Edited version of your written advice

Authorisation Number: 1012817599934

Ruling

Subject: Death benefits - interdependency

Question

Was the Taxpayer a death benefits dependant as defined in section 302-195 of the Income Tax Assessment Act 1997 of the Deceased?

Answer

No.

This ruling applies for the following periods:

The income year ended 30 June 2014.

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

Your client is the child of the Deceased.

Prior to her/his death, the Deceased lived in State X. Your client did not reside with the Deceased.

The Deceased was in poor health as a result of underlying illness exacerbated by a workplace accident. The Deceased spent several weeks at a time with your client in order to attend medical appointments.

It was anticipated that the Deceased would require a major surgery, which would necessitate moving to a residence which could accommodate her/his disability.

Your client, your client's spouse and the Deceased entered into a contract to purchase land and build a residence. The intention was that this would be suitable accommodation for the Deceased, which would allow your client to live with her/his and provide care. The Deceased provided 100% of the funds required to purchase the land, and a borrowing contract was entered with a bank to finance the build.

Your client and the Deceased maintained a joint bank account for many years. This account received regular deposits from the Deceased, and was used so that your client could pay bills on her/his behalf and cover his/her own living expenses.

The Deceased passed before construction of the house was completed.

Your client is in paid employment, and has erratic wages.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-195

Income Tax Assessment Act 1997 Section 302-200

Income Tax Assessment Regulations 1997 Regulation 302-200.01

Income Tax Assessment Regulations 1997 Regulation 302-200.02

Reasons for decision

Summary

An Interdependency relationship as defined under sub section 302-200(1) of the Income Tax Assessment Act 1997 (ITAA 1997) did not exist between the deceased and the beneficiary as not all of the requirements which are set out in the relevant legislation have been satisfied in this case.

Your client was not financially dependant on the Deceased. The Deceased did not contribute all or a major amount of necessary financial support to your client. Therefore, your client is not a dependant of the Deceased with the definition of death benefit dependant.

Detailed reasoning

Death Benefits Dependant in relation to the Superannuation Death Benefit

Division 302 of the ITAA 1997 sets out the taxation arrangements that apply to the payment of superannuation death benefits that are made after 30 June 2007. 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.

As the adult child of the Deceased, paragraphs 302-195(1)(a) and (b) are not applicable.

You have contended that your client was in an interdependency relationship with the Deceased, per paragraph 302-195(1)(c) of the ITAA 1997. For completeness, we will also consider whether your client was a dependent of the Deceased just before she died, under paragraph 302-195(1)(d) of the ITAA 1997.

Interdependency relationship

Section 302-200(1) of the ITAA 1997 states:

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) of the ITAA 1997.

Regulation 302-200.01(2) of the Income Tax Assessment Regulations 1997 (ITAR 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; and

(b) the existence of a statutory declaration signed by 1 of the persons to the effect that the person is, or (in the case of a statutory declaration made after the end of the relationship) was, in an interdependency relationship with the other person.

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. These are specified in regulation 302-200.02 of the ITAR 1997.

All of the conditions in subsection 302-200(1), or alternately both the condition in paragraph 302-200(1)(a) and the condition in subsection 302-200(2) of the ITAA 1997, or one of the tests in regulation 302-200.02 of the ITAR 1997 must be satisfied for the taxpayer to be able to claim that he/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'.

This requirement is common to all of the tests specified in section 302-200 of the ITAA 1997 and regulation 302-200.02 of the ITAR 1997.

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.

In the explanatory statement to the Income Tax Amendment Regulations 2005 (No. 7) which inserted Regulation 8A into the ITR 1936, it stated that:

'It is not necessary for each of the listed circumstances to be satisfied in order for an interdependency relationship to exist. There are circumstances in which it would be inappropriate to consider certain matters. For example, it would not be relevant to consider whether there was a sexual relationship when determining whether an interdependency relationship existed between siblings.

