Edited version of your written advice

Authorisation Number: 1013009266870

Date of advice: 12 May 2016

Ruling

Subject: Death benefit - financial dependency

Question

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

Answer

1. Yes

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The deceased passed away during the relevant income year.

During the subsequent income year, the deceased's superannuation fund made several superannuation lump sum payments to the trustee of the deceased's estate.

PAYG payment summaries from the deceased's superannuation fund for the income year ended 30 June 20XX were provided.

The beneficiary in this case is the child of the deceased and is one of two equal beneficiaries of the deceased's estate.

The beneficiary lived with the deceased from the time they were born until the passing away of the deceased. The deceased and the beneficiary's parent had separated.

At the time of the passing away of the deceased, the beneficiary was a full time university student. While the beneficiary was studying, they worked part time for a number of different employers. Their taxable incomes for the 3 income years prior to the passing away of the deceased were provided.

The beneficiary did not own any assets other than some clothing and personal effects with no material value.

The beneficiary paid for some of their annual expenses them self. An estimate of the annual expenses paid for by the beneficiary for each of the relevant income years was provided,

The deceased paid for the groceries and household expenses of the household. An estimate of the amount spent on groceries and household expenses was provided. The deceased and the beneficiary were the only two members of the household.

The deceased also spent an amount per year to pay for some of the beneficiary's university costs.

The beneficiary resided in a dwelling owned by the deceased and did not pay any rent. An estimate of the annual cost of rent that the beneficiary would have paid if the deceased had charged rent was provided.

Details of the beneficiary's bank account balances at the end of each of the relevant income years were provided.

The only other person that the beneficiary received financial support from in each of the relevant income years was their parent who contributed an amount per year towards their university costs.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 302-10

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

Income Tax Assessment Act 1997 section 302-60

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)(d)

Income Tax Assessment Act 1997 paragraph 302-200(1)(b)

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 307-70

Income Tax Assessment Act 1997 subsection 995-1(1)

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

For superannuation death benefits paid after 1 July 2007, subsection 995-1(1) of the ITAA 1997 states that a 'superannuation death benefit' has the meaning given by section 307-5 of the ITAA 1997.

A superannuation death benefit is defined in subsection 307-5(4) of the ITAA 1997 as being a payment described in Column 3 of the table in subsection 307-5(1) of the ITAA 1997. A superannuation death benefit is described in Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997 as:

… A payment to you from a superannuation fund, after another person's death, because the other person was a fund member.

A superannuation lump sum is described in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream as defined in section 307-70 of the ITAA 1997.

In this case the deceased passed away during the relevant income year. Prior to their death, the deceased was a member of a certain superannuation fund.

The deceased's superannuation fund made two payments directly to the deceased's estate during the subsequent income year. These payments were made because the deceased was a fund member. Hence these payments are superannuation benefits within the meaning of Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997.

These payments are thus superannuation death benefits as defined in subsection 307-5(4) of the ITAA 1997 and superannuation lump sums within the meaning of section 307-65 of the ITAA 1997.

Application of section 302-10 of the ITAA 1997

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 payments in this case were superannuation death benefits received from the deceased's superannuation fund by the deceased's estate, section 302-10 of the ITAA 1997 will apply to the deceased's 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 'death benefits 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 'death benefits dependant' of the deceased, and the benefit is taken to be income to which no beneficiary is presently entitled.

In other words, the superannuation death benefit will be treated concessionally if a 'death benefits dependant' of the deceased will benefit from the estate. Where a person receives a superannuation death benefit and that person was a 'death benefits 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 'death benefits dependant' of the deceased.

Death benefits dependant

The definition of 'death benefits dependant' is outlined by section 302-195 of the ITAA 1997 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 focus of the application in this case is on dependency under paragraph 302-195(1)(d) of the ITAA 1997.

Meaning of 'dependant'

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.

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.

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 to maintain their normal standard of living.

In the current case, it is clear that the deceased provided financial support to the beneficiary. The facts of the case indicate that the deceased paid for the beneficiary's groceries, household expenses, university expenses, and provided them with accommodation. Determining whether the beneficiary relied on this support to maintain their standard of living requires an analysis of their annual expenses.

An analysis of the beneficiary's annual expenses, suggest that the beneficiary would not have been able to meet their expenses in the relevant income years if they had not received financial support from the deceased. The amounts earned by the beneficiary in those income years would not have been enough to cover her expenses if the deceased had not provided the beneficiary with financial support.

In view of the above, the beneficiary is financially dependent on the deceased, which means that the condition under paragraph 302-195(1)(d) of the ITAA 1997 is satisfied. As such, the beneficiary is a 'death benefits dependent' of the deceased.

The tax treatment of the superannuation death benefits

1. As previously mentioned, 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, that part of the benefit 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, that part of the benefit 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.

2. According to section 302-60 of the ITAA 1997:

A * superannuation lump sum that you receive because of the death of a person of whom you are a * death benefits dependant is not assessable income and is not * exempt income.

3. In this case, as the beneficiary is a 'death benefits dependant' of the deceased, the part of the superannuation death benefit that the beneficiary receives will be tax-free in the hands of the deceased's estate.