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Ruling

Subject: Superannuation death benefit

Question

Will the death benefit superannuation payments paid to the beneficiary of a deceased estate receive concessional tax treatment giving consideration to whether beneficiary is classified as a dependant of the deceased under section 302-195 of the Income Tax Assessment Act 1997?

Advice/Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The taxpayer is the adult daughter of the deceased.

The estate of the deceased (the Estate) has a trustee.

The taxpayer is one of two beneficiaries of the Estate. The other beneficiary is her sibling.

The deceased was over 60 years of age when he died.

The deceased worked in the 2005-06 income year and was retired in the 2006-07 and the 2007-08 income years.

The deceased resided at a particular address.

The deceased died of an illness.

Prior to early 2005 the taxpayer, her spouse and children resided in a barn that had been set up as a separate place of accommodation in the property mentioned above.

They paid rent and attended to the maintenance of the property.

From early 2005 the taxpayer and her family have resided at the above address in the main house in order to be close enough to care for the deceased as his health deteriorated.

From then until the deceased's death the taxpayer and her family were not liable for rent.

The taxpayer worked in the 2005-06 income year and was a full time carer for the deceased in the 2006-07 and 2007-08 income years. The taxpayer left work during the 2005-06 income year to attend to the full time care of her father, who became terminally ill. The taxpayer provided full time care to her father until his death.

The duties performed by the taxpayer while looking after the deceased were:

· household shopping

· internal cleaning of property

· administering medicine to the deceased

· taking the deceased to the hospital as and when required

· as the disease progressed, providing greater assistance to the deceased such as bathing, changing and helping him to get around the house.

The taxpayer attended to the day to day running of the household and her spouse attended to the external care and maintenance of the property.

The taxpayer's spouse was employed in the 2005-06, 2006-07 and 2007-08 income years.

The deceased paid for purchases of food and household supplies. He provided credit card access to the taxpayer to purchase clothing for her and her children and the deceased was responsible for all out of house dining expenses.

The deceased paid the private health insurance monthly premium for the taxpayer and her family, her motor vehicle including fuel, registration and insurance and the day care expenses of her children.

The taxpayer's spouse also took care of various expenses for the family.

In the 2009-10 income year payments were made to the Estate by a superannuation fund as shown on the PAYG payment summaries.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27AAB.

Income Tax Assessment Act 1997 Ch 3-Pt 3-30-Div 302.

Income Tax Assessment Act 1997 Section 302-60.

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 subsection 995-1(1).

Income Tax Assessment Act 1997 section 307-5.

Income Tax Assessment Act 1997 subsection 307-5(1).

Income Tax Assessment Act 1997 subsection 307-5(4).

Income Tax Assessment Act 1997 section 307-65.

Income Tax Assessment Act 1997 section 307-70.

Income Tax Assessment Act 1997 . Subsection 302-10(1).

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

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

Income Tax Assessment Act 1997 section 302-195.

Income Tax Assessment Act 1997 section 302-140.

Income Tax Assessment Act 1997 section 302-145

Income Tax Assessment Act 1936 Subsection 101A(3).

Income Tax Regulations 1936 8A.

Reasons for decision

Summary

It is considered that the adult child, the beneficiary and the deceased had an interdependency relationship at the time of the deceased's death. Therefore, the beneficiary is a death benefits dependant of the deceased. As the beneficiary is considered to be a death benefits dependant, the superannuation death benefit payable to the beneficiary 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.

Superannuation death benefits paid to the trustee of a deceased estate

For superannuation death benefits paid after 1 July 2007, subsection 995-1(1) of the ITAA 1997 states that a 'superannuation death benefit' has the meaning given by section 307-5 of the ITAA 1997.

A superannuation death benefit is defined in subsection 307-5(4) of the ITAA 1997 as being a payment described in Column 3 of the table in subsection 307-5(1) of the ITAA 1997. A superannuation death benefit is described in Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997 as:

… A payment to you from a superannuation fund, after another person's death, because the other person was a fund member.

A superannuation death benefit must be paid as either:

· a superannuation lump sum; or

· a superannuation income stream.

A superannuation lump sum is described in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream as defined in section 307-70 of the ITAA 1997.

The deceased died and a superannuation death benefit was paid to the Estate.

The benefit was made to the Estate during the 2010-11 income year from the superannuation fund after the deceased's death, because the deceased was a fund member. Hence this payment is a superannuation benefit within the meaning of Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997. This benefit is a superannuation death benefit as defined in subsection 307-5(4) of the ITAA 1997.

The superannuation benefit is a superannuation lump sum within the meaning of section 307-65 of the ITAA 1997. As the payment was made by a superannuation fund after 1 July 2007, the provisions of Division 302 of the ITAA 1997 apply to the benefit.

