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Ruling

Subject: Interdependency Relationship

Question 1

Was the beneficiary of the deceased estate in an interdependency relationship with 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 periods:

Year ending 30 June 2012.

The scheme commences on:

28 May 2011.

Relevant facts and circumstances

You are a beneficiary of your parent's deceased estate.

You were born in 1986.

You lived in the family home with your younger sibling.

The beneficiary parent passed away in 2011.

Prior to the passing, the children lived with their parent in the family home.

During this time all household expenses, including mortgage repayments and other expenses were paid by the deceased and no contribution towards these expenses were made by the children.

During the 2008 to 2011 financial years you had salary and wages income.

Various expenses paid by the deceased include, but were not limited to the following:

o Internet charges

o Foxtel subscription

o Laptop & computer

o Telephone charges

o Food expenses and toiletries

o Water rates

o Council rates

o Electricity charges of approx

o Household maintenance, including property repairs, lawn mowing and gardening, painting etc.

o Mortgage payments

o Family private health insurance

o Car Registration

o Car Insurance

o Roadside assistance

o Repairs and maintenance of car

o Fuel expense

No assets were owned jointly by the deceased and you.

In September 2011, the superannuation company paid a death benefit superannuation lump sum to the trustee of the deceased estate. The payment consisted entirely of a taxable component (taxed element) and no tax was withheld.

On September 2011 a sum of money was used to pay off the house mortgage and other credit cards the parent had.

In October 2011 an amount was paid to you.

Relevant legislative provisions

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 Subsection 302-200(3).

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 Regulations 1997 Regulation 302-200.01.

Reasons for decision

For superannuation death benefits made after 30 June 2007, the term interdependency relationship is defined in section 302-200 of the Income Tax Assessment Act 1997 (ITAA 1997), which has replaced former section 27AAB of the of the Income Tax Assessment Act 1936 (ITAA 1936).

Section 302-200 of the ITAA 1997 states:

(1) Subject to subsection (3), two persons (whether or not related by family) have an interdependency relationship 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 the other 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, 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; and

(b) the existence of a statutory declaration signed by 1 of the persons to the effect that the person is, or (in the case of a statutory declaration made after the end of the relationship) was, in an interdependency relationship with the other person.

In order for a taxpayer 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 that we 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:

o the duration of the relationship;

o the degree of mutual commitment to a shared life;

o 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 former regulation 8A of the ITR 1936, it was stated that:

Generally speaking, it is not expected that children will be in an interdependency relationship with their parents.

Normally, a relationship between the parents and their children would not meet the requirement under subsection 302-200(1) of the ITAA 1997 because there would not be a mutual commitment to a shared life between the two. This is because an adult child's relationship with their parents 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 beneficiary is a child of the deceased. A close familial relationship existed between the beneficiary and the deceased prior to, and at the time of, the deceased's death. This, however, does not necessarily indicate that a close personal relationship existed for the purposes of the tax legislation.

You and the deceased were working and earning income. No evidence was provided of a closeness of relationship between you and the deceased that goes beyond a normal parent/adult child relationship. On top of this no assets were jointly owned by you and the deceased. Accordingly, there is nothing to indicate that the deceased's relationship with you 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 parents and their children, 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.

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 facts show that you and the deceased were residing in the family home prior to and at the time of the deceased's death.

Therefore the requirement specified in paragraph 302-200(1)(b) of the ITAA 1997 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 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.

Based on the facts presented the deceased paid in full the utility, bills, car expenses, gym membership and other household expenses during the course of his residing in the family home. However, there is no evidence of you providing any financial support to the deceased.

In this instance, the existence of financial assistance provided by the deceased to you 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 beneficiaries lived with the deceased parent on an uncommitted basis. There are no facts whether the beneficiaries provided a certain amount of domestic care including washing of clothes.

Consistent with both 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 did not provide you with significant personal care services.

On the facts provided, it is considered that the requirement in paragraph 302-200(1)(d) of the ITAA 1997 has 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 of 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 other conditions is therefore not necessary.

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

Interdependency Relationship

Based on the facts of the case, it is clear that all of the requirements which are set out in subsection 302-200(1) of the ITAA 1997 have not been satisfied in this case. Therefore it is considered that you and the deceased were not in an interdependency relationship.

Financial dependency

As discussed above, not all of the requirements which are set out in paragraphs 302-200(1)(a) and 302-200(1)(d) of the ITAA 1997 have been satisfied in this case. Consequently it is considered that the deceased did not have an interdependency relationship with you immediately prior to, and at the time of his death.

As it is considered that an interdependency relationship did not exist, the issue of whether you were financially dependant upon the deceased will be examined.

For you to be financially dependant upon the deceased it must be demonstrated that you were actually dependent upon the deceased for maintenance and support.

Further it must be established that the level of financial support provided by the deceased, up to the time of the deceased's death, was substantial in that the deceased contributed all or a major amount of your financial support. If the level of financial support is insignificant or minor, then the beneficiaries cannot be regarded as dependants.

The test that is applied is: if the financial support received by a person were withdrawn would the person be able to survive on a day-to-day basis? If the financial support provided merely supplements the person's income and represents 'quality of life' payments, then it would not be considered a substantial support. What needs to be determined is whether or not the person would be able to meet their daily basic necessities (shelter, food, clothing, etc.) without the additional financial support.

As noted in the facts, you were employed during the 2008-09, 2009-10 and 2010-11 income years and had salary and wages income.

It is evident that you were not financially dependent on the deceased, although the deceased did contribute financially towards your expenses, if the income of the deceased was withdrawn then you would still be able to survive on a day-to-day basis that is provide yourself with shelter, food, clothing etc.

Accordingly, it is considered that you were not financially dependent on the deceased immediately prior to, and at the time of the deceased's death.

Conclusion

You are not considered to be a death benefit dependant, the death benefit superannuation payment will be treated as if it had been paid to the Trust and is included as income of the estate to which no beneficiary is presently entitled (subsection 302-10(3) of the ITAA 1997).

A tax offset will ensure that the rate of tax payable on the taxed element of the taxable components will not exceed 15%.