Each of the matters listed is to be given the appropriate weighting under the circumstances. The degree to which any matter is met or is present or not, as the case may be, does not necessarily of its own accord, confirm or preclude the existence of an interdependency relationship

Generally speaking, it is not expected that children will be in an interdependency relationship with their parents.'

As stated above, the intention of the law is that 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. It would be expected that the adult child would eventually move out and secure independence from their parents.

In this case, your client is the child of the Deceased. It is clear that a close family relationship existed prior to, and at the time of the Deceased's death. The beneficiary lived with the Deceased until attending university, and provided emotional support and domestic assistance to the Deceased during the course of her/his medical condition.

While your client remained an important part of the Deceased's life, it is evident that the relationship had already changed significantly.

Prior to and at the time of the Deceased's death, the Deceased was living separately from your client.

Although the Deceased would spend time at the beneficiary's house in order to attend medical appointments, it is still considered that she had lived a predominantly independent life from the beneficiary. Accordingly, the Deceased's relationship with the beneficiary was such that it cannot be said that there was a mutual commitment to a shared life.

In respect of emotional support, it is accepted that the beneficiary provided a significant degree of support to the Deceased throughout the course of her/his illness, regardless of whether they were living together or separately.

It is not doubted that a loving and supportive relationship existed between your client and the Deceased. However, although there are some aspects of a 'close personal relationship' evident between the Deceased and your client, it is considered that overall the relationship between them is not of the type envisioned by the legislation.

Accordingly, the first requirement specified in paragraph 302-200(1)(a) of the ITAA 1997 has not been satisfied in this case.

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 third edition of the Macquarie Dictionary (2000 multimedia edition) in its definition of live lists:

24. live together,  ...  cohabit.

The Macquarie Dictionary defines cohabit as:

2. to dwell or reside in company or in the same place.

The Macquarie Dictionary further defines dwell as:

1. to abide as a permanent resident.

Prior to and at the time of the Deceased's death, the Deceased and your client were not living together. The Deceased resided at her/his own separate residence and had been living there for many years. It was anticipated that the Deceased and your client would live together pending construction of the new house, however this had not yet occurred.

Although the Deceased at times stayed with your client for the purpose of attending medical appointments, it is still considered that the Deceased's dominant place of residence was, prior to her/his death, at her/his own house.

Consequently, it is considered that paragraph 302-200(1)(b) of the ITAA 1997 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.

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 of financial support (not necessarily substantial) is being provided by one person (or each of them) to the other.

According to statements from your client, the Deceased has provided your client with some degree of financial support during the course of their relationship. In particular, the Deceased contributed regularly to a shared bank account, which your client used to cover his/her living expenses and to fund medical treatments for his/her spouse. Furthermore, the Deceased provided lump sum amounts to clear your client's debts.

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.'

From the facts presented, your client clearly provided domestic support to the Deceased on an ongoing basis. Your client, along with two others, attended to cleaning, household chores, dressing wounds and driving the Deceased to and from medical appointments.

Therefore 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):

As the four requirements in subsection 302-200(1) of the ITAA 1997 have not been met, we will consider the application of subsection 302-200(2) of the ITAA 1997 and regulation 302-200.02 of the ITAR 1997.

Essentially, subsection 302-200(2) ensures that where two people have a close personal relationship, however, because of the physical, intellectual or psychiatric disability of one of both of them, they do not satisfy one or more of the requirements in paragraphs 302-200(1)(b), (c) and (d) of the ITAA 1997, they will still be considered to have an interdependency relationship.

However, subsection 302-200(2) of the ITAA 1997 will only apply where the deceased and the beneficiary satisfy the requirements of paragraph 302-200(1)(a), in accordance with the terms of paragraph 302-200(2)(a).

As the requirements specified in paragraph 302-200(1)(a) have not been satisfied in this instance consideration of the other conditions is not necessary in this case.

Consequently, subsection 302-200(2) of the ITAA 1997 does not apply in this instance.

