Edited version of your written advice

Authorisation Number: 1051199736881

Date of advice: 17 March 2017

Ruling

Subject: Death benefits- interdependency

Question

Is a person (the Beneficiary) a death benefits dependant of a person who has died (the Deceased) in accordance with section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997) by virtue of being in an interdependency relationship with the Deceased under section 302-200 of the ITAA 1997 just before they died?

Answer

No.

This ruling applies for the following period:

Income year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Deceased died on 30 July 2015.

The Beneficiary is a child of the Deceased aged more than 18 years.

The Beneficiary suffers from disabilities arising from brain damage. The ongoing effects of this disability restricted the Beneficiary’s ability to perform everyday tasks and they require ongoing care and support.

The Beneficiary resided with the Deceased for a period of 5 years until their complex care needs required them to move into a specialised facility (the Facility).

The Beneficiary was not financially dependent on the Deceased as the Facility accommodated most of the Beneficiary needs.

The Deceased provided the Beneficiary with fortnightly payments which allowed the Beneficiary to access the community.

The Deceased was a member of a Superannuation Fund (the Fund)

In accordance with the Deceased’s will, the Fund’s balance is to go to a Special Disability Trust (the Trust) established to provide for the Beneficiary.

The Fund’s balance has been paid as death benefits payments to the trustee of the Estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 302-195.

Income Tax Assessment Act 1997 section 302-200.

Income Tax Assessment Act 1997 section 302-10(2).

Income Tax Assessment Act 1997 section 302-10(3).

Income Tax Assessment Act 1997 section 302-140.

Income Tax Assessment Act 1997 section 302-145.

Income Tax Assessment Regulations 1997 Regulation 302-200.01.

Reasons for decision

Summary

An interdependency relationship as defined under section 302-200 of the ITAA 1997 did not exist between the Deceased and the Beneficiary just before the Deceased died. Therefore, the Beneficiary is not a death benefits dependant of the Deceased as defined in section 302-195 of the ITAA 1997.

Detailed reasoning

Death benefits dependant

Subsection 302-195(1) of the ITAA 1997 defines a ‘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 just before he or she died.

*To find the definition of asterisked terms, see the Dictionary, starting at section 995-1.

As the Beneficiary is a child of the Deceased aged over 18, paragraphs 302-195(1)(a) and (b) of the ITAA 1997 do not apply. Therefore, to find that the Beneficiary is a death benefits dependant of the Deceased, it must be established that the Beneficiary was in an ‘interdependency relationship’ with the Deceased, or that they were a ‘dependant’ of the Deceased just before the Deceased died.

What is an interdependency relationship?

Subsection 302-200(1) of the ITAA 1997 states that two persons (whether or not related by family) have an interdependency relationship 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.

Subsection 302-200(3) of the ITAA 1997 provides the matters and circumstances which are to be considered in determining whether an interdependency relationship exists between two persons under that section may be specified in the regulations.

To that effect, regulation 302-200.01 of the Income Tax Assessment Regulation 1997 (ITAR 1997) states that in considering subparagraph 302-200(2)(a) of the ITAA 1997, matters to be taken into account are all relevant circumstances of the relationship between the persons, including (in this case):

(a) the duration of the relationship; and

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

(c) the degree of emotional support; and

(d) the extent to which the relationship is one of mere convenience; and

(e) any evidence suggesting that the parties intend the relationship to be permanent.

Close personal relationship

Generally, a close personal relationship as specified in subsection 302-200(1) of the ITAA 1997 would not exist between a parent and child. This is because the relationship between a parent and child would be expected to change significantly over time and there would be no mutual commitment to a shared life between the two. However, where unusual and exceptional circumstances exist, a relationship between a parent and child may be treated as an interdependency relationship for the purposes of subsection 302-200(1) of the ITAA 1997.

In the facts do not indicate that a situation of unusual and exceptional circumstances existed. There is nothing to indicate a level of commitment to a shared life or a level of care above what would be normal or expected in a parent/child relationship.

Consequently, while it is accepted that the Beneficiary and the Deceased had a close parent/child relationship, it is not considered that a close personal relationship existed between the Beneficiary and the Deceased as contemplated by paragraph 302-200(1)(a).

As all the conditions of subsection 302-200(1) of the ITAA 1997 must be satisfied for an interdependency relationship to exist, an interdependency relationship between the Beneficiary and the Deceased did not exist because it has not been established that the Beneficiary and the Deceased had a close personal relationship just before the Deceased died.

Even if it could be argued that the Beneficiary and the Deceased did, in fact, have a close personal relationship for the purposes of paragraph 302-200(1)(a) of the ITAA 1997, based on the information provided, it is our view that they did not have an interdependency relationship because just before the Deceased died:

(a) the Beneficiary was living in a special-needs facility;

(b) neither party provided financial support to the other; and

(c) neither party provided domestic support or personal care for the other.

Is the Beneficiary a dependant of the deceased?

Relevantly, ATO Interpretative Decision 2014/22 Income Tax: death benefits dependent-adult child caring for a terminally ill parent (ATOID 2014/22) considered the scope of paragraph 302-195(1)(d), stating:

The definition of death benefits dependant in paragraph 302-195(1)(d) does not stipulate the nature or degree of dependency, but it is generally accepted that this refers to financial dependence and it is a condition that must exist in relation to the taxpayer at the time of the deceased’s death.

The Beneficiary was not financially dependent on the Deceased for maintenance and support at the time of the Deceased’s death.

Accordingly, the condition in paragraph 302-195(1)(d) has not been established.

Superannuation death benefits paid to a trustee of a deceased estate for distribution to a Special Disability Trust

In this instance, the Deceased’s will requires the trustees to pay the proceeds of the Fund into the Trust, established solely for the benefit of the Beneficiary until their death.

The trustee of the Trust is required to apply the income of the Trust for the benefit of the Beneficiary to ensure that they have reasonable care and accommodation.

Based on the facts of this case, the Commissioner considers that this payment represents a payment for the benefit of a non-dependant beneficiary of the Deceased.

Accordingly, as a payment made to a non-dependant beneficiary, the trustee will be subject to tax as if it had been paid directly to the Beneficiary.

Tax treatment of superannuation death benefits paid to a trustee of a deceased estate

In accordance with subsection 302-10(3) of the ITAA 1997, where a non- dependant beneficiary receives, or will receive, all or part of a superannuation death benefit payment, the trustee will be subject to tax on that part of the benefit paid or to be paid to the dependent as if it had been paid to that beneficiary. However, the dependent beneficiary is not presently entitled to the payment and the benefit does not form a part of their assessable income.

Section 302-140 of the ITAA 1997 provides that the tax-free component of a superannuation lump sum received by a non-dependant beneficiary is not assessable income and is not exempt income.

Section 302-145 of the ITAA 1997 provides that the taxable component of a superannuation lump sum received by a non-dependant beneficiary is assessable income, with a tax offset to ensure that the rate of tax on the untaxed element in the fund does not exceed 15% and that the rate of tax on the untaxed element in the fund does not exceed 30%.

The taxable components of the payments must be disclosed in the income tax return of the Estate.

Once the payment is made from the Estate to the relevant beneficiary, it is not included as assessable income in that beneficiary’s tax return as the payment represents a distribution of the Estate.