Private ruling: Superannuation death benefits - Dependency
Published: July 2013
Ruling period: For the year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Is your client a death benefits dependant in accordance with section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)? Advice/Answer No.

Relevant facts and circumstances: The deceased is an adult child of your client. The deceased moved out of the family home several years ago and was not living with your client prior to and at the time of the deceased's death. The deceased died intestate during the relevant year income year. Your client provided the deceased with support and was authorised to act on the deceased's behalf regarding dealings with various companies. No assets were held jointly by the deceased and your client. Your client would often deposit money into the deceased's bank account to help cover bills and expenses. Your client was not financially dependent on the deceased. The deceased's taxable income for the 200X, 200Y and 200Z income years have been provided. Your client's taxable income for the 200X, 200Y and 200Z income years have been provided. For the relevant income year, your client was in receipt of a carer's payment for looking after a parent. After the deceased's death, a super unclaimed payment was made to the deceased's estate. Your client was advised by a fund that after considering all the objections received to their original decision, the trustee has reconsidered that on receipt of a deed, a specified percentage of the benefit will be distributed to your client as the deceased's non-dependant and a specified percentage to another non-dependant person. PAYG Superannuation lump sum - Payment summaries were made to your client from several superannuation funds during the relevant and subsequent income years which included taxable components - taxed elements and untaxed elements with amounts of tax withheld. In late 200Z, a fund confirmed that an amount was deposited to your client's nominated bank account.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 27AAA. | Income Tax Assessment Act 1936 Section 27AAB. | Income Tax Assessment Act 1997 Division 302. | 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)(a). | Income Tax Assessment Act 1997 Paragraph 302-195(1)(b). | Income Tax Assessment Act 1997 Paragraph 302-195(1)(c). | Income Tax Assessment Act 1997 Paragraph 302-195(1)(d). | 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(2)(a). | Income Tax Assessment Act 1997 Paragraph 302-200(2)(b). | Income Tax Assessment Act 1997 Paragraph 302-200(2)(c). | Income Tax Assessment Act 1997 Subsection 302-200(3). | Income Tax Assessment Act 1997 Paragraph 302-200(3)(b). | Income Tax Assessment Act 1997 Subsection 302-145(1) | Income Tax Assessment Act 1997 Subsection 302-145(2) | Income Tax Assessment Act 1997 Subsection 302-145(3) | Income Tax Assessment Act 1997 Subsection 995-1(1). | Income Tax Regulations 1936 8A . | Income Tax Regulations 1997 Regulation 302-200.01(2)

Reasons for decision: Summary: Your client was not in an interdependency relationship with the deceased and was not financially dependant on the deceased prior to or at the time of the deceased's death. Therefore, your client is not a death benefits dependant of the deceased. Consequently, the taxable components of the superannuation death benefits are assessable to your client and subject to taxation. Your client is entitled to a tax offset on the taxable components that ensures the rate of tax payable will not exceed 15% plus Medicare levy on the element taxed in the funds and 30% plus Medicare levy on the element untaxed in the funds. | Detailed Reasoning - Detailed reasoning: Division 302 of the Income Tax Assessment Act 1997 (ITAA 1997), which has replaced former section 27AAB of the of the Income Tax Assessment Act 1936 , 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. 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. | Detailed Reasoning - Interdependency relationship: Under subsection 302-200(1) of the ITAA 1997 an interdependency relationship is defined as: Two persons (whether or not related by family) have an interdependency relationship under this section 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(2) of the ITAA 1997 states: In addition, 2 persons (whether or not related by family) also have an interdependency relationship under this 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, above, states that the regulations may specify the matters that are, or are not, to be taken into account in determining whether 2 persons have an interdependency relationship under subsections 302-200(1) and (2). Paragraph 302-200(3)(b) states that the regulations may specify the circumstances in which 2 persons have, or do not have an interdependency relationship under subsections 302-200(1) and (2). Regulation 302-200.01(2) of the Income Tax Regulations 1997 (ITR 1997) which has replaced former regulation 8A of the Income Tax Regulations 1936 (ITR 1936) 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. All of the conditions in subsection 302-200(1) of the ITAA 1997, or alternately both the condition in paragraph 302-200(1)(a) and the condition in subsection 302-200(2), must be satisfied for the taxpayer to be able to claim that he or she has an interdependency relationship. It is proposed to deal with each condition in turn. | Detailed Reasoning - 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. 