Edited version of private advice

Authorisation Number: 1051605106644

Date of advice: 17 December 2019

Ruling

Subject: Death benefit dependent

Question 1

Is the Trustee considered to be a "death benefits dependent" of the Deceased according to section 302-195 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2

Is the superannuation lump sum paid to the Trustee by the Estate exempt from income tax under section 302-60 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commenced on:

1 July 2018

Relevant facts and circumstances

The Beneficiary is the parent of the Deceased.

Prior to the Deceased's other parent passing away, the Deceased had lived with their parents their whole life. However, after the Deceased's other parent passed away in 20XX, they continued to reside at the family home with the Beneficiary.

The Deceased did not have any plans to move out of the family home, largely due to personal circumstances and the support the Beneficiary required, as well as their own personal financial circumstances.

Following the passing of the Deceased's other parent the Deceased and the Beneficiary became the sole occupants of the rural property.

As a result of the passing of the Deceased's other parent, the Deceased took over the responsibility for maintaining the property. As part of maintaining the property, the duties which the Deceased undertook were as follows:

·        mowing, slashing and fencing;

·        cleaning paddocks and gutters;

·        maintaining the chicken pen;

·        collecting firewood;

·        feeding the dogs;

·        mechanical maintenance work such as repairing the mower and maintaining pumps and chainsaws; and

·        other miscellaneous tasks.

In addition to the tasks mentioned above, the Deceased also took on the responsibility for the significant clean-up and repair work required after their property was flooded in 20XX.

The Beneficiary maintained the house, carried out general household duties such as cleaning, doing the shopping and preparing meals as required.

The Deceased also assisted with basic household duties at times, did thier own washing and ironing, assisted with meal preparation and carried out any heavy lifting.

During the spouse's illness and even more so following their death, the Beneficiary was heavily reliant on the Deceased for emotional support.

Specific examples of how the Deceased provided emotional support for the Beneficiary include:

·        Spending time together with the Beneficiary in the form of sharing meals, watching TV and talking and sharing memories of the Deceased's other parent.

·        Doing activities together with the Beneficiary such as shopping, attending family and social functions, camping and going out for dinner.

·        Assisting the Beneficiary with arranging transportation when required, for example to attend social gatherings and or car servicing and other appointments.

·        Providing the Beneficiary with regular advice and assistance around financial matters, property and car maintenance matters and technical matters around home appliances and technology including the internet.

·        Assisting the Beneficiary with making decisions around major purchases such as buying and selling a car and the arrangements around other parent's funeral service, burial and monument selection and wording.

The Deceased also provided the Beneficiary with a sense of safety and security, considering that they lived on a large rural property.

In terms of financial support, the Deceased paid weekly board to the Beneficiary. The Deceased commenced paying this board from 20XX until their death. No further financial contribution was required according to the Beneficiary as they wanted to provide financial support to the Deceased by assisting the Deceased save money for their financial future.

In 20XX, the Deceased passed away aged XX.

At the time of the Deceased's death, the Deceased resided with the Beneficiary on the family's rural property. According to our records, they both resided at the same address.

In 20XX, the Estate received a death benefit payment as a result of the Deceased's death. No tax was withheld on this payment.

In 20XX, the Estate made the death benefit payment to the Beneficiary.

Relevant legislative provisions

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)(c).

Income Tax Assessment Act 1997 Section 302-200.

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 Regulations 1997 Regulation 302-200.01.

Reasons for decision

Meaning of death benefits dependant

Subsection 302-195(1) of the ITAA 1997 defines 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 the asterisked terms, see the Dictionary, starting at section 995-1

As the Beneficiary is the parent of the Deceased, paragraphs 302-195(1)(a) and (b) of the ITAA 1997 do not apply in this case. Therefore, to conclude that the Beneficiary is a death benefits dependant of the Deceased, it must be established that the Beneficiary had 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 that matters and circumstances that are, or are not, to be taken into account in determining whether two persons have an interdependency relationship under that section may be specified in the regulations.

To that effect, regulation 302-200.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) states that in considering subparagraph 302-200(3)(a) of the ITAA 1997, matters to be taken into account are all the 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 reputation and public aspects of the relationship; and

(d)   the degree of emotional support; and

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

(f)     any evidence suggesting that the parties intend the relationship to be permanent; and

(g)   the existence of a statutory declaration signed by one 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.

Regulation 302-200.02 of the ITAR 1997 sets out the circumstances in which two persons have, or do not have, an interdependency relationship under section 302-200 of the ITAA 1997 and provides that interdependency relationship exists where:

·        two persons satisfy the requirements of paragraphs 302-200(1)(a) to (c) and one, or each of them, provides the other with support and care of a type and quality normally provided in a close personal relationship rather than by a friend or flatmate (for example, significant care provided for the other person when they are unwell or suffering emotionally).

