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Ruling

Subject: Superannuation death benefit - dependency of beneficiary

Question 1

Is the superannuation death benefit prepared on a PAYG payment summary by a superannuation fund (Fund 1) which was paid in the 2010-11 income year included in the estate return for the 2010-11 income year?

Answer:

Yes.

Question 2

Is the parent of the deceased considered to be in an interdependent relationship with the deceased at the date of death?

Answer:

No.

Question 3

Is the parent of the deceased considered to be a financial dependant of the deceased at the date of death?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

Your client is a parent of the deceased who died in an accident in the 2009-10 income year.

The deceased was less than 25 years of age.

In the 2010-11 income year a death benefit from a superannuation fund (Fund 1) was paid to the trustee of the estate of the deceased (the Estate).

Your client is also the trustee for the Estate.

A copy of the PAYG Payment Summary prepared by Fund 1 has been provided which shows the components of the death benefit payment.

Fund 1 did not consider your client a dependant of the deceased.

In the 2010-11 income year another death benefit payment in the relation to the deceased was paid by another superannuation fund (Fund 2) directly to your client.

Fund 2 considered your client to have been a dependant of the deceased.

Apart from your client, the only other beneficiary of a death benefit which related to the deceased was a sibling of the deceased who was a non dependant.

Details of the deceased's income, as well as that of your client, have been provided for the 2007-08, 2008-09 and 2009-10 income years.

Details in relation to your client's assets have been provided and show that no assets were held in joint names with the deceased.

Statements in relation to your client's accounts, held solely and in joint names (that is, with your client's late spouse), have been provided.

The statements show:

· a large balance in your client's account prior to the deceased's death; and

· the main growth in this account commenced months before the deceased's death and arose from deposits made from the estate of your client's late spouse.

You state the deceased:

· up the date of death, resided at your client's residence;

· paid weekly board and occasionally made some repairs; and

· provided your client with emotional support during the illness of your client's late spouse (a parent of the deceased) and after that time up to the deceased's date of death.

Relevant legislative provisions

Income Tax Assessment Act 1936 repealed section 27AAB.

Income Tax Assessment Act 1936 Subsection 101A(3)

Income Tax Assessment Act 1997 Ch3-Pt3-30-Div302.

Income Tax Assessment Act 1997 Section 302-10.

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 Former Regulation 8A.

Income Tax Regulations 1997 Regulation 302-200.01

Income Tax Regulations 1997 Regulation 302-200.02

Reasons for decision

Summary

Your client is not a death benefits dependant. Accordingly no part of the taxable components of the superannuation lump sum death benefits paid to the Trustee of the Estate or your client will be tax free.

Further, it should be noted that the death benefit payment which was made by Fund 1 is assessable income in the Estate's income tax return for the 2010-11 income year.

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 who receives the superannuation death benefit is a death benefits dependant of the deceased or not; and whether the amount is paid as a superannuation lump sum death benefit or a superannuation income stream death benefit.

Where a person receives a superannuation death benefit and that person is a death benefits dependant of the deceased, it is not assessable income and is not exempt income.

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, as your client, who is a beneficiary, cannot qualify under paragraphs (a) or (b) of the above definition, paragraphs (c) and (d) of section 302-195 of the ITAA 1997 need to be examined to determine if she was a dependent of the deceased.

Interdependency relationship

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

Under subsection 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.

Subsection 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, subsection 302-200(3) of the ITAA 1997 states the regulations may specify the matters and circumstances that are, or are not, to be taken into account.

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

It is proposed to deal with each condition of subsection 302-200(1) of the ITAA 1997 and whether they satisfy the regulations.

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) Bill 2003 which inserted former section 27AAB of the Income Tax Assessment Act 1936 (ITAA 1936). This section dealt with interdependency relationships prior to 1 July 2007. In discussing the meaning of a 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.

The facts show that your client is a parent of the deceased. Clearly a familial relationship existed between your client and the deceased prior to, and at the time of, the deceased's death.

Given that the deceased was an adult at the time of death, the deceased and your client had of course known each other for some time. The facts also indicate that the relationship between the deceased and your client was a normal familial relationship for a young person living with a parent. Whilst both the deceased and your client may have intended to remain an important part of each others life, it is reasonable to assume that the relationship would have changed significantly over time.

