Edited version of your written advice

Authorisation Number: 1012886843172

Date of advice: 1 October 2015

Ruling

Subject: Death benefit - interdependency

Question 1

Are your clients death benefits dependants of the deceased as defined under section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the superannuation death benefit to be paid to your clients treated as assessable income of the trustee of the deceased estate in accordance with section 302-145 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Client A is the sibling of the Deceased.

Client B is the Deceased's sibling in law.

The Deceased died suddenly during the relevant income year.

The Deceased suffered from a genetic inheritable disease. As a result the Deceased was confined to a power wheelchair full-time for many years prior to their death.

The Deceased resided with their parents and received a disability support pension.

Client A suffered from a physical disability. They left the family home many years ago after they married Client B.

Client A and the Deceased did not live together due to their physical disabilities.

Client A and Client B provided the Deceased with domestic support such as cooking, cleaning and grocery shopping for many years. They also provided personal care such as helping the Deceased with showering, regularly visiting and calling the Deceased to check on their welfare.

The emotional support provided by Client A and Client B to the Deceased included the following:

• Both undertook regular visits separately and together and made numerous phone calls to the Deceased to check on their welfare, especially when the Deceased's parents were on holiday/respite breaks and during non-care times.

• The Deceased often discussed their condition and the difficulties and frustrations they encountered with Client A and they encouraged them to utilise services and equipment that kept them feeling as independent as they could be, as well as providing empathy and love.

There was no financial support between Client A and Client B and the Deceased.

Client A and Client B did not receive a carer allowance for the care of the Deceased.

During the relevant income year, an Australian superannuation fund made a lump sum superannuation death benefit payment to the Deceased's estate (the Estate).

Client A and Client B are the beneficiaries of the Estate.

Relevant legislative provisions

Income Tax Assessment Act 1936 former section 27AAB.

Income Tax Assessment Act 1997 section 302-10.

Income Tax Assessment Act 1997 section 302-60.

Income Tax Assessment Act 1997 section 302-145.

Income Tax Assessment Act 1997 section 302-195.

Income Tax Assessment Act 1997 section 302-200.

Reasons for decision

Summary

Just before the Deceased died, Client A and Client B and the Deceased did not have an interdependency relationship as defined in section 302-200 of the ITAA 1997. Therefore, Client A and Client B are not considered to be death benefits dependants of the Deceased for the purposes of section 302-195 of the ITAA 1997.

A superannuation lump sum death benefit paid to a person who is not a death benefits dependant is assessable income.

To the extent that a death benefits non-dependant has benefited, or may be expected to benefit, from a superannuation death benefit received by the trustee of a deceased estate, the benefit is treated by the trustee as if it had been paid to a death benefit non-dependant. Therefore, the superannuation lump sum death benefit to be paid to Client A and Client B from the Deceased's estate is treated as assessable income of the trustee of the Deceased's estate.

Detailed reasoning

Death benefits dependant

Division 302 of the ITAA 1997 sets out the taxation arrangements that apply to the payment of superannuation death benefits.

Section 302-195 of the ITAA 1997 defines death benefits dependant, of a person who has died, as:

(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 paragraphs (a), (b) or (d) of the above definition do not apply to Client A and Client B, paragraph 302-195(c) of the ITAA 1997 is considered to determine whether Client A and Client B were in an interdependency relationship with the Deceased just before the Deceased died.

Interdependency relationship

Relevantly, section 302-200 of the ITAA 1997 provides that two persons (whether or not related by family) have an interdependency relationship under that 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.

Under subsection 302-200(2) of the ITAA 1997 two people who have a close personal relationship but cannot satisfy all of the other requirements of an interdependency relationship because of a physical, intellectual or psychiatric disability, may still have an interdependency relationship.

In accordance with subsection 302-200(3) of the ITAA 1997, matters and circumstances that are, or are not, to be taken into account in determining whether two persons have an interdependency relationship under that section may be specified in the regulations.

To that effect, subregulation 302-200.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) states that the matters to be taken into account for the purposes of paragraph 302-200(3)(a) of the ITAA 1997 are all the relevant circumstances of the relationship between the persons, including (in this case):

(i)  the duration of the relationship; and

…

(iii) the ownership, use and acquisition of property; and

(iv)  the degree of mutual commitment to a shared life; 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

…

Subregulation 302-200.02 of the ITAR 1997 sets out the circumstances in which two persons have an interdependency relationship and, as far as relevant, states that two persons have an interdependency relationship if:

(a)  they satisfy the requirements of paragraphs 302-200(1)(a) to (c) of the Act; and

(b)  1 or each of them provides the other with support and care of a type and quality normally provided in a close personal relationship, rather than by a mere friend or flatmate.

