Edited version of your private ruling

Authorisation Number: 1012376631120

Ruling

Subject: Death benefit - Financial dependency

Question

Is the beneficiary a dependant of the deceased at the time of death of the deceased?

Answer

Yes.

This ruling applies for the following periods

2012-13 income year

The scheme commences on

1 July 2012

Relevant facts and circumstances

The deceased was an elderly parent of the beneficiary.

The beneficiary is an adult child of the deceased.

The deceased was previously in receipt of a reversionary pension from a self managed superannuation fund to the date of death.

The deceased died in the 2012-13 income year.

The beneficiary has children with their partner.

The beneficiary is unemployed and is not in receipt of any Centrelink benefits.

The beneficiary's partner was recently diagnosed as permanently disabled and is not receiving any Centrelink benefits or any other type of pension. They are currently not working.

The beneficiary's household expenditure includes mortgage/rental, food, clothing and medical expenses.

The deceased was previously making monthly payments to the beneficiary since year 2010 to help meet daily necessities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1.

Income Tax Assessment Act 1997 Section 302-195.

Income Tax Assessment Act 1997 Section 302-200.

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).

Income Tax Assessment Act 1997 Section 302-60.

Income Tax Assessment Regulations 1997 Regulation 302-200.01.

Reasons for decision

Summary of decision

It is considered that the beneficiary was financially dependent on the deceased at the time of the deceased's death. Therefore the beneficiary is considered to be a dependant of the deceased within the definition of 'death benefit dependant' under section 302-195 of the Income Tax Assessment Act 1997.

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 of the ITAA 1997 states that the term 'death benefits dependant' has the meaning given by section 302-195. 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 is an adult child of the deceased and not in an interdependency relationship with the deceased, they cannot be considered a death benefit dependant under paragraphs 995-1(a), 995-1(b) or 995-1(c) of the ITAA 1997. Therefore, we will now consider whether the beneficiary was dependent on the deceased.

According to the Macquarie Dictionary, one meaning of the term 'dependant' is - 'a person to whom one contributes all or a major amount of necessary financial support.' In the CCH Macquarie Concise Dictionary of Modern Law a 'dependant' is defined as being - 'a person substantially maintained or supported financially by another.' In both dictionary definitions the emphasis is on the fact that the financial support or maintenance is substantial. In determining whether a person is a dependant it is necessary to establish the actual level of financial support that was provided to that person by the deceased. This is because dependence is assessed on the basis of the actual fact of dependence or reliance on the earnings of another for support. This is a question of fact (Aafies v. Kearney 8 ALR 455, Barwick CJ at 456).

In Case [2000] AATA 8, 43 ATR 1273, Fayle SM in considering the definition of 'dependant' in relation to section 27AAA of the ITAA 1936 stated:

The Act is primarily concerned with commercial and financial matters"…An Act relating to the imposition assessment and collection of tax upon incomes". As such, a question of dependency should be construed within that context. The relevant question in this sense is whether the applicants were financially dependent on their son at the relevant time.

Where the level of financial support provided to a person is substantial then that person can be regarded as a dependant. So a 'financial dependant' is considered to be a person to whom another person contributes all or a major amount of necessary financial support. If the level of financial support is insignificant or minor, then the person cannot be regarded as a dependant.

In the Victorian Supreme Court case of Fenton v. Batten [1949] ALR 69; [1948] VLR 422, Justice Fullager made the following comments regarding dependency:

The word 'dependant' is, in a true sense a technical term. If the evidence established that the alleged 'dependant' relied on or relies on another as the source wholly or in part of his or her existence then dependence is established. Questions of 'scale of living' do not enter into the matter in the absence of some such statutory enactment.

These comments made in Fenton v. Batten when read in the context of the facts established in that case, would tend to confirm the definition of 'dependant' contained in the CCH Macquarie Dictionary of Modern law and the meaning quoted above from the Macquarie Dictionary.

In the full High court case of Kauri Timber Co. (Tas) Pty Ltd v. Reeman [1973] (1973) 47 ALJR 184; [1972-73] ALR 1266; (1973) 128 CLR 177 at (CLR) 180, Justice Gibbs (as he then was) in speaking of previous cases on the issue of dependency stated that:

The principle underlying these authorities is the actual fact of dependence or reliance on the earnings of another for support that is the test.

Handing down the decision in Malek v. Federal Commissioner of Taxation 42 ATR 1203, 99 ATC 2294 (Malek's Case), Senior Member Pascoe of the Administrative Appeals Tribunal (AAT) further clarified the meaning of the word 'dependant', stating:

In my view, the question is not to be decided by counting up the dollars required to be spent on the necessities of life for [Mrs Malek], then calculating the proportion of those dollars provided by the [son] and regarding her as a dependant only if that proportion exceeds 50%...In my view, the relevant financial support is that required to maintain the person's normal standard of living and the question of fact to be answered is whether the alleged dependant was reliant on the regular continuous contribution of the other person to maintain that standard.

In Malek's Case, the evidence supplied by the taxpayer was able to demonstrate that the financial support received from her deceased son had been significant. The son had accepted responsibility for mortgage repayments, maintenance and other expenses of the unit in which the taxpayer lived.

Taking into account all of the above, 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 taxpayers depended or relied on the earnings of the deceased for their day to day sustenance.

If the financial support provided merely supplements the person's income and represents 'quality of life' payments, then it would not be considered 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.

In this case, the beneficiary was an adult child of the deceased. Hence the point to be considered is whether the facts show that the beneficiary 'depended or relied on' the earnings of the deceased for their day to day sustenance at the time of the deceased's death.

The facts show that the beneficiary was an adult child of the deceased and is unemployed and not receiving any Centrelink benefits. The beneficiary has a joint mortgage with their partner from a commercial bank, which they are struggling to meet as the partner was diagnosed as permanently disabled. The beneficiary's spouse has not worked since June 2011 due to this disability and is not in receipt of any Centrelink benefits or pensions.

Documentation provided shows that although the deceased had been receiving monthly payments from a reversionary pension from a self managed superannuation fund prior to death, the majority of this pension was transferred directly to the beneficiary on a monthly basis. Given the deceased paid the beneficiary an amount which was sufficient to cover the majority of their household expenditure indicates the beneficiary relied significantly on the deceased's contributions to maintain a basic standard of living.

It is clear from the above that the beneficiary was financially dependent on the deceased at the time of death and is therefore a dependant of the deceased within the definition of 'death benefit dependant' under section 302-195 of the ITAA 1997.

The taxation treatment of superannuation death benefits

As the beneficiary is considered to be death benefit dependant of the deceased, the superannuation death benefit payment will be tax-free and therefore not included in their assessable income in the year in which it is received under section 302-60 of the ITAA 1997.