In the explanatory statement to the Income Tax Amendment Regulations 2005 (No. 7) which inserted Regulation 8A into the Income Tax Regulations 1936, it states that:

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

A close personal relationship of the type envisaged by the legislation would not normally exist between a parent and their adult children because there would not be a mutual commitment to a shared life between the two. It would be expected that the adult child would eventually move out and secure independence from their parents.

In this case, the deceased was working and earning income. The fact that the deceased was working and earning income whilst still residing at the parents' residence however does not indicate the deceased's situation as being any different from that of any other young adult child who may reside at his or her family's residence after having entered the workforce.

It is considered that the relationship between your client and the deceased was one that a person would expect between a parent and their child. Further there were no indicators, such as assets held in joint names etc, of there being a mutual commitment to a shared life between the deceased and your client prior to and at the time of the deceased's death .

For the above reasons, it is considered that though a close familial relationship existed between your client and the deceased, it was not a close personal relationship 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 your client 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.

In this case some documentation was provided by your client in relation to household expenses. Though no split up was provided as to how much was contributed by the client and the deceased towards those expenses it is noted that your client stated the deceased did pay weekly board.

In this instance, it is considered that the existence of board paid to your client, though not financially substantial, shows some level of financial assistance was provided by the deceased to your client.

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 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.

Your client states that the care and support the deceased provided your client prior to the deceased's death included:

(a) occasionally repairs; and

(b) emotional support during illness of your client's late spouse and after the spouse's death.

Further, your client states that reliance on the deceased for emotional support after the spouse's death qualifies your client as a dependant of the deceased.

In this case, the examples and facts provided by your client in relation to care and support are only indicative of the normal domestic support that a child would provide in a family household. Further, the emotional care and support provided by the deceased to your client are typical of the care and support family members would provide to each other in times of illness and death of a family member.

Based on the information provided it is considered that the relationship between your client and the deceased did not involve personal care as specified in paragraph 302-200(1)(d) of the ITAA 1997, notwithstanding the loving familial relationship which existed between the two parties prior to and at the time of the deceased's death.

Further, as indicated in the SEM, personal care services are envisaged to consist of assistance with mobility, personal hygiene and generally ensuring the physical and emotional comfort of a person, for example, when a person is suffering an illness.

It follows from the foregoing, and the facts provided, that the care and support offered by your client to the deceased, and that of the deceased to your client, is not domestic support and personal care of a type and quality normally provided within the meaning of paragraph 302-200(1)(d) of the ITAA 1997.

Consequently, it is considered that the fourth requirement specified in paragraph 302-200(1)(d) of the ITAA 1997 has not been satisfied in this instance.

Application of subsection 302-200(2) of the ITAA 1997

Essentially, this subsection ensures that where two people have a close personal relationship, however, 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 taxpayer and the deceased satisfy the requirement of paragraph 302-200(1)(a), in accordance with the terms of paragraph 302-200(2)(a).

As previously discussed above, the requirement specified in paragraph 302-200(1)(a) of the ITAA 1997 has not been satisfied in this instance. Since this requirement has not been satisfied, consideration of paragraphs 302-200(2)(b) and (c) is not necessary in this instance.

Determination of an interdependency relationship

As already noted above, in order to qualify as an interdependency relationship all the requirements of subsection 302-200(1) of the ITAA 1997 must be satisfied. In the present case, only two of the four requirements of subsection 302-200(1) are considered to have been satisfied.

Accordingly, as neither subsections 302-200(1) or 302-200(2) of the ITAA 1997 have been satisfied it is considered an interdependency relationship did not exist between your client and the deceased.

Financial dependant

As an interdependency relationship did not exist between your client and the deceased, it must be determined whether your client, in order to be viewed as a dependant of the deceased, was financially dependant upon the deceased.

For your client to be financially dependent upon the deceased it must be demonstrated that your client was actually dependent upon the deceased for maintenance and support.

In the definition of death benefits dependant in paragraph 302-195(1)(d) of the ITAA 1997 financial dependency was not specified. The position taken by the Commissioner is that where a person was financially dependent upon the deceased, that person would be considered a dependant of the deceased. Paragraph 41 of Taxation Ruling IT 2168 stated this opinion in that a person, who did not fall within the specific inclusions of the definition, would only be a dependant if he or she was actually dependent upon the deceased for maintenance and support.

