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Edited version of your written advice
Authorisation Number: 1051424955416
Date of advice: 18 April 2019
Ruling
Subject: Superannuation death benefits
Question
Are the Beneficiaries ‘death benefits dependants’ of the Deceased in accordance with section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following period:
Income year ended 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
The Deceased died during the 20XX-XX income year.
The Beneficiaries are the children of the Deceased, aged more than 18 years.
The Deceased provided ongoing financial support to the Beneficiaries until the time of their death.
An implied agreement existed between the Beneficiaries and the Deceased whereby the Deceased would meet the shortfall of the beneficiaries living expenses.
The Beneficiaries did not live with the Deceased at the time of the Deceased’s death. They lived rent-free in accommodation that was purchased by the deceased.
The first Beneficiary receives no financial support from their former spouse.
The second Beneficiary is financially independent from the spouse.
The deceased provided continuous financial support to the first Beneficiary through payment of the beneficiary’s ongoing living expenses including:
● utilities such as electricity, gas, water and telephone
● household costs such as rates, insurance, and maintenance
● food and clothing
● school fees, day care/ pre-school fees
● car insurance, maintenance and running costs and
● travel and entertainment
The deceased provided continuous financial support to the second Beneficiary through payment of the beneficiary’s ongoing living expenses including:
● utilities such as electricity, gas, water and telephone
● household costs such as rates, insurance, and maintenance
● food and clothing
● school fees, day care/ pre-school fees
● car insurance, maintenance and running costs and
● travel and entertainment
The Beneficiaries’ annual expenses were significantly higher than their net income.
The Beneficiaries did not live with the Deceased at the time of the Deceased’s death.
A loan to the first beneficiary was provided to acquire a home in 20XX-XX income year. The terms and conditions of this loan prescribed that no interest was payable, nor were any repayments required. The Deceased’s will directs the executors to release and forgive this loan and to discharge the mortgage.
A loan to the second beneficiary was provided to acquire a home in 20XX-XX income year. The terms and conditions of this loan prescribed that no interest was payable, nor were any repayments required. The Deceased’s will direct the executors to release and forgive this loan and to discharge the mortgage.
The last will and testament of the deceased was provided.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 302-195
Income Tax Assessment Act 1997 Section 302-200
Reasons for decision
The Beneficiaries are ‘death benefits dependants’ of the Deceased because they were dependants of the Deceased, as defined under section 302-195(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997), just before the Deceased died.
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
As the Beneficiaries are the children of the Deceased and are aged more than 18 years, it must be established that they were ‘dependants’ of the Deceased just before the Deceased died.
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.
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 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, 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 [son] 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 son had been significant. The son 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.
As the Beneficiaries only received one source of income, which was insufficient, they relied on the Deceased to meet their basic living expenses.
The Beneficiaries were reliant on the regular continuous contributions from the Deceased to maintain their normal standard of living.
Therefore, the Beneficiaries are considered to have satisfied the requirements of section 302-195(1)(d) of the ITAA 1997 and are ‘death benefits dependants’ of the Deceased.