Private ruling: Taxation of superannuation death benefits
Date of advice: 12 September 2018
Published: November 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is a person (the Beneficiary) a death benefits dependant of a person who is deceased (the Deceased) in accordance with section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is the superannuation lump sum death benefit received by the Beneficiary from the Trustee of the Deceased Estate tax free in accordance with section 302-60 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No

Relevant facts and circumstances: The Deceased died in early 20XX. The Beneficiary is the sibling of the Deceased. The Deceased was diagnosed with brain cancer less than five years ago. The ongoing and progressive effects of this illness required ongoing care and support. The Deceased lived with their parent and, following their diagnosis, was cared for by the Beneficiary and the Deceased. The Beneficiary did not live with the Deceased. In 20XX, the Deceased was admitted to hospital for treatment. While the Deceased was in hospital, the parent passed away. It was the intention that the Deceased would move in with the Beneficiary. However, the rapid decline of the Deceased’s physical and cognitive health resulted in their transfer to palliative care. The Beneficiary provided the Deceased with ongoing financial and domestic support and personal care including: n shopping for groceries and medical supplies; n paying the electricity, telephone, water and strata bills for the Deceased’s residence; n visiting the Deceased in hospital and palliative care daily; n taking the Deceased to lunch to alleviate isolation; n monitoring the Deceased’s medications; n transporting the Deceased to and from hospital and medical appointments; n acting as the Deceased’s Enduring Guardian and Enduring Power of Attorney to manage the Deceased’s medical treatment and arrange their palliative care; n taking extended and short term leave from work to care for the Deceased. The Deceased’s superannuation fund paid a lump sum death benefit (the Benefit) to the Trustee of the Deceased Estate in 20XX. The Benefit was paid to the Beneficiary from the Deceased Estate.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 302-60 | Income Tax Assessment Act 1997 Section 302-195. | Income Tax Assessment Act 1997 Section 302-200. | Income Tax Assessment Act 1997 Subsection 995-1(1). | Income Tax Assessment Act 1997 Section 302-140. | Income Tax Assessment Act 1997 Section 302-145.

Reasons for decision: Summary: The Beneficiary is not a death benefits dependant of the Deceased because an interdependency relationship, as defined under section 302-200 of the ITAA 1997, did not exist between the Beneficiary and the Deceased, nor was the Beneficiary a dependant of the Deceased, just before the Deceased died. | Detailed Reasoning - Detailed reasoning: Subsection 302-195(1) of the ITAA 1997 defines a ‘death benefits dependant’ of person who has died as follows: (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 definitions of asterisked terms, see the Dictionary, starting at section 995-1. As paragraphs 302-195(1)(a) and (b) of the ITAA 1997 do not apply in this case, it must be established that the Beneficiary was in an ‘interdependency’ relationship’ with the Deceased or that the Beneficiary was a ‘dependant’ of the Deceased just before the Deceased died. | Detailed Reasoning - 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 the matters and circumstances which are to be considered in determining whether an interdependency relationship exists between two persons under that section may be specified in the regulations. To that effect, regulation 302-200.01 of the Income Tax Assessment Regulation 1997 (ITAR 1997) state 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 degree of emotional support; and (d) the extent to which the relationship is one of mere convenience. In this case, the facts do not indicate a relationship between a brother and a sister that may be treated as an interdependency relationship for the purposes of subsection 302-200(1) of the ITAA 1997. There is nothing to indicate a level of commitment to a shared life or a level of care above what would normally be expected between family members. It is expected that family members would provide emotional support in difficult times. There is no evidence to suggest that the Beneficiary and the Deceased were mutually committed to a shared life together. Instead, the Deceased had resided with their parent until that parent’s passing. Consequently, while it is accepted that the Beneficiary and the Deceased had a close sibling relationship, it is not considered that a close personal relationship existed between the Beneficiary and the Deceased as contemplated in paragraph 302-200(1)(a) of the ITAA 1997. As all the conditions of subsection 302-200(1) of the ITAA 1997 must be satisfied for an interdependency relationship to exist, an interdependency relationship between the Beneficiary and the Deceased did not exist because it has not been established that the Beneficiary