stated that the deceased suffered from a mental illness and often became violent as a result of this illness and alcohol abuse. On a regular basis you drove and waited for him as he attended specialist appointments.

Therefore clearly a relationship over and above the usual familial relationship existed between the deceased and the taxpayer, prior to, and at the time of the deceased's death. The deceased was highly dependent on the taxpayer emotionally and that care was provided on a continuing basis. It is reasonable to assume that given the circumstances of the relationship would not have changed significantly over time. The facts show that there was a mutual commitment to a shared life between the taxpayer and the deceased prior to and at the time of the deceased's death on 14 November 2007.

Therefore, it is accepted that a close personal relationship existed between the deceased and the taxpayer 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 facts show that the deceased and the taxpayer were residing in the family home 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 that the deceased and the taxpayer provided each other with some financial support. The deceased would pay board and contribute to household utilities such as telephone expenses. The deceased also assisted the family group with ongoing payments towards petrol and vehicle expenses for the family car.

In this instance, both the existence and the level of financial assistance provided by the deceased and the taxpayer to each other 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 facts show that the taxpayer assisted the deceased with their physical needs. The taxpayer assisted by cooking their meals, cleaned their clothes and supplied many necessities.

It is also evident from the facts that the constant care provided by the taxpayer to the deceased, is significant emotional support and care of a type and quality normally provided in a close personal relationship. For example, often the taxpayer and their wife would stay up at night to support the deceased who had difficulty sleeping. Both would also drive and wait for the deceased to attend specialist appointments in relation to their mental issues.

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 the taxpayer 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):

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.

The deceased is in an interdependency relationship with the taxpayer:

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

Therefore the taxpayer is considered to be a dependant of the deceased within the definition of death benefits dependant in section 302-195 of the ITAA 1997.

The taxation treatment of a superannuation death benefit

As the taxpayer is considered to be a death benefits dependant the superannuation death benefit will be tax-free and is not included as assessable income in the hands of the Estate. The amount ultimately distributed from the Estate to the taxpayer as beneficiary will not be taxable in their hands because the amount will represent a distribution of the corpus of the Estate.