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Ruling

Subject: Death benefit - dependency

Question 1

Were you a death benefits dependant of the deceased in accordance with section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

This ruling applies for the following period:

2010-11 income year

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You have suffered from a severe mental illness for a number of years.

You have been unable to work since the 2010-11 income year.

You were granted a Disability Pension during the 2010-11 income year.

Your parent (the deceased) passed away from an illness during the 2009-10 income year.

A PAYG payment summary - superannuation lump sum from a superannuation fund (the Fund) for the year ending 30 June 2011 dated on a specific date during the 2011-12 income year stated that a payment was made to you on a specific date during the 2010-11 income year. The payment comprised a taxable component - taxed element and a tax free component. There was an amount of tax withheld.

You are under 55 years of age.

According to Tax Office records, your taxable income for the 2008-09 income year was Amount A which included salary and wages income, an eligible termination payment, a Sickness Allowance of (for the period from a specific date during the 2008-09 income year to a specific date during the 2008-09 income year) and a Newstart Allowance (for the period from a specific date during the 2008-09 income year to a specific date during the 2008-09 income year) from Centrelink.

According to Tax Office records, your taxable income for the 2009-10 income year was Amount B which included salary and wages income, a Newstart Allowance (for the period from a specific date during the 2009-10 income year to a specific date during the 2009-10 income year) and a Newstart Allowance (for the period from a specific date during the 2009-10 income year to a specific date during the 2009-10 income year) from Centrelink.

The deceased resided at the same address for several years until the date of their death on a specific date during the 2009-10 income year. The only person who resided with the deceased for several years prior to their death was their spouse.

During the 2008-09 and 2009-10 income year you owned the following assets solely by yourself:

§ a car (the deceased helped you purchase this car in 2005-06 and sold it in 2008 for living expenses after a prolonged episode of mental illness).

§ Stereo CD player which was a gift.

§ Sporting equipment that the deceased helped you to buy.

You do not have any other assets. You do not have any assets held jointly with the deceased or any other party.

The deceased provided ongoing financial and emotional support to you from several years ago when you first became ill through until their death. The deceased would help you as much as they could by paying for living expenses that you could not afford.

The itemised details of your expenses for the 2008-09 and 2009-10 income years and until the date of the Deceased's death and the amounts that the deceased would have contributed towards those expenses are as follows:

Expenses Paid by you Paid by the deceased

Rent An amount per week

Food, grocery and daily living An amount per week

Telephone, electricity, insurance An amount per week

Cigarettes An amount per week

Clothing, shoes An amount per annum

Car registration An amount per annum

Car Insurance An amount per annum

Car Servicing and maintenance An amount per annum

Tyres & alignments An amount per annum

Dental An amount per annum

Physiotherapy and chiropractic treatments An amount per annum

The deceased received no financial support from you during the 2008-09 and 2009-10 income years and until the date of the deceased's death.

There was no domestic support or personal care that was provided to you by the deceased or by you to the deceased at the time of their death as the deceased's death from an illness was very sudden and unexpected.

There was an enormous amount of emotional support provided to you by the deceased from the time of the onset of your illness several years ago and up to the deceased's death on a specific date during the 2009-10 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1997 Subsection 302-10(2)

Income Tax Assessment Act 1997 Subsection 302-10(3)

Income Tax Assessment Act 1997 Section 302-60

Income Tax Assessment Act 1997 Section 302-145

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

Income Tax Assessment Act 1997 Subsection 302-145(3)

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 Paragraph 302-200(2)(a)

Income Tax Assessment Act 1997 Paragraph 302-200(2)(b)

Income Tax Assessment Act 1997 Paragraph 302-200(2)(c)

Income Tax Regulations 1997 Regulation 302-200.01(2)

Reasons for decision

Summary of decision

You were not a death benefits dependant of the deceased in accordance with section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

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 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 cannot qualify under paragraphs (a) or (b) of the above definition, paragraphs (c) and (d) of section 302-195 need to be examined.

Interdependency relationship

Paragraph 302-195(c) of the definition of death benefits dependant refers to 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.

All of the conditions in subsection 302-200(1) of the ITAA 1997, or alternatively both the condition in paragraph 302-200(1)(a) and the condition in subsection 302-200(2), of the ITAA 1997 must be satisfied for a person to be in an interdependency relationship with another person.

To assist in determining whether 2 persons have an interdependency relationship, 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 addition, 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) of the ITAA 1997.