·        two persons have a close personal relationship and they do not satisfy the other requirements set out in subsection 30-200(1) of the ITAA 1997 because they are temporarily living apart, for example, one of the persons is temporary working overseas, or two persons have a close personal relationship and they do not satisfy the other requirements set out in subsection 30-200(1) of the ITAA 1997 because either or both of them suffer from a disability.

Two persons do not, however, have an interdependency relationship if domestic support and personal care is provided by one person to the other under an employment contract or contract for services or on behalf of another person or organisation such as a charitable organisation (subregulation 302-200.01(5) of the ITAR 1997.

Explanatory Statement to the Income Tax Amendment Regulations 2005 (No 7) which introduced regulations that specified matters that are, or are not, to be taken into account in determining whether two people have an interdependency relationship for the purposes of former section 27AAB of the Income Tax Assessment Act 1936 (ITAA 1936) - the immediate predecessor of section 302-200 of the ITAA 1997 - states:

It is not necessary for each of the listed circumstances to be satisfied in order for an interdependency relationship to exist. There are circumstances in which it would be inappropriate to consider certain matters. For example, it would not be relevant to consider whether there was a sexual relationship when determining whether an interdependency relationship existed between siblings.

Each of the matters listed is to be given the appropriate weighting under the circumstances. The degree to which any matter is met or is present or not, as the case may be, does not necessarily of its own accord, confirm or preclude the existence of an interdependency relationship.

Generally speaking, it is not expected that children will be in an interdependency relationship with their parents.

Did the Beneficiary have a close personal relationship with the Deceased?

A close personal relationship, as specified in paragraph 302-200(1)(a) of the ITAA 1997, would not normally exist between parents and their children. This is because there would not be a mutual commitment to a shared life as an adult child's relationship with their parents would be expected to change significantly over time as the child moves out of home and seeks independence.

However, where unusual and exceptional circumstances exist, a relationship between a parent and an adult child may be treated as an interdependency relationship for the purposes of subsection 302-200(1) of the ITAA 1997.

In this situation, the Beneficiary is the parent of the Deceased. Taking into consideration that the Deceased had lived with the Beneficiary their whole life and their living arrangements became one of convenience to one of necessity as a result of the Deceased's other parent passing away, we consider that a close family relationship existed prior to, and at the time of the Deceased's death.

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

Did the Beneficiary live with the Deceased?

The term 'live' is not defined in the ITAA 1997 or the Regulations. According to the Macquarie Dictionary, the term 'live' means to dwell or reside. The term 'reside' is defined as the action of dwelling in a particular place permanently or for a considerable time.

According to the facts of this case, the Deceased and the Beneficiary both lived at the same address at the time of the Deceased's passing and the Deceased had no intention to move out of the family home in the near future.

Hence, in this case, paragraph 302-200(1)(b) of the ITAA 1997 is satisfied as the Deceased and the Beneficiary lived together at the time of the Deceased's death.

Did the Deceased provide the Beneficiary with financial support (or vice versa)?

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.

According to the facts presented, the Deceased provided financial support to the Beneficiary by paying board of $X per week from 20XX up until the Deceased's death.

However, this was a nominal amount on the basis of the Beneficiary wanting the Deceased to save money for their financial future, which is seen to be a form of financial support the Beneficiary provided for the Deceased.

In this case, as the Beneficiary and the Deceased provided each other with financial support, paragraph 302-200(1)(c) of the ITAA 1997 is satisfied.

Did the Deceased provide the Beneficiary with domestic support and personal care (or vice versa)?

Subregulation 301-200.02(1) of the Regulations provides that for the purposes of paragraph 302-200(1)(d) of the ITAA 1997, the support and care provided must be of a type and quality normally provided in a close personal relationship.

It has been established that the Deceased and the Beneficiary were in a close personal relationship for the purposes of paragraph 302-200(1)(a) of the ITAA 1997.

As per the facts of this case, the Deceased not only provided the Beneficiary with a type and quality of domestic support and personal care normally expected in a close personal relationship, but also at a level well beyond that of a typical relationship between a parent and an adult child.

Based on the level of domestic support and personal care provided by the Deceased to the Beneficiary, we consider that the requirement in paragraph 302-200(1)(d) of the ITAA 1997 has been satisfied.

Conclusion

As the conditions stipulated by subsection 301-200(1) of the ITAA 1997 have been satisfied, the Commissioner considers that there was a interdependency relationship and therefore the Beneficiary is a death benefits dependant in accordance with paragraph 302-195(1)(c) of the ITAA 1997.

Taxation of the lump sum death benefits paid to dependants

Section 302-60 of the ITAA 1997 provides that a superannuation lump sum 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.

In this case, as the Beneficiary is a death benefits dependant of the Deceased in accordance with paragraph 302-195(1)(c) of the ITAA 1997, the superannuation lump sum paid to the Beneficiary by the Estate is regarded as non-assessable income, non-exempt income under section 302-60 of the ITAA 1997.