Examples of care normally provided in a close personal relationship rather than by a friend or flatmate

1. Significant care provided for the other person when he or she is unwell.

2. Significant care provided for the other person when he or she is suffering emotionally.

Close personal relationship:

Paragraphs 302-200(1)(a) and 302-200(2)(a) of the ITAA 1997 state that the two persons (whether or not related by family) must have a close personal relationship.

Generally, a close personal relationship as specified in subsection 302-200(1) of the ITAA 1997 would not exist between siblings or in-laws. This is because the relationship between siblings and in-laws would be expected to change significantly over time and there would be no mutual commitment to a shared life between the two.

It is not doubted that a loving and supportive relationship existed between Client A and Client B and the Deceased. However, at the time of the Deceased's death, Client A and Client B have demonstrated a commitment to live their lives independently of the Deceased based on:

• Client A and Client B residing together and the Deceased residing with their parents; and

• Client A and Client B not providing financial support to the Deceased and vice-versa, demonstrating that they were able to live independently of each other.

Furthermore, the Deceased's parents were their primary carers. It is acknowledged that personal care and domestic support were provided by Client A and Client B on an occasional basis to the Deceased, including when the parents were away. However, it is evident that the Deceased demonstrated a commitment to a shared life with their parents, as opposed to Client A and Client B, just before their sudden passing.

Based on the circumstances outlined above, it is considered that the relationship between Client A and Client B and the Deceased is not a 'close personal relationship' as envisaged by paragraph 302-200 (1)(a) of the ITAA 1997.

For completeness, we will also consider the other conditions below.

Living together:

Paragraph 302-200(1)(b) of the ITAA 1997 states that the two persons must live together.

At the time of the Deceased's death, Client A and Client B and the Deceased did not live together. This is because Client A and the Deceased suffered from a physical disability.

As the reason that Client A and Client B did not live with the Deceased is because of the Deceased's physical disability, paragraph 302-200(2)(c) of the ITAA 1997 will apply in relation to this requirement.

Consequently, it is considered that paragraph 302-200(1)(b) of the ITAA 1997 does not need to be satisfied in this instance.

Financial support:

Financial support under paragraph 302-200(1)(c) of the ITAA 1997 is satisfied if some level (not necessarily substantial) of financial support is being provided by one person (or each of them) to the other.

There was no financial support provided between Client A and Client B and the Deceased.

No evidence was provided to indicate that the reason why the financial support requirement was not satisfied in this case was due to Client A's and the Deceased's physical disability. As such, paragraph 302-200(2)(c) of the ITAA 1997 does not apply in this instance.

Consequently, paragraph 302-200(1)(c) of the ITAA 1997 has not been satisfied.

Domestic support and personal care:

The Supplementary Explanatory Memorandum to the Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004 which inserted former section 27AAB of the ITAA 1936 (the immediate predecessor to section 302-200 of the ITAA 1997) discusses the meaning of domestic support and personal care and states:

2.16 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 activities. Personal care services may commonly consist of assistance with mobility, personal hygiene and generally ensuring the physical and emotional comfort of a person.

You state that Client A and Client B provided the Deceased with domestic support such as cooking, cleaning and grocery shopping for many years. They also provided personal care such as helping the Deceased with showering, regularly visiting and calling the Deceased to check on their welfare.

In view of the above it is considered that the requirement in paragraph 302-200(1)(d) of the ITAA 1997 has been met.

As Client A and Client B and the Deceased were not able to satisfy all the conditions in subsection 302-200(1) or all the conditions in subsection 302-200(2) of the ITAA 1997, they were not in an interdependency relationship just before the Deceased died.

Consequently Client A and Client B are not death benefits dependants of the Deceased for the purposes of section 302-10 of the ITAA 1997.

Superannuation death benefit paid to the trustee of deceased estate

Section 302-10 of ITAA 1997 applies to superannuation death benefits paid to the trustee of a deceased estate.

Relevantly, subsection 302-10(3) of the ITAA 1997 states:

To the extent that 1 or more beneficiaries of the estate who were not death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit:

(a) the benefit is treated as if it had been paid to you as a person who was not a death benefits dependant of the deceased; and …

Therefore, subsection 302-10(2) of the ITAA 1997 applies so that the superannuation death benefit paid to the Trustee will be treated as if the Trustee was not a death benefits dependant of the deceased.

The tax free component of a superannuation lump sum paid to a non-dependant is tax free under section 302-140 of the ITAA 1997. The taxable component of the lump sum is included in assessable income, with a tax offset to ensure that the rate of tax on the element taxed in the Fund does not exceed 15% and that the rate of tax on the element untaxed in the Fund does not exceed 30%. This is in accordance with section 302-145 of the ITAA 1997. No Medicare levy is added to the rates mentioned above.