Regulation 302-200.01(2) of the Income Tax Regulations 1997 (ITR 1997) 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

any evidence suggesting that the parties intend the relationship to be permanent;

It is proposed to deal with each condition of subsection 302-200(1) of the ITAA 1997 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 (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 the explanatory statement to the Income Tax Amendment Regulations 2005 (No. 7) which inserted regulation 8A of the Income Tax Regulations 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 of this case show that the deceased is your parent. A close familial relationship existed between you 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.

From the facts provided, you did not reside with the deceased. This would indicate a move to secure your own independence. You have advised that you are close to your parent and the deceased provided ongoing financial and emotional support to you from several years ago when you first became ill, through until their death. However, there is no evidence provided of a closeness of relationship between you and the deceased that goes beyond a normal parent/adult child relationship. Accordingly, there is nothing to indicate that your relationship with the deceased 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 you and the deceased was one that a person would expect between a parent and their child, but it was not a close 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 the two persons live together.

As mentioned above you did not reside with the deceased therefore the requirement specified in paragraph 302-200(1)(b) of the ITAA 1997 has not been met.

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.

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 has provided you with financial assistance (such as for clothing, car registration and insurance, and physiotherapy and chiropractic treatments) over the years. In this instance, the existence of financial assistance is established and it is not necessary to look at the level of financial support provided, but merely to establish that such support existed.

Therefore the requirement specified in paragraph 302-200(1)(c) of the ITAA 1997 has been met.

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 term 'personal care' is also discussed in the New South Wales Supreme Court in 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…

You advised that there was an enormous amount of emotional support provided to you by the deceased from the time of the onset of your illness several years ago and up to the deceased's death on a specific date during the 2009-10 income year.

However, you also advised that there was no domestic support or personal care that was provided to you by the deceased or by you to the deceased at the time of their death as the deceased death from bowel cancer was very sudden and unexpected.

However, in accordance with section 302-195(c) of the ITAA 1997, to qualify as a death benefit dependant in terms of interdependency we must look at support levels in the period 'just before he or she died'. Based on the facts you have provided, there was no domestic support or personal care that was provided to you by the deceased or by you to the deceased at the time of their death.

Therefore the condition under paragraph 302-200(1)(d) of the ITAA 1997 has not been met.

As three of the conditions under subsection 302-200(1) of the ITAA 1997 have not been met, you are not considered to have an independency relationship with the deceased.

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, subsection 302-200(2) of the ITAA 1997 will only apply where the two people satisfy the requirements of paragraph 302-200(1)(a), in accordance with the terms of paragraph 302-200(2)(a).

As discussed above, the requirements specified in paragraph 302-200(1)(a) has not been satisfied so you cannot have an independency relationship under subsection 302-200(2) of the ITAA 1997.

Accordingly, there was no interdependency relationship between you and the deceased under subsection 302-200(1) of the ITAA 1997.

For payments made after 30 June 2007, if an interdependency relationship cannot be established, dependency based on financial dependency will need to be established.

Financial dependency

According to the Macquarie Dictionary, one meaning of the term dependant is a person to whom one contributes all or a major amount of necessary financial support.

In the CCH Macquarie Concise Dictionary of Modern Law a dependant is defined as being a person substantially maintained or supported financially by another.

In both dictionary definitions the emphasis is on the fact that the financial support or maintenance is substantial. In determining whether a person is a dependant it is necessary to establish the actual level of financial support that was provided to that person by the deceased. This is because dependence is assessed on the basis of the actual fact of dependence or reliance on the earnings of another for support. This is a question of fact (Aafjes v. Kearney 8 ALR 455, Barwick CJ at 456).

In Case [2000] AATA 8, 43 ATR 1273, Senior Member Fayle, in considering the definition of dependant in relation to section 27AAA of the ITAA 1936, stated:

The Act is primarily concerned with commercial and financial matters. An Act relating to the imposition assessment and collection of tax upon incomes. As such, a question of dependency should be construed within that context. The relevant question in this sense is whether the applicants were financially dependent on their son at the relevant time.

Where the level of financial support provided to a person is substantial then that person can be regarded as a dependant. So a financial dependant is considered to be a person to whom another person contributes all or a major amount of necessary financial support. If the level of financial support is insignificant or minor, then the person cannot be regarded as a dependant.

In the Victorian Supreme Court case of Fenton v. Batten [1949] ALR 69; [1948] VLR 422, Justice Fullager made the following comments regarding dependency:

The word dependant is, in a true sense a technical term. If the evidence established that the alleged dependant relied on or relies on another as the source wholly or in part of his or her existence then dependence is established. Questions of scale of living do not enter into the matter in the absence of some such statutory enactment.

