Edited version of your written advice

Authorisation Number: 1051498665309

Date of advice: 03 April 2019

Ruling

Subject: Death benefits dependant

Question

Is the Beneficiary a ‘spouse’ of the Deceased for the purposes of section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question

Is the Beneficiary a death benefits dependent of the Deceased for the purposes of 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 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Deceased passed away in 20CC.

The Deceased is survived by:

a. The Beneficiary, their fiancée.

b. A minor child with the Beneficiary.

c. Two adult children from a previous relationship.

The Deceased was a member of two superannuation funds:

a. The trustee of the first fund paid a sum to the executor of the estate as a death benefit lump sum payment.

b. The trustee of the second fund is yet to pay any death benefit payment.

The Deceased and the Beneficiary met in 20XX in Australia. They lived together for several months until the Beneficiary returned overseas following the expiration of their visa. From late 20XX until their death, the Deceased would frequently visit the Beneficiary overseas. The Deceased applied for a flexible working arrangement with their employer allowing them to spend a number of weeks every few months working from the overseas country. In 20XX, the Beneficiary was granted a Visa to return to Australia on a permanent basis, and they intended to marry at that time; however, the Deceased passed away before the permanent move could occur.

The Deceased provided the Beneficiary with financial support until their death. In 2014, relevant years, they would deposit funds every few months into a joint account held with the Beneficiary. From 20XX onwards, these payments increased in frequency and would occur almost monthly. The Deceased would also give the Beneficiary cash when they visited them overseas.

The Beneficiary did not work when they lived with the Deceased in Australia, or when they returned overseas. The Beneficiary was engaged full-time in caring for their child with the Deceased. They had no other source of income aside from the money provided by the Deceased.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1997 Subsection 302-195(1)

Income Tax Assessment Act 1997 Paragraph 302-195(1)(c)

Income Tax Assessment Act 1997 Subsection 302-200(1)

Income Tax Assessment Act 1997 Paragraph 302-200(1)(a)

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

Income Tax Assessment Act 1997 Paragraph 302-200(1)(c)

Income Tax Assessment Act 1997 Paragraph 302-200(1)(d)

Income Tax Assessment Act 1997 Subsection 302-200(2)

Income Tax Assessment Act 1997 Paragraph 302-200(3)(a)

Income Tax Assessment Regulations 1997 Subregulation 302-200.01(2)

Income Tax Assessment Regulations 1997 Regulation 302-200.02

All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Summary

The Beneficiary was not the spouse of the Deceased for the purposes of section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997).

The Beneficiary is considered a death benefits dependant of the Deceased as defined in subsection 302-195(1)(d), because they were financially dependent on the Deceased.

Detailed reasoning

Question 1

Division 302 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the taxation arrangements that apply to the payment of superannuation death benefits. 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 302-195(1) of the ITAA 1997 defines death benefits dependant as follows:

A death benefits dependant, of a person who has died, is:

(a) the deceased persons spouse or former spouse; or

(b) the deceased persons 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.

Section 995-1 of the ITAA 1997 provides that a spouse of an individual includes:

(a) another individual (whether of the same sex or a different sex) with whom the individual is in a relationship which is registered under *State law or *Territory law prescribed for the purposes of section 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section; and

(b) another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple.

In this case the parties did not register their relationship under State law or territory law, nor did they live together on a full time basis. While it is acknowledged the Deceased and the Beneficiary were engaged with the intention of marrying, at the time of the Deceased’s death the beneficiary was not a spouse of the Deceased and therefore (a) of the definition set out in subsection 302-195(1) does not apply.

Question 2

Superannuation death benefits paid to the trustee of a deceased estate

A superannuation death benefit, as defined in section 307-65 of the ITAA 1997, was paid to the Estate from one of the Deceased’s two superannuation funds. The trustee of the second fund is yet to pay any death benefit payment, but it is expected that this will also be paid to the Estate.

The beneficiaries of the deceased estate include, among others, the Beneficiary.

As the superannuation lump sum death benefit from the fund was made to the trustee of the Estate, section 302-10 of the ITAA 1997 will apply. In accordance with subsection 302-10(2) 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 deceased estate.

This means that, where a dependant of the deceased receives or will receive part or all of a superannuation death benefit, the lump sum will be subject to tax as if it were paid to a dependant of the deceased, and the death benefit is taken to be income to which no beneficiary is presently entitled (subsection 302-10(2) of the ITAA 1997).

Similarly, where a person who is not a dependant receives or will receive part or all of a superannuation death benefit, the benefit will be subject to tax as if it were paid to a non-dependant of the deceased to that extent, and the benefit is taken to be income to which no beneficiary is presently entitled (subsection 302-10(3) of the ITAA 1997).

Superannuation death benefits will be treated concessionally if dependants of the deceased will benefit from the estate. Where a person receives a superannuation lump sum death benefit and that person was a dependant of the deceased, the benefit is not assessable income and is not exempt income, that is, it is tax-free.

Death benefits dependant

Subsection 302-195(1) 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.

In this case, the facts show that for the purposes of subsection 302-195(1) the relevant provision that needs to be satisfied is paragraph 302-195(1)(d). That is, a relationship of financial dependency needs to be established between the Deceased and the Beneficiary just before the Deceased passed away.

Financial dependency

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 sole source of income was the contributions they received from the Deceased. Due to childcare responsibilities, the Beneficiary was not engaged in any outside employment.

The Deceased provided your client with financial support. In particular, the Deceased made regular lump sum payments during the relevant period in order to pay for the maintenance of their child and the Beneficiary’s living expenses (including rent, groceries and other household expenses).

The financial benefits provided to the Beneficiary were both regular and continuous, and were necessary for the Beneficiary to maintain her standard of living. Having no other income, the Beneficiary was substantially maintained and supported financially by the Deceased.

In view of the above it is considered the Beneficiary was financially dependent on the Deceased at the time of the Deceased's death, within the meaning in paragraph 302-195(1)(d) of the ITAA 1997.

Conclusion

As the Beneficiary was financially dependent on the Deceased, the Beneficiary is a death benefits dependant as defined under section 302-195 of the ITAA 1997.