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 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 (for example 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 the Explanatory Statement to the Income Tax Amendment Regulations 2005 (No. 7) which inserted former regulation 8A of the ITR 1936, it stated that: Generally speaking, it is not expected that children will be in an interdependency relationship with their parents. A close personal relationship as specified in subsection 302-200(1) of the ITAA 1997 would not normally exist between parents and their children because there would not be a mutual commitment to a shared life between the two. In addition, the relationship between parents and their adult children would be expected to change significantly over time. It would be expected that the adult child would eventually move out and secure independence from their parents. In this case, the deceased is an adult child of your client. Clearly a familial relationship existed prior to, and at the time of the deceased's death. Your client provided the deceased with support and was authorised to act on the deceased's behalf regarding dealings with various companies. The relationship between your client and the deceased was a normal familial relationship for an adult child. Whilst both your client and the deceased may have intended to remain an important part of each others lives, it is reasonable to assume that the relationship would have changed significantly over time. Your client was working and earning income, and provided some financial support to the deceased where necessary. While providing financial assistance to the deceased, your client did not share ownership of assets with the deceased. Furthermore, the deceased was working and earning income prior to the deceased's death. The above provides evidence that the deceased was, independent from your client. Accordingly, the deceased's relationship with your client was such that it cannot be said that there was a mutual commitment to a shared life. It is noted that your client and the deceased provided each other with emotional support and companionship. This however, in itself does not necessarily indicate a close personal relationship to share one's life with another on all levels but reflects the bonds one would expect in a normal familial relationship. No evidence was provided of a closeness of relationship between your client and the deceased that goes beyond a normal parent/adult child relationship. Although there are some aspects of a close personal relationship evident between the deceased and your client, it is considered that overall the relationship between them is not of the type envisioned by the legislation. In light of the foregoing, it is not accepted that a close personal relationship existed between your client and the deceased at the time of the deceased's death as envisaged by paragraph 302-200 (1)(a) of the ITAA 1997. | Detailed Reasoning - Living together:: The second requirement to be met is specified in paragraph 302-200(1)(b) of the ITAA 1997, and states that two persons live together. The facts show that prior to and at the time of the deceased's death your client and the deceased were not living together therefore the requirement specified in paragraph 302-200(1)(b) of the ITAA 1997 has not been satisfied. | Detailed Reasoning - Financial support:: The third requirement to be met is specified in paragraph 302-200(1)(c) of the ITAA 1997, and states that one or each of these two parties provides the other with financial support. Unlike the situation prior to 1 July 2004 where financial dependency (substantial support) needs to be satisfied, 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. In this instance, both the existence and the level of financial assistance provided by your client to the deceased is established and it is not necessary to look at the level of financial support, but merely to establish that such support existed. Consequently, it is considered that paragraph 302-200(1)(c) of the ITAA 1997 has been satisfied in this instance. | Detailed Reasoning - Domestic support and personal care:: The fourth requirement to be met is specified in paragraph 302-200(1)(d) of the ITAA 1997, and states that one or each of these two persons provides the other with 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 services. Personal care services may commonly consist of assistance with mobility, personal hygiene and generally ensuring the physical and emotional comfort of a person. Consistent both with the ordinary meaning of the words 'domestic support and personal care' in the context of paragraph 302-200(1)(d) of the ITAA 1997, and with the meaning of these words as discussed in paragraph 2.16 of the SEM, there is no evidence to show that your client provided the deceased with domestic support or significant personal hygiene and personal care services. On the facts provided, it is considered that the requirement in paragraph 302-200(1)(d) of the ITAA 1997 has not been satisfied. | Detailed Reasoning - Application of subsection 302-200(2) of the ITAA 1997:: Essentially, this subsection ensures that where two people have a close personal relationship, however, because of the physical, intellectual or psychiatric disability of one of both of them, they do not satisfy one or more of the requirements in paragraphs 302-200(1)(b) to (d) of the ITAA 1997, they will still be considered to have an interdependent relationship. However, the initial mandatory requirements of subsection 302-200(1)(a)(b) and (d) of the ITAA 1997 has not