Edited version of your private ruling

Authorisation Number: 1012568185642

Ruling

Subject: Death benefit - interdependency relationship

Question

Were the parents in an inter-dependency relationship with the deceased at the time of the death of the deceased in accordance with section 302-195(c) of the Income Tax Assessment Act 1997?

Advice/Answers:

Yes.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts:

1. The deceased was under 55 years of age.

2. The deceased was a full time student and completed a number of qualifications.

3. The deceased commenced employment and was diagnosed with an illness within a few months.

4. The deceased had lived with the deceased's parents most of the deceased's adult life including the time of the deceased's passing.

5. The deceased did not live with the deceased's parents for one year when the deceased studied overseas as part of the deceased's course. The deceased's parents funded the stay overseas.

6. The deceased had signed a contract and was to continue work. However, the deceased's health deteriorated rapidly and surgery was performed.

7. As the deceased was still working the deceased's parents drove the deceased to and from work.

8. The deceased worked until a certain date in the 2009-10 financial year.

9. When the deceased's condition became terminal the parents provided palliative care at home which included modifying their home to provide ramps, wheelchair access, bathroom modifications and the hire of portable oxygen.

10. The deceased's parents assisted the deceased financially by:

· purchasing a mobile phone, lap top and provided an internet modem;

· dental and medical costs and private health fund membership; and

· purchasing a car with shared maintenance and registration costs.

11. The deceased contributed by purchasing groceries and paid for own incidental expenses.

12. Prior to the illness diagnosis the parents and the deceased did the shopping, cooking, washing and ironing of clothes and house cleaning.

13. After the illness diagnosis the parents did the above tasks.

14. The deceased contributed to running the household by:

· doing the gardening; assisting siblings with driving, and assisting another sibling with an illness

· This helped the deceased's parents as they were able to assist their other children.

15. The parents did the following, particularly, during palliative care:

· assisted with the provision of medical-related services,

· the mother looked after the deceased's personal hygiene issues;

· attended medical appointments with the deceased;

· administered necessary medication;

· massaged affected areas;

· applied compression stockings;

· managed the oxygen machine;

· slept with the deceased in the hospital;

· the mother slept in the room with deceased at home;

· assisted with the mobility of the deceased, lifting in and out of bed, gave injections; and

· ensured the physical and emotional comfort of the deceased.

16. The parents of the deceased took leave to care for the deceased during the illness.

17. When the deceased was not in hospital, palliative care was provided by a local organisation. This commenced about two months before the deceased passed away. A community nurse visited the deceased twice a week.

18. One parent received a Centrelink Carer Allowances.

19. Early in the 2010-11 income year the deceased passed away.

20. The deceased was single with no children.

21. Four death benefit payments have been received by the deceased's estate. None of these payments included a tax free component.

22. The parents are the executors and beneficiaries of 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 parents were in an interdependency relationship with the deceased at the time of (deceased's) death. As a result the superannuation death benefit payments are tax free in the hands of the parents.

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

1. 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:

2. 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.

3. 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.

4. The taxpayer (each parent) 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.

5. 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

6. 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.

7. 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.

8. 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).

9. 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.

10. 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:

11. 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.

12. 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.

13. 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.

14. 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.

15. In this case it is clear that the relationship between the parents and deceased is close as they were parents and child. The relationship was expected to change over time as the deceased would move out and secure independence from the deceased's parents.

16. After the deceased's illness was diagnosed the parents did the shopping, cleaned the house and transported the deceased to and from various medical appointments and hospital. During the year last year of the deceased's life the deceased was quite ill and as such the parents' care for the deceased was substantial. The care and support provided by the parents 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 parents.

17. Therefore clearly a relationship over and above the usual familial relationship existed between the deceased and the parents, prior to, and at the time of the deceased's death. The deceased was dependent on her parents emotionally and physically to a great extent and care was provided on a continuing basis.

18. 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:

19. 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.

20. The facts show that the deceased and the parents were residing at the same address before and at the time of the deceased's death.

21. Therefore the requirement specified in paragraph 302-200(1)(b) has been satisfied in this instance.

Financial support:

22. 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.

23. 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.

24. It is clear from the facts presented that the taxpayer provided the deceased with a high level of financial support. This is because the deceased was a full time student for most of the deceased's adult life, had minimal employment income and did not receive any youth allowance.

25. In this instance, both the existence and the level of financial assistance provided by the parents 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.

26. 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:

27. 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.

28. In relation to domestic support and prior to the illness diagnosis the parents and the deceased did the shopping, cooking, washing and ironing of clothes and house cleaning.

29. After the illness diagnosis the parents did all the above tasks.

30. In relation to personal care, the parents did the following particularly during palliative care of the deceased:

· assisted with the provision of medical-related services,

· the mother looked after the deceased's personal hygiene issues;

· attended medical appointments with the deceased;

· administered necessary medication;

· massaged affected areas;

· applied compression stockings;

· managed the oxygen machine;

· slept with the deceased in the hospital;

· the mother slept in the room with deceased at home;

· assisted with the mobility of the deceased, lifted the deceased in and out of bed, gave injections; and

· ensured the physical and emotional comfort of the deceased.

31. Further, palliative care provided at home included modifying the home to provide ramps, wheelchair access, bathroom modifications and the hire of portable oxygen.

32. It is also evident from the facts that the constant care provided by the parents to the deceased, who was very ill, is significant emotional support and care of a type and quality normally provided in a close personal relationship.

33. 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 parents provided the deceased with significant personal care services at this time.

34. 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.

35. 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 parents:

36. 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.

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

38. Therefore, as an interdependency relationship has been established between the parents and the deceased, the parents are considered to be a dependants 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:

39. 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.

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

Death benefits to a dependant:

41. 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.

42. 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.

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