The definition of dependant in paragraph 302-195(1)(d) of the ITAA 1997 does not stipulate the nature or degree of dependence. Financial dependence is accepted as a condition which had to exist in relation to the taxpayer (the beneficiary) either at the time of death of the deceased, or at the time the payment was made. Where financial dependency is proved by a person (the first person, the beneficiary) on another person (the second person, the deceased), the first person is determined to be a dependant of the deceased.

In the courts, dependence was assessed on the basis of the actual fact of dependence or reliance on the earnings of another for support. This issue is a question of fact (Aafjes v. Kearney (1976) 50 ALJR 454; (1976) 8 ALR 455; (1976) 180 CLR 199; [1976] WCR (NSW) 18, per Chief Justice Barwick).

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 the taxpayer's financial support. If the level of financial support is insignificant or minor, then the taxpayer cannot be regarded as a dependant.

The test to be 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, et cetera) without the additional financial support.

It has been established that the deceased contributed weekly amounts to your client for board. This means that while your client received some financial support from the deceased. In view of the amount of the weekly board provided, the level of support is considered to be insufficient for your client to be a financial dependant for the purposes of subsection 302-195(1) of the ITAA 1997.

Further, taking into account your client's:

· income received in the 2007-08, 2008-09 and 2009-10 income years; and

· assets, which included, prior to and at the time of the deceased's death, an account with a large balance ;

· the Commissioner does not consider your client to have been financially dependent upon the deceased. Rather, the level of support provided by the deceased is considered by the Commissioner to represent supplementary amounts contributed to your client's household and cannot be considered as substantial financial support.

Conclusion relating to dependency

Taking into account all of the above, it is considered that your client was not in an interdependency relationship with the deceased or financially dependent upon the deceased, in the period prior to and at the time of the deceased's death. It follows from the foregoing that your client is not a death benefits dependant of the deceased for the purposes of subsection 302-195 of the ITAA 1997.

Taxation treatment of the superannuation death benefits

In view of the above and the facts provided, the superannuation death benefits (death benefits) are ultimately paid to non-dependant beneficiaries, that is your client and the deceased's sibling.

Further the facts show that the death benefit from Fund 1 was directly paid to the Estate and the payment from Fund 2 was directly made to your client.

Death benefit payment made to the Trustee of the Estate

In accordance with subsection 101A(3) of the ITAA 1936 the death benefit paid directly to your client as the Trustee of the Estate should be disclosed in an income tax return lodged by the Trustee of the deceased Estate for the 2010-11 income year (that is, the income year in which the death benefit from Fund 1 was paid to the Trustee of the Estate).

In relation to how death benefits made to an estate are treated section 302-10 of the ITAA 1997 states:

302-10(1) 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.

302-10(3) 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.

The effect of the above is that where a death benefit is paid to the Trustee, and there are non-dependant beneficiaries, the tax rates applied are determined by reference to sections 302-140 and 302-145 of the ITAA 1997 which deal with death benefits to non-dependants.

In the 2010-11 income tax return lodged for the Estate, the taxable components of the lump sum death benefit represent assessable income. In accordance with subsections 302-145(2) and (3) of the ITAA 1997 the taxed and untaxed elements of the taxable component are subject to tax offsets so that the effective maximum rates of tax on these elements is 15% and 30% respectively.

Further, it should be noted that as this benefit is paid directly to the Trustee of the Estate, no Medicare levy or Medicare levy surcharge is applicable.

The amount of the benefit when distributed from the Estate to your client (the beneficiary) is not required to be shown in your client's taxable income for the 2010-11 income year because this amount represents a distribution of the corpus of the estate.

Death benefit payment made directly to your client

In relation to the death benefit paid directly to your client, the taxable component of the death benefit represents assessable income.

In accordance with subsections 302-145(2) and (3) of the ITAA 1997 the taxed and untaxed elements of the taxable component are subject to tax offsets so that the effective maximum rates of tax on these elements is 15% and 30% respectively, plus the Medicare levy.