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Subject : Superannuation death benefits - Dependant

Issue

Question

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

Advice/Answer

Yes.

This ruling applies for the following period

For the year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The deceased lived in Australia until his departure for another country in the 2006-07 income year to pursue a career.

The deceased had visited the overseas country to finalise details of his future employment returning to Australia to settle his financial affairs.

Whilst back in Australia the deceased suffered an illness requiring surgery. After obtaining the "all clear", the deceased departed Australia in the 2006-07 income year to commence the new job overseas.

The deceased rented an apartment in the overseas country. The deceased had no assets or personal effects in the overseas country. Whilst in the overseas country the deceased's illness returned and the deceased became unwell and was in extreme pain.

During the second quarter of the 2008-09 income year, the deceased was in such a state the beneficiary moved in with the deceased to provide care. The beneficiary is a single aged pensioner.

The beneficiary provided the deceased with daily domestic support such as cleaning and cooking and aided the deceased with personal care to bath and dress and provided the deceased with emotional support.

In return the deceased provided the beneficiary with financial support and housing with all travel and living expenses being funded by the deceased.

During the fourth quarter of the 2008-09 income year the deceased returned to Australia as they were unhappy with the level of medical care they were receiving in the overseas country. The beneficiary also came to Australia in order to continue nursing and caring for the deceased.

Whilst living in Australia, both the deceased and the beneficiary resided together.

During the fourth quarter of the 2008-09 income year, the deceased was admitted to a hospital. A short time later the deceased was moved to another hospital's palliative care unit where the deceased passed away.

The beneficiary is the sole beneficiary of the deceased's estate and is entitled to receive the superannuation death benefits made to the deceased's estate.

A Superannuation Lump Sum Payment Summary for the year ending 30 June 2010 made from a superannuation fund to the trustee of the deceased estate shows a taxable component which included a taxed element and an untaxed element with no tax withheld.

A Superannuation Lump Sum Payment Summary for the year ending 30 June 2010 made from a superannuation fund to the trustee of the deceased estate shows a taxed element of a taxable component with no tax withheld.

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 Regulation 8A.

Income Tax Regulations 1997 Regulation 302-200.01(2).

Reasons for decision

Summary

The beneficiary and the deceased had an interdependency relationship so the beneficiary is considered to be a death benefit dependants of the deceased. Consequently, the superannuation death benefits will not be assessable to the trustee (or administrator) of the deceased estate.

Detailed reasoning

Superannuation death benefits

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 30 June 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 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.

As the beneficiary 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

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), 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) of the ITAA 1997 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).

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 (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 child of the beneficiary, the facts show that the beneficiary resided with the deceased as a full-time carer providing the deceased with emotional support up until the time of the deceased's death.

During the last few weeks of the deceased's life the deceased's terminal illness deteriorated and was admitted to hospital. However, the beneficiary continued to provide the deceased with personal and emotional support and comfort.

Therefore clearly a relationship over and above the usual familial relationship existed between the deceased and the beneficiary, prior to, and at the time of the deceased's death. The deceased was highly dependent on the beneficiary emotionally and that care was provided on a continuing permanent 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 beneficiary 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 the beneficiary 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 beneficiary were residing together up to the time the deceased was hospitalised. It is noted that from the second quarter of the 2008-09 income year, the beneficiary resided with the deceased on a full-time basis.

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 provided financial support and that the deceased's beneficiary was dependant upon the deceased to provide housing, living expenses and travel arrangements not withstanding that the beneficiary was a single aged pensioner.

In this instance, both the existence and the level of financial assistance provided by the deceased to the beneficiary 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 deceased's beneficiary assisted the deceased with daily hygiene and to dress each day.

The deceased's beneficiary did the cleaning and would cook their daily meals.

It is also evident from the facts that the constant care provided by the deceased's beneficiary to the deceased, is significant emotional support and care of a type and quality normally provided in a close personal relationship.

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 deceased's beneficiary 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, however, because of the physical, intellectual or psychiatric disability of one of 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.

As previously noted the deceased required treatment and was hospitalised, just prior to the deceased's death.

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.

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 that the deceased and the beneficiary did have an interdependency relationship.

Therefore the deceased's beneficiary 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 deceased's beneficiary 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 deceased's sole beneficiary will not be taxable in the beneficiary's hands because the amount will represent a distribution of the corpus of the Estate.