Edited version of your private ruling

Authorisation Number: 1012520217747

Ruling

Subject: Death benefit - interdependency relationship

Questions:

1. Is the taxpayer a death benefits dependant of the deceased under section 302-195 of the Income Tax Assessment Act 1997?

2. Are death benefits payments made to the trustee of the deceased estate tax free?

Advice/Answers:

1. Yes.

2. Yes.

This ruling applies for the following period:

1 July 2012 to 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts:

The deceased was under 55 years of age and was the child of the taxpayer.

The deceased moved to a capital city where the deceased studied and also trained as a professional sportsperson.

Later the deceased lived with the taxpayer and their stepparent and held a job.

The deceased was injured in an accident. As a result of the accident, the deceased was assessed as a quadriplegic and confined to a wheel chair.

It was intended that the deceased would live in the family home after the deceased's release from hospital. However this was not possible as:

· the family home was two stories high with the stairs making the second floor (living area) inaccessible for a wheelchair;

· considerable, expensive renovations would have had to be made to the downstairs toilet and bathroom; and

· the family home had a steep driveway with steps to enter the house from either the garage or front door making it difficult for a wheelchair to access.

The taxpayer and the taxpayer's spouse purchased a duplex for the deceased, which was under construction. The duplex was suitable for the deceased's condition as:

· it was on a flat block of land;

· the garage and living space were on the same ground level; and

· the builder was able to alter the design to make it wheelchair friendly by cutting out hallways, enlarging the bathroom with a wheelchair friendly toilet and shower, installing timber floors throughout as carpet was detrimental to wheelchair operation, lowering the kitchen benches and installing customised large, low light switches.

The deceased lived in the duplex after their discharge from hospital.

Later the deceased attempted to rejoin the work force but was unable to retain the job because of the disability and ended up in hospital.

The taxpayer and the deceased's stepparent assisted the deceased financially by:

· purchasing a duplex for the deceased;

· purchasing all furniture and household items for the duplex;

· purchasing a motor vehicle for the deceased;

· assisting with the regular household expenses including electricity, rates, telephone and home and contents insurance;

· assisting with various personal and medical expenses; and

· contributing to overseas trips for the deceased to attend a physiotherapy institution.

The taxpayer attended to the household shopping, cleaning and other household chores.

The deceased was allocated over 50 hours per week of care.

With respect to personal care the taxpayer frequently:

· assisted with the provision of medical-related services, including personal hygiene issues;

· attended medical appointments with the deceased;

· administered necessary medication;

· assisted in emergency circumstances;

· assisted with the mobility of the deceased when a carer was unavailable; and

· ensured the physical and emotional comfort of the deceased by taking the deceased out of the duplex for social activities and facilitating their participation in the physiotherapy institution.

In the 2011-12 income year the deceased died.

The deceased was single with no children.

The deceased had five superannuation accounts. These were paid to the trustee of the deceased estate. None of these payments included a tax free component.

The taxpayer and the taxpayer's spouse were the executors and trustees of the deceased estate and beneficiaries under the will of the deceased.

As beneficiaries, the taxpayer and the taxpayer's spouse received equal distributions from the deceased's superannuation accounts in the deceased estate.

Relevant legislative provisions:

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 302-140

Income Tax Assessment Act 1997 section 302-145

Income Tax Assessment Act 1936 Subsection 101A(3)

Income Tax Regulations 1936 Regulation 8A.

Reasons for decision

Summary

The taxpayer was in an interdependency relationship with the deceased at the time of the deceased's death. As a result the superannuation death benefit payments are tax free in the taxpayer's hands.

The lump sum superannuation benefits are tax free in the hands of the trustee of the deceased estate.

Detailed reasoning

'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.

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.

The taxpayer is neither a spouse nor a former spouse of the deceased, nor a child of the deceased. Therefore, it must be established whether there was an interdependency relationship between the taxpayer and the deceased as per paragraph (c) of the above definition.

Alternatively, if an interdependency relationship cannot be established then the taxpayer will need to have been financially dependent upon the deceased in order to qualify as a dependant.

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 two 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 two 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 taxpayer and deceased is close as they were parent and child. The relationship was expected to change over time as the deceased would move out and secure independence from the deceased's parents.

However, although the deceased lived in a separate home from the deceased's parents, the deceased was not independent from them as they required some level of care being a quadriplegic.

After the deceased's injury the taxpayer did the shopping, cleaned the house and transported the deceased to and from various medical appointments and hospital. During the last five years of life the deceased was a quadriplegic and as such the taxpayer's care for him was substantial. The care and support provided by the taxpayer is more than that provided in a usual familial relationship. This is because of the kind of illness the deceased had and the degree of care and support required by the deceased from the taxpayer.

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 dependent on the taxpayer emotionally and physically to a great extent and care was provided on a continuing basis.

Consequently, 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 not residing at the same address at the time of the deceased's death.