and the Deceased had a close personal relationship just before the Deceased died. | Detailed Reasoning - Death Benefits Dependant: As the Beneficiary is not considered to be in an interdependency relationship with the Deceased, will must now consider whether the Beneficiary is a ‘dependant’ of the Deceased just before they died under paragraph 302-195(1)(d) of the ITAA 1997. | Detailed Reasoning - Meaning of ‘dependant’: The term ‘dependant’ is not defined in the ITAA 1997 therefore, it has its common law meaning. According to the Macquarie Dictionary , a ‘dependant’ is: 1.one who depends on or looks to another for support, favour, etc 2. a person to whom one contributes all or a major amount of necessary financial support. Butterworth’s Australian Legal Dictionary defines ‘dependant’ as ‘a person who depends on another, wholly or substantially’. 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. Handing down the decision in Re Malek v. Federal Commissioner of Taxation Case [1999] AATA 678; (1999) 42 ATR 1203, (1999) 99 ATC 2294, 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 person’s 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 Case [2000] AATA 8, (2000) 43 ATR 1273; 2000 ATC 129, Senior Member Fayle in considering the definition of dependant in relation to section 27AAA of the Income Tax Assessment Act 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 In the current case, the Deceased did not provide the Beneficiary with any financial support. Therefore, it cannot be said that the Beneficiary depended or relied on the support of the Deceased to maintain their normal standard of living at the time of the Deceased’s death. Consequently, the Beneficiary is not a death benefits dependant of the Deceased as defined in section 302-195 of the ITAA 1997. | Summary: As the Trustee of the Estate of the Deceased (the Estate) has received a superannuation death benefit payable ultimately to non-dependant beneficiaries, it is income to which the beneficiaries are not presently entitled and the trustee is liable to pay tax on that income. Therefore, as the Benefit represents a distribution of the corpus it is not included in the assessable income of the Beneficiary. | Detailed Reasoning - Detailed Reasoning: Section 302-60 of the ITAA 1997 applies to superannuation death benefits payments made directly to the Beneficiary. In this instance, the Benefit was paid to the Trustee of the Deceased Estate. Section 302-10 of the ITAA 1997 deals with superannuation death benefits paid to the Trustee of a Deceased Estate. Therefore, section 302-10 of the ITAA 1997 will apply to the Benefit. | Detailed Reasoning - Tax treatment of a death benefits payment made from a Deceased Estate to a non-dependant beneficiary: Subsection 302-10(3) of the ITAA 1997 states: To the extent that 1 or more beneficiaries of the estate who were not death benefits dependent s of the deceased have benefited, or may be expected to benefit, from the * superannuation death benefit: (a) the benefit is treated as if it had been paid to you as a person who was not a death benefits dependent of the deceased; and (b) the benefit is taken to be income to which no beneficiary is presently entitled. *To find the definition of asterisked terms, see the Dictionary, starting at section 995-1. Therefore, where a non- dependent beneficiary receives or will receive all or part of a superannuation death benefit payment, the trustee will be subject to tax on that part of the benefit paid or to be paid to the dependent as if it had been paid to that beneficiary. However, the dependent beneficiary is not presently entitled to the payment and the benefit does not form a part of their assessable income. Section 302-140 of the ITAA 1997 provides that the tax free component of a superannuation death benefit payment received by a non-dependent is not assessable income and is not exempt income. In relation to the taxable component of a death benefit payment, section 302-145 of the ITAA states the following: (1) If you receive a superannuation lump sum because of the death of a person of whom you are not a *death benefits dependent, the *taxable component of the lump sum is assessable income. Note: For taxable component , see Subdivision 307-C (2) You are entitled to a *tax offset that ensure that the rate of the incom e tax on the *element taxed in the fund of the lump sum does not exceed 15% (3) You are entitled to a *tax offset that ensure that the rate of the income tax on the *element taxed in the fund of the lump sum does not exceed 30% *To find the definition of asterisked terms, see the Dictionary, starting at section 995-1. As the Beneficiary is a non-dependant of the Deceased, the taxable component of the lump sum payments made by the Fund will be taxed as per the above rates. The taxable components of the payments are disclosed in the income tax return of the Estate. Once the payment is made from the Estate to the relevant beneficiary, it will not need to be included as assessable income in that beneficiary’s tax return as the payment represents a distribution of the Estate.