Regulation 302-200.02 of the ITAR 1997 sets our circumstances in which two people have an interdependency relationship for the purposes of section 302-200 of the ITAA 1997. Common to all of these circumstances is the requirement that paragraph 302-200(1)(a) is satisfied. As discussed above, as this requirement has not been satisfied, regulation 302-200.02 of the ITAR 1997 will not apply in this instance.

Interdependency relationship

From the foregoing, not all of the requirements which are set out in section 302-200 of the ITAA 1997 have not been satisfied in this case. Consequently it is considered that the deceased and your client were not in an interdependency relationship.

Financial dependency

A person may also qualify as a death benefits dependant where they were a dependant of the deceased person just before he or she died, per paragraph 302-195(1)(d) of the ITAA 1997.

Therefore, we will now consider whether your client was a dependant of the Deceased.

According to the Macquarie Dictionary (2000 multimedia edition), 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) 180 CLR 199, per Chief Justice Barwick).

Senior Member Fayle of the Administrative Appeals Tribunal (AAT), in Case [2000] AATA 8, in considering the definition of 'dependant' in relation to former 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 dependant on their child 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, beyond a level of subsistence, then the person should not be characterised as a dependant in terms of paragraph 302-195(1)(d) of the ITAA 1997.

In the case of Aafjes v Kearney (1976) 180 CLR at page 207 Gibbs J cited the High Court case of Kauri Timber Co (Tas) Pty Ltd v Reeman (1973) 128 CLR 77 at pages 188-189, and further clarified uncertainty concerning dependency noting:

'…but it does not follow from it that a person who in fact receives some support from one person cannot properly be said to be wholly dependent on another. It is not the mere fact of receipt of support but the dependence or reliance upon another to provide it that matters.' [Emphasis added]

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 their 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, 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) 128 CLR 177, 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 Re Malek v. Commissioner of Taxation (Cth) Case [1999] AATA 678 (Malek), Senior Member Pascoe 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 [child] and regarding their 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, the evidence supplied by the taxpayer was able to demonstrate that the financial support received from their deceased child had been significant. The child had accepted responsibility for mortgage repayments, maintenance and other expenses of the unit in which the taxpayer lived.

That dependency involves more than the mere receipt of support, but also reliance on it, was affirmed by Hamilton J in Griffiths v Westernhagen [2008] NSWSC 851, [58]:

'For a relationship of dependency to be established, there must be more than the mere giving of money. Rather there must be a relationship where one party relies on the other for what is required for their ordinary living.'

The tenor of the case law noted above refers to a level of dependency to maintain the dependant's ordinary living (Griffiths v Westernhagen), normal standards of living (Malek's case) and relying on another as a means of subsistence (Kauri Timber Co (Tas) Pty Ltd).

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.

In this case, the point to be considered is whether the facts show your client depended or relied on the earnings of the Deceased to maintain his/her ordinary standard of living at the time of the Deceased's death.

You have stated that your client's primary source of income is his/her wages.

The Deceased provided your client with some financial support. In particular, the Deceased made several lump sum payments in order to clear your client's personal loans and debts, and to pay the deposit on the land.

The Deceased also made contributions to a joint bank account held with your client, which your client used to fund medical treatments for his/her spouse, and to pay some bills and supplement his/her income at times when work was erratic.

Whilst the Deceased provided financial benefits to your client, the support from the Deceased was neither regular nor continuous. Rather, the Deceased provided irregular amounts to your client, which are better characterised as the giving of money (Griffith v Westernhagen) and derivation of a benefit (per Simmons v White) The financial support provided supplemented your client's personal income and represents quality of life payments.

Therefore, it cannot be said that the Deceased was the one who contributed all or a major amount of necessary financial support to your client. That is, your client was not substantially maintained or supported financially by the Deceased.

In view of the above it is considered your client was not financially dependant on the Deceased at the time of the Deceased's death, within the meaning in paragraph 302-195(1)(c) of the ITAA 1997

Conclusion

As your client was not financially dependant on the Deceased, nor in an interdependency relationship with the Deceased, just before their death, your client is not a death benefits dependant as defined under section 302-195 of the ITAA 1997.