These comments made in Fenton v. Batten when read in the context with the facts established in that case, would tend to confirm the definition of dependant contained in the CCH Macquarie Dictionary of Modern law and the meaning quoted above from the Macquarie Dictionary.

In the full High court case of Kauri Timber Co. (Tas) Pty Ltd v. Reeman [1973] (1973) 47 ALJR 184; [1972-73] ALR 1266; (1973) 128 CLR 177 at (CLR) 180, Justice Gibbs (as he then was) in speaking of previous cases on the issue of dependency stated that:

The principle underlying these authorities is the actual fact of dependence or reliance on the earnings of another for support that is the test.

Handing down the decision in Malek v. Federal Commissioner of Taxation 42 ATR 1203, 99 ATC 2294 (Maleks Case), Senior Member Pascoe of the Administrative Appeals Tribunal (AAT) further clarified the meaning of the word dependant, stating:

In my view, the question is not to be decided by counting up the dollars required to be spent on the necessities of life for [Mrs Malek], then calculating the proportion of those dollars provided by the [son] and regarding her as a dependant only if that proportion exceeds 50%...In my view, the relevant financial support is that required to maintain the persons normal standard of living and the question of fact to be answered is whether the alleged dependant was reliant on the regular continuous contribution of the other person to maintain that standard.

In Maleks Case, the evidence supplied by the taxpayer was able to demonstrate that the financial support received from her deceased son had been significant. The son had accepted responsibility for mortgage repayments, maintenance and other expenses of the unit in which the taxpayer lived.

Taking into account all of the above, it is considered that financial dependence occurs where a person is wholly or substantially maintained financially by another person. The point to be considered is whether the facts show that a person depended or relied on the earnings of the deceased for their day to day sustenance.

If the financial support provided merely supplements the persons income and represents quality of life payments, then it would not be considered substantial support. What needs to be determined is whether or not the person would be able to meet their daily basic necessities (e.g. shelter and food etc.) without the additional financial support.

In this case, you were an adult child of the deceased, being over 18 years of age at the time of the death of the deceased.

The facts shows that the deceased provided you with ongoing financial support for living expenses that you could not afford. These included monies for clothing, shoes, car registration, car Insurance, car servicing and maintenance, tyres and alignments, dental, physiotherapy and chiropractic treatments.

The point to be considered is whether the facts show that you depended or relied on the earnings of the deceased for your day to day sustenance at the time of the deceased's death. From the facts provided, the financial support received from the deceased had not been so significant that you would not be able to meet your daily basis necessities such as rent and groceries without that financial support.

According to ATO records you had a taxable income of Amount A in the 2008-09 income year which included salary and wages income, an eligible termination payment, a Sickness Allowance (for the period from a specific date during the 2008-09 income year to a specific date during the 2008-09 income year) and a Newstart Allowance (for the period from a specific date during the 2008-09 income year to a specific date during the 2008-09 income year) from Centrelink. Also, according to Tax Office records, your taxable income for the 2009-10 income year was Amount B which included salary and wages income, a Newstart Allowance (for the period from a specific date during the 2009-10 income year to a specific date during the 2009-10 income year) and a Newstart Allowance (for the period from a specific date during the 2009-10 income year to a specific date during the 2009-10 income year) from Centrelink.

The financial support provided by the deceased amounted to approximately one-fifth of all your expenses in the 2008-09 and 2009-10 income years.

It is therefore concluded that you would have been able to meet your basic necessities without the additional financial support of the deceased.

It is considered that you were not financially dependant on the deceased at the time of the deceased's death. Therefore you are not considered to be a dependant of the deceased within the definition of death benefit dependant in section 302-195 of the ITAA 1997.

Conclusion

You are not considered to be a dependant of the deceased within the definition of death benefit dependant in section 302-195 of the ITAA 1997 as it has been determined that you are not in an interdependency relationship with the deceased under subsection 302-200(1) of the ITAA 1997 and you are not financially dependant on the deceased at the time of the deceased's death. Therefore, you are considered to be a non-dependant of the deceased for the purposes of the tax legislation.

Taxation of death benefit superannuation payment

As you are not considered to be a death benefit dependant, the death benefit superannuation payment from the Fund is assessable to you.

Consequently, the taxable component (taxed element) of the death benefit payment should be included in your assessable income for the 2010-11 income year.

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