Therefore the requirement specified in paragraph 302-200(1)(b) has not 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.

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 taxpayer provided the deceased with a high level of financial support. The household living expenses and utilities were shared between the taxpayer and the taxpayer's spouse both providing a reasonable amount of support. They purchased a duplex and motor vehicle for the deceased and paid for the deceased's overseas trip which would help the deceased in managing the disability.

In this instance, both the existence and the level of financial assistance provided by the taxpayer to the deceased is established and it is not necessary to look at the level of financial support provided in detail, 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:

· assisted with the provision of medical-related services, including personal hygiene issues;

· attended medical appointments with the deceased.

· administered necessary medication;

· assisted in emergency circumstances; and

· assisted with the mobility of the deceased when a carer was unavailable;

· ensured the physical and emotional comfort of the deceased by taking the deceased out of the duplex for social activities and facilitating the deceased's participation in the physiotherapy institution.

It is also evident from the facts that the constant care provided by the taxpayer to the deceased, who was a quadriplegic, 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.

The facts also show that the taxpayer provided domestic support for the deceased, such as shopping and cleaning.

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):

The 'living together' requirement in paragraph 302-200(1)(b) of the ITAA 1997 has not been satisfied and it must be considered whether the parties lived apart due to the deceased's disability.

It is stated in the submission that it was initially intended that the deceased would live in the family home after being released from hospital. However, this was not possible because:

· the family home was two stories high with the stairs making the second floor (living area) inaccessible for a wheelchair;

· considerable, expensive renovations would have had to be made to the downstairs toilet and bathroom; and

· the family home had a steep driveway with steps to enter the house from either the garage or front door making it difficult for a wheelchair to access.

As a result, the deceased's parents purchased a duplex which was under construction and suitable to the deceased's disability as:

· it was on a flat block of land;

· the garage and living space were on the same ground level; and

· the builder was able to alter the design to make it wheelchair friendly by cutting out hallways, enlarging the bathroom with a wheelchair friendly toilet and shower, installing timber floors throughout as carpet was detrimental to wheelchair operation, lowering the kitchen benches and installing customised large, low light switches.

Subsection 302-200(2) of the ITAA 1997 applies if the two people do not live together because either or both of them suffer from a disability. It does not specifically state where the disabled person(s) must live.

Care facilities such as nursing homes provide services that meet the needs of people with disabilities who cannot care for themselves for a long period of time. However, long term care can be provided at home, in the community or in assisted living facilities.

In this case, the deceased's physical disability prevented the deceased from living with the deceased's parents in their family home which was not equipped to accommodate the deceased's disability. The deceased lived alone in this purpose built duplex which accommodated the disability. Having received over 50 hours per week of personal care services provided by the Injuries Association and supplementary personal care from the deceased's parents, the care the deceased received was not different from the long term care services normally provided by facilities such as nursing homes or a personal care facility. However, it was better than the care services provided by those facilities in the sense that it was one on one with the carers and provided in the comfort of the deceased's own home.

This situation can be clearly distinguished from one where it was merely convenient, or usual, for the deceased to live apart from their beneficiaries. In this case both:

· the premises were structurally modified to accommodate the deceased's disability, and

· substantial ongoing care, similar to that available in a care facility, was being provided to the deceased by health professionals.

Accordingly, it is considered that the requirements specified in subsection 302-200(2) of the ITAA 1997 have been satisfied.

Further, subsection 302-200(3) of the ITAA 1997 is also satisfied as the interdependency relationship complies with Income Tax Assessment Regulations 302-200.01 and 302-200.02.

The deceased was in an interdependency relationship with the taxpayer:

From the facts presented, the requirements which are set out in section 302-200 of the ITAA 1997 have been satisfied in this case. Consequently it is considered the deceased and the taxpayer had an interdependency relationship.

Because an interdependency relationship has been established, no consideration of whether the taxpayer was financially dependent upon the deceased is necessary.

Therefore, as an interdependency relationship has been established between the taxpayer and the deceased, 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.

Tax Treatment of death benefit payments paid to the trustee of a deceased estate:

Where the trustee of a deceased estate receives a superannuation death benefit in their capacity as a trustee:

· if a dependant of the deceased is expected to receive part or all of the benefit, it is subject to tax as if it were paid to a dependant, and

· if a person who is a non-dependant is expected to receive part or all of the benefit, it is subject to tax as if it were paid to a non-dependant.

In both cases, the benefit is taken to be income to which no beneficiary is presently entitled.

Death benefits to a dependant:

In this case as the beneficiary of the deceased is a dependant beneficiary the superannuation benefit will be taxed as explained above, in the hands of the estate.

Under section 302-60 of the ITAA 1997, where a person receives a superannuation lump sum death benefit and that person was a dependant of the deceased, it is not assessable income and is not exempt income. This means the person is not liable to pay tax on this amount.

Consequently, the lump sum superannuation benefits are tax free in the hands of the trustee of the deceased estate.