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Ruling

Subject: Superannuation death benefit - dependency

Questions

Were the deceased's parents in an interdependency relationship with the deceased at the time of death?

Were the deceased's parents financially dependant on the deceased at the time of death?

Advice/Answers

No.

No.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

The Deceased passed away in the 2010-11 income year.

The Deceased was a member of the Fund.

The Fund has paid out benefits to the Deceased's parents as beneficiaries of the Deceased.

The Deceased did not give the Deceased's parents any financial support. The Deceased was establishing their own life and circumstances at the time meant the Deceased's parents did not require help in any monetary way.

The Deceased's parents were prepared to help the Deceased financially if necessary, however the Deceased did not require financial assistance.

A PAYG payment summary - superannuation lump sum for the 2011-12 income year from the Fund shows a death benefit was made to the Deceased's parents, a non dependant and tax was withheld. The PAYG payment summary further shows the death benefit was made up of following components:

· a taxable component - taxed element;

· a taxable component - taxed element; and.

· a tax-free component.

The domestic support supplied between the Deceased's parents and the Deceased was that of a normal parent child relationship.

At the time of their death, the Deceased was not living with the Deceased's parents.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27AAB

Income Tax Assessment Act 1997 Division 302

Income Tax Assessment Act 1997 Section 302-195.

Income Tax Assessment Act 1997 Subsection 302-195(1).

Income Tax Assessment Act 1997 Subsection 302-200(1).

Income Tax Assessment Act 1997 Subsection 302-200(2).

Income Tax Assessment Act 1997 Subsection 302-200(3).

Reasons for decision

Summary of our decision

No part of the superannuation lump sum death benefit paid from the Fund to the Deceased's parents will be tax free as it is considered that the payment was not made in relation to a dependant.

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.

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:

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, the Deceased's parents were not the Deceased's spouse, former spouse or the Deceased's child aged less than 18. It will now be determined if the Deceased's parents had an interdependency relationship with the Deceased.

Interdependency relationship

The term interdependency relationship is defined in section 302-200 of the ITAA 1997. Section 302-200 of the ITAA 1997 states:

(1) Subject to subsection (3), for the purposes of this Subdivision, 2 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.

(1) In addition, 2 person (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;

(1) 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.

Paragraph 302-200(3)(a) of the ITAA 1997,above, states that the regulations may specify the matters that are, or are not, to be taken into account in determining whether two persons have an interdependency relationship under subsections 302-200(1) and (2) of the ITAA 1997.

Paragraph 302-200(3)(b) states that the regulations may specify the circumstances in which two 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

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), of the ITAA 1997 must be satisfied for you to be able to claim that you had an interdependency relationship.

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 (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.

The explanatory statement to the Income Tax Amendment Regulations 2005 (No. 7) which inserted regulation 8A of the Income Tax Regulations 1936 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, an adult child's relationship with their parents would be expected to change significantly over time.

In this case, the beneficiaries, the Deceased's parents, are the parents of the Deceased. Clearly a familial relationship existed prior to, and at the time of the Deceased's death.

The facts also show that the relationship between the Deceased's parents and the deceased was a normal parent child relationship. Whilst the Deceased's parents and the deceased may have intended to remain an important part of each other's lives, it is noted that the Deceased was establishing their own life and it is reasonable to assume that the relationship would have changed significantly over time.

In light of the foregoing, it is not accepted that a close personal relationship, as envisaged by paragraph 302-200(1)(a) of the ITAA 1997, existed between you, your spouse and the Deceased at the time of death.

As noted previously 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), of the ITAA 1997 must be satisfied for you to be able to claim that you had an interdependency relationship. As paragraph 302-200 (1)(a) of the ITAA 1997 has not been satisfied the Deceased's parents were not in an interdependency relationship with the Deceased.

We will, however, deal with some of the other conditions.

Financial support

Paragraph 302-200(1)(c) of the ITAA 1997 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.

The Deceased did not give the Deceased's parents any financial support. The Deceased was establishing their own life and circumstances at the time did not require the Deceased to help the Deceased's parents in any monetary way. Further, whilst the Deceased's parents were prepared to help the Deceased financially if necessary the Deceased did not require financial assistance.

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

Domestic support and personal care

The requirement specified in paragraph 302-200(1)(d) of the ITAA 1997 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 case Dridi v. Fillmore 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…

The domestic support supplied between the Deceased's parents and the Deceased was that of a normal parent child relationship and does not indicate domestic support and personal care to satisfy paragraph 302-200(1)(d) of the ITAA 1997.

Financial dependency

To qualify as a death benefit made to a dependant, where an interdependency relationship cannot be established, dependency based on financial dependency will need to be established.

Therefore, we will now consider whether the Deceased's parents were financially dependant on the deceased.

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 the beneficiaries depended or relied on the earnings of the deceased for their day to day sustenance.

We have reviewed the facts and the information supplied. As previously, you provide that the Deceased did not give the Deceased's parents any financial support. The Deceased was establishing their own life and circumstances at the time did not require them to help the Deceased's parents in any monetary way. Further, the Deceased's parents were prepared to help the Deceased financially if necessary however the Deceased did not require financial assistance.

In view of the above, the Deceased's parents were not substantially maintained or supported financially by the Deceased. Therefore the Deceased's parents are not considered to be a dependant of the Deceased within the definition of 'dependant' in subsection 302-195(1) of the ITAA 1997.

While we acknowledge your arguments, where the requirements set out in respect of dependency are not met, we can not reclassify the Deceased's parent's dependency status. Further, the Commissioner of Taxation does not have the authority to exclude the payment from the Deceased's parent's taxable income unless he is given that authority in the legislation which he administers. In this case, that authority relates solely to a person who is actually a death benefits dependant.

Similarly, while you are correct in stating that the Flood levy would not have been payable on a death benefit paid after 30 June 2012, the Commissioner must take account of the actual facts of a case in determining a person's liability to tax. A death benefit paid in the 2011-12 income year will be subject to the Flood levy.