Application of section 302-10 of the ITAA 1997

Section 302-10 of the ITAA 1997 deals with superannuation death benefits paid to the Trustee of the Deceased Estate. Subsection 302-10(1) of the ITAA 1997 states:

This section applies to you if:

(a) you are the trustee of a deceased estate; and

(b) you receive a superannuation death benefit in your capacity as trustee.

As the payment was a superannuation death benefit received from the superannuation fund by the Executor of the Estate, section 302-10 of the ITAA 1997 will apply to the Trustee of the Estate.

Application of subsections 302-10(2)and 302-10(3) of the ITAA 1997

Subsection 302-10(2) of the ITAA 1997 states:

To the extent that 1 or more beneficiaries of the estate who were death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit:

(a) the benefit is treated as if it had been paid to you as a person who was a death benefits dependant of the deceased; and

(b) the benefit is taken to be income to which no beneficiary is presently entitled.

Under subsection 302-10(2) of the ITAA 1997 where a dependant of the deceased receives or is to receive part or all of a superannuation death benefit, the Trustee of the Estate will be subject to tax on that part of the benefit paid or to be paid to the dependant as if it were paid to a dependant of the deceased. However the dependant is not presently entitled to this superannuation death benefit at this time and the benefit therefore does not form part of his or her assessable income.

Subsection 302-10(3) of the ITAA 1997 states:

To the extent that 1 or more beneficiaries of the estate who were not death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit:

(a) the benefit is treated as if it had been paid to you as a person who was not a death benefits dependant of the deceased; and

(b) the benefit is taken to be income to which no beneficiary is presently entitled.

Under subsection 302-10(3) of the ITAA 1997 where a non-dependant of the deceased receives or is to receive part or all of a superannuation death benefit, the trustee will be subject to tax on that part of the benefit paid or to be paid to the non-dependant as if it were paid to a non-dependant of the deceased.

Similarly, the non-dependant is not presently entitled to this superannuation death benefit at this time and the benefit therefore does not form part of his or her assessable income.

Application of subsection 101A(3) of the ITAA 1936

Subsection 101A(3) of the Income Tax Assessment Act 1936 (ITAA 1936) states:

To avoid doubt, if in the year of income an amount is included in the assessable income of a deceased taxpayer under Division 82 or 302 of the Income Tax Assessment Act 1997 in respect of a payment received by the trustee of the estate of the deceased taxpayer, that amount shall be included in the assessable income of that year of income of the trust estate.

Subsection 101A(3) of the ITAA 1936 brings into the assessable income of the trust estate the amount of a superannuation death benefit received after the death of a taxpayer that is included in the assessable income of a deceased taxpayer under Division 302 of the ITAA 1997.

For the purposes of these taxation arrangements it is necessary to determine whether the beneficiary is a death benefits dependant of the deceased.

'Death Benefits Dependant' in relation to the Superannuation Death Benefit

Subsection 995-1(1) of the ITAA 1997 states that the term 'death benefits dependant' has the meaning given by section 302-195 of the ITAA 1997. Section 302-195 of the ITAA 1997 defines a death benefits dependant as follows:

Where a person receives a superannuation death benefit as a lump sum and that person was a dependant of the deceased, it is not assessable income and is not exempt income. This is in accordance with section 302-60 of the ITAA 1997.

Subsection 302-195(1) 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.

In this case you have asked if the taxpayer was a dependant of the deceased in terms of paragraph 302-195(1)(d) that is, if she was a financial dependant of the deceased.

If a case of interdependency cannot be established then the beneficiary could only be viewed as a death benefit dependant if it can be shown that she was financially dependent upon the deceased at the time of his death.

In this case, on the basis of the information provided we have determined that the taxpayer and her father were in an interdependency relationship. Therefore we will not be considering financial dependency.

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.

In this case it is clear that the relationship between the father and daughter has changed over time as the daughter has married and has her own family. However, she has moved closer to her father in the family home and had even given up her job to care for him during his illness.

The taxpayer did the shopping, cleaned the household and transported her father to and from various medical appointments and hospital. During the last few months of his life the deceased was terminally ill and as such the taxpayer's care for her father increased.

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.

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 at the same address 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 provided the taxpayer with financial support. The household living expenses and utilities were shared between the taxpayer's husband and father with the father providing a reasonable amount of support.

In this instance, both the existence and the level of financial assistance provided by the deceased to the taxpayer 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 did the following:

· household shopping

· internal cleaning of property

· administering medicine to the deceased

· taking the deceased to the hospital as and when required

· as the disease progressed, providing greater assistance to the deceased such as bathing, changing and helping him to get around the house.

It is also evident from the facts that the constant care provided by the taxpayer to the deceased, who was terminally ill, 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 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 her hands because the amount will represent a distribution of the corpus of the Estate.