been met, so consideration of subsection 302-200(2) is not necessary in this instance. | Detailed Reasoning - Interdependency relationship:: From the facts presented, it is clear that all of the requirements which are set out in subsection 302-200(1) of the ITAA 1997 have not been satisfied in this case. Consequently it is considered that your client and the deceased were not in an interdependency relationship. For payments made after 30 June 2007, if an interdependency relationship cannot be established, dependency based on financial dependency will need to be established. | Detailed Reasoning - Financial dependency: According to the Macquarie Dictionary , 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 8 ALR 455, Barwick CJ at 456). In Case [2000] AATA 8, 43 ATR 1273, Senior Member Fayle, in considering the definition of dependant in relation to 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 dependent 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, then the person cannot be regarded as a dependant. 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 her 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, would tend to 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] (1973) 47 ALJR 184; [1972-73] ALR 1266; (1973) 128 CLR 177 at (CLR) 180, 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 Malek v. Federal Commissioner of Taxation 42 ATR 1203, 99 ATC 2294 ( Maleks Case ), Senior Member Pascoe of the Administrative Appeals Tribunal (AAT) 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 her 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 Maleks Case , the evidence supplied by the taxpayer was able to demonstrate that the financial support received from her 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. Taking into account all of the above, it is considered that financial dependence occurs where a person is wholly or substantially maintained financially by another person. The point to be considered is whether the facts show that a person depended or relied on the earnings of the deceased for their day to day sustenance. If the financial support provided merely supplements to the person's income and represents quality of life payments, then it would not be considered substantial support. What needs to be determined is whether or not the person would be able to meet their daily basic necessities (shelter, food, clothing, et cetera) without the additional financial support. In this case, the deceased is an adult child of your client. Hence the point to be considered is whether the facts show that your client depended or relied on the deceased's earnings for your client's day to day sustenance at the time prior to the deceased's death. The facts provided show the following in relation to your client: · No assets were held jointly by the deceased and your client. · Your client was not financially dependent on the deceased as your client was earning income prior to and at the time of the deceased's death. · Your client provided the deceased with some financial assistance by depositing money into the deceased's bank account to help cover the deceased's bills. · Although the deceased was earning income prior to the deceased's death, there is no evidence to show that your client depended or relied on the deceased's earnings for your client's day to day sustenance. Whilst there is evidence to show that your client provided financial support to the deceased, there is no evidence of financial support provided by the deceased to your client. That is, your client was not substantially maintained or supported financially by the deceased. In view of the above it is considered your client was not financially dependant on the deceased at the time of the deceased's death. As your client was not financially dependant on the deceased, nor in an interdependency relationship with the deceased, just before the deceased's death, your client is not a death benefits dependant as defined under section 302-195 of the ITAA 1997. | Detailed Reasoning - Superannuation death benefits made to a non-dependant: The taxable component of a superannuation lump sum that you receive because of the death of a person of whom you are not a death benefits dependant is fully included in your assessable income under subsection 302-145(1) of the ITAA 1997. In the facts of this case, superannuation death benefits were made to your client in the relevant and subsequent income years. Your client is considered to be a non-dependant of the deceased. Therefore the superannuation death benefits received by your client will not attract the additional concession available to a 'death benefits dependant', but rather is assessable to your client according to the components. As noted above, the taxable components are fully included as assessable income in your client's tax return in the income year they are received in accordance with subsection 302-145(1) of the ITAA 1997. However, under subsections 302-145(2) and (3) of the ITAA 1997 your client is entitled to a tax offset on the taxable components that ensures the rate of tax payable will not exceed 15% plus Medicare levy on the element taxed in the funds and 30% plus Medicare levy on the element untaxed in the funds. The legislation itself is quite specific. It requires all the conditions set out in section 302-195 of the ITAA 1997 to be met. It does not contain a discretion that can be exercised by the Commissioner to allow the taxable components of the payments to be excluded from your client's assessable income.