Edited version of your written advice

Authorisation Number: 1051454663269

Date of advice: 21 December 2018

Ruling

Subject: Death Benefits

Question

Is the beneficiary a "death benefits dependent" of the deceased in accordance with section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2019

The scheme commences on:

1 July 201E

Relevant facts and circumstances

The Estate of the Deceased was created in 201D following the death of the Deceased.

In 201E an amount was paid to the estate from the Deceased’s superannuation fund.

The Deceased had nominated their in-law (the Beneficiary) as 100% beneficiary of their death benefit and sole beneficiary of their estate.

The Deceased and the Beneficiary met in 19XX.

During the Beneficiary’s separation from the Deceased’s sibling, the Deceased provided financial support to the Beneficiary in order to assist with both legal fees and household expenses.

It was understood that these amounts were not required to be repaid.

After the separation, the Deceased took on an active role in the lives of their X relatives, the Beneficiary’s children. They paid for a number of expenses in relation to the X children, including extra-curricular activities, tutoring and specialist appointments

The Deceased also provided support for the Beneficiary in relation to various household expenses, these have been included.

At the time of their death, the Deceased was planning to purchase the Beneficiary a new motor vehicle.

The Beneficiary was engaged in employment, and received Family Tax Benefit Part A and B, as well as child support payments from their ex-spouse. They did not have any other financial support in Australia, as their own family were located overseas.

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

Neither a relationship of interdependency nor a relationship of financial dependency, as defined under sub section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997), existed between the deceased and the beneficiary.

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 family member and friend of the Deceased, paragraphs 302-195(1)(a) and (b) are not applicable in relation to the Beneficiary.

You have contended that your client was a financial dependent of the Deceased, per paragraph 302-195(1)(d) of the ITAA 1997.

You have not provided any evidence to suggest that the Beneficiary was in an interdependency relationship with the Deceased. Nevertheless, for completeness, we will also consider whether the Beneficiary was a dependent of the Deceased just before she died, under paragraph 302-195(1)(c) of the ITAA 1997.

Interdependency

Section 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.

In accordance with subsection 302-195(2) of the ITAA 1997, two persons also have an ‘interdependency relationship’ under that 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 this case, the Beneficiary is the family member and friend of the Deceased. It is clear that a close family and personal relationship existed prior to, and at the time of the Deceased's death. The Deceased provided the Beneficiary with financial and emotional support and was closely involved with the lives of the Beneficiary and their children.

Overall, it is considered that the relationship between them is of the type envisioned by the legislation.

Accordingly, the first requirement specified in paragraph 302-200(1)(a) of the ITAA 1997 has been satisfied in this case.

Living together

The Beneficiary and the Deceased did not live together. This was not due to any physical, intellectual or psychiatric disability on the part of either the Beneficiary or the Deceased.

Consequently, it is considered that paragraph 302-200(1)(b) of the ITAA 1997 has not been 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.

The Deceased provided the Beneficiary with the financial support necessary to meet their household expenses plus the Beneficiary’s own personal expenses.

Therefore, it is considered that the Deceased provided financial support to the Beneficiary.

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

The Deceased did not provide the Beneficiary with any significant measure of domestic support services.

In view of the above it is considered that the requirement in paragraph 302-200(1)(d) of the ITAA 1997 has not been met.

While the Beneficiary meets some of the requirements of section 302-200 of the ITAA 1997, the section requires that all of the requirements are met. Therefore, the Beneficiary was not in an interdependency relationship with the Deceased.

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 the Beneficiary was a financial 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 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.

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

You have stated that the Beneficiary’s primary source of income is their wages as a business manager. In the 201C-17 income year, the Beneficiary earned a taxable income. Furthermore, during that income year the Beneficiary received child support payments and Family Tax Benefit payments.

The Deceased provided your client with financial support. In particular, the Deceased made lump sum payments during the 201A-1B financial year in order to assist with household expenses and legal fees. They paid for expenses in relation to the Beneficiary’s X children, including extra-curricular activities, tutoring and specialist appointments.

The Deceased also provided support for the Beneficiary in relation to various household expenses, these have been included.

At the time of their death, the Deceased was planning to purchase the Beneficiary a new motor vehicle.

Whilst the Deceased provided financial benefits to the Beneficiary, the support from the Deceased was neither regular nor continuous. Rather, the Deceased provided irregular amounts to the Beneficiary, 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 the Beneficiary. That is, the Beneficiary was not substantially maintained or supported financially by the Deceased.

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

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

Taxation of Death Benefits

As the Beneficiary is not a dependant of the Deceased for the purposes of section 302-195 of the ITAA 1997, the death benefit must be paid as a lump sum. The tax exempt component will be tax free. The taxable component of the payment will be entitled to a tax offset that ensures that the rate of income tax is as follows:

● taxed element – maximum of 15% plus Medicare levy

● untaxed element – maximum of 30% plus Medicare levy.