Edited version of your written advice

Authorisation Number: 1012780880117

Ruling

Subject: death benefit - financial dependency

Question

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

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased, who was a widow, passed away during the 20XX-XX income year.

The Deceased's adult child, the Beneficiary, is entitled to a distribution from the Deceased's estate.

During the 20XX-XX income year, a superannuation fund (the Fund) made a superannuation lump sum death benefit payment to the Deceased's estate.

You provided a PAYG payment summary from the Fund for the income year ended 30 June 20XX which detailed the lump sum payment as a death benefit.

You have provided the following information:

• regular financial support was provided for the Beneficiary by the Deceased, mainly by way of reduced rent charged on the property that the Beneficiary lived in which was owned by the Deceased.

• there was no formal lease arrangement in place. The arrangement was non arm's length. A market appraisal of the weekly rent on the property shows the rent was reduced by almost half for the Beneficiary as a means of financial support to the Beneficiary by the Deceased.

• the Deceased paid for rates and insurance and other property expenses.

• the Beneficiary's disabled children (the children), for whom the Beneficiary is their full-time carer, resided at the property with them.

• on many occasions the Deceased would give money to the Beneficiary when the Beneficiary was short of money or needed help with the costs associated with the children.

• when the Beneficiary struggled to pay for some utility bills the Deceased would give the Beneficiary further rent relief.

• the Deceased would take the Beneficiary and the children out for meals on a regular basis and always paid the bill. The Deceased also cooked meals for the Beneficiary and the children to reduce the cost of groceries.

You provided information itemising the income earned and expenses incurred by the Beneficiary for the 20XX-XX, 20XX-XX and 20XX-XX income years (up until the date of death) and the Deceased's contributions towards those expenses.

The information shows that Deceased's contributions towards the Beneficiary's expenses were not insubstantial.

Up until the time the Deceased passed away, the Beneficiary and the children did not receive financial support from any other sources apart from what appear in the information provided, that is, a carer's payment and some part-time employment income.

Details of the Deceased's income for the 20XX-XX, 20XX-XX and 20XX-XX income years (up until the date of death) have been provided.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 302-C

Income Tax Assessment Act 1997 section 302-10

Income Tax Assessment Act 1997 subsection 302-10(1)

Income Tax Assessment Act 1997 subsection 302-10(3)

Income Tax Assessment Act 1997 subsection 302-145(1)

Income Tax Assessment Act 1997 subsection 302-145(2)

Income Tax Assessment Act 1997 subsection 302-145(3)

Income Tax Assessment Act 1997 section 302-195

Income Tax Assessment Act 1997 subsection 302-195(1)

Income Tax Assessment Act 1997 paragraph 302-195(1)(a)

Income Tax Assessment Act 1997 paragraph 302-195(1)(b)

Income Tax Assessment Act 1997 paragraph 302-195(1)(c)

Income Tax Assessment Act 1997 paragraph 302-195(1)(d)

Reasons for decision

Summary

The Beneficiary is a death benefits dependant of the Deceased under section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997) as the Beneficiary was financially dependent on the Deceased.

Detailed reasoning

Superannuation death benefits paid to the trustee of a deceased estate

Section 302-10 of the ITAA 1997 deals with superannuation death benefits paid to the trustee of a deceased estate. Subsection 302-10(1) of the ITAA 1997 states:

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.

As the lump sum payment in this case is a superannuation death benefit paid to the trustee of the deceased estate from the Deceased's superannuation fund (the Fund), section 302-10 of the ITAA 1997 applies to the trustee of the estate.

Under section 302-10 of the ITAA 1997, the taxation arrangements for superannuation death benefits paid to a trustee of a deceased estate are determined in accordance with the taxation arrangements that would otherwise apply to the person or persons otherwise intended to benefit from the estate.

This means that where a dependant of the deceased is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid to a dependant of the deceased, and the benefit is taken to be income to which no beneficiary is presently entitled.

Where a person that is not a dependant is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid to a non-dependant of the deceased to that extent, and the benefit is taken to be income to which no beneficiary is presently entitled.

Accordingly, in the present case, the superannuation death benefit is assessable to the trustee as income to which no beneficiary is presently entitled.

The superannuation death benefit will be treated concessionally if a dependant of the deceased will benefit from the estate. 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.

It will now be determined if the Beneficiary in this case is a dependant of the Deceased.

Death benefits dependant

Subsection 302-195(1) 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.

The facts of this case rule out the Beneficiary being a death benefits dependant of the Deceased on the basis of paragraph 302-195(1)(a), 302-195(1)(b) or 302-195(1)(c) of the ITAA 1997.

Therefore, in order for the Beneficiary to be a death benefits dependant of the Deceased, dependency under paragraph 302-195(1)(d) of the ITAA 1997 will need to be established.

Financial dependency

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 (Aafjes v. Kearney (1976) 8 ALR 455, Barwick CJ at 456).

In Case [2000] AATA 8, (2000) 43 ATR 1273, Senior Member Fayle, in considering the definition of dependant in relation to section 27AAA of the Income Tax Assessment Act 1936 (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.(emphasis added)

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 with 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) 47 ALJR 184; [1972-73] ALR 1266; (1973) 128 CLR 177 at 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 [1999] AATA 678, 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 persons 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 a person 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.

The facts show that the Beneficiary is the adult child of the Deceased, whose only income was that of a carer's payment and occasional part-time employment. It is clear that the Deceased provided financial support to the Beneficiary and the children to assist with property and food expenses.

The combined income for the Beneficiary for the 2011-12, 2012-13 and 2013-14 income years up until the Deceased's date of death has been provided. For the same period, the Beneficiary total necessary expenses (less entertainment) have been provided. The Deceased contributed towards these expenses (not including entertainment) more than 45%.

Given:

• the inability of the Beneficiary to earn additional income because of the carer responsibilities for the disabled children;

• the nature and amount of the Beneficiary's expenses; and

• the continuous financial support provided by the Deceased for most of the expenses;

it is considered that the Beneficiary was reliant upon the Deceased's financial support.

In view of the above, it has been substantiated 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' in section 302-195 of the ITAA 1997.