Private ruling: Superannuation death benefits and interdependency relationship
Published: January 2012
Ruling period: Year ended 30 June 2011. | Year ending 30 June 2012.
Date scheme commenced: 1 July 2010.

Ruling: Q1: Will any part of the superannuation lump sum death benefits paid to the executor of a deceased estate be tax-free under section 302-60 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Was the beneficiary in an interdependency relationship with the deceased in accordance with section 302-200 of the ITAA 1997? | A2: No.

Relevant facts and circumstances: The deceased passed away during the middle of the 2010-11 income year. The deceased never married and was the sole parent of the beneficiary, the deceased's only child. The beneficiary was an adult at the time of the deceased's death, and is the sole beneficiary of the deceased's estate (the Estate). It has been advised that all the assets of the Estate, after the extinguishment of relevant liabilities, have been distributed to the beneficiary. It is stated that as the beneficiary was the deceased's child, and the beneficiary was over age 18 when the deceased passed away, the beneficiary is not a death benefits dependant of the deceased under either paragraph 302-195(1)(a) or paragraph 302-195(1)(b) of the ITAA 1997. The beneficiary's family consisted only of the beneficiary and the deceased, who was the beneficiary's mentor as well as the beneficiary's parent. The beneficiary often confided in the deceased and sought the deceased's advice for major life decisions. Both parties considered themselves to be a tight family unit, as most of the beneficiary's extended family reside outside of the metropolitan area except for one relative. The beneficiary never lived away from home before the deceased's death, and the beneficiary was living at the parent's residence at the time of the deceased's death. As such, the deceased and the beneficiary were living together at all times before the deceased's death. In the 2008-09 and 2009-10 income years and in the period from 1 July 2010 until the deceased's death, the deceased was employed. Details of the deceased's taxable income in the 2008-09, 2009-10 and 2010-11 income years were obtained. Prior to and at the time of the deceased's death, the beneficiary suffered from a medical condition and required regular specialist medical treatment. Also at this time, the beneficiary was employed as an apprentice and was studying for an apprenticeship. The beneficiary was required by their employers to have a motor vehicle as they worked at different jobs throughout the metropolitan area. The travel allowance the beneficiary received was not sufficient to cover the running and maintenance costs of their motor vehicle. At the time of the deceased's death, the beneficiary had not owned real estate, and it is stated that the beneficiary was not in a financial position to acquire a home. Details of the beneficiary's taxable income in the 2008-09, 2009-10 and 2010-11 income years were obtained. The beneficiary received no other non-taxable income in these income years. The deceased was responsible for meeting all the mortgage payments on their home and the payment of all household expenses including rates, insurance, electricity, telephone, food, etc. The deceased provided the beneficiary with clothing, food and housing. The deceased also paid for the beneficiary's private health insurance through a health fund. The beneficiary's income covered the running costs of their motor vehicle, their mobile phone and some incidental expenses. The deceased provided the beneficiary with financial assistance with the registration, insurance, service and other maintenance costs of their motor vehicle. In addition to providing the beneficiary with meals, the deceased supported the beneficiary domestically by cleaning the house and doing the beneficiary's laundry. In return, the beneficiary was responsible for looking after the gardens and performing repairs to the house. The deceased and the beneficiary served as the primary emotional support for each other. In the 2010-11 income year, a superannuation lump sum death benefit was paid in respect of the deceased by a fund trustee. A PAYG payment summary-superannuation lump sum for the 2010-11 income year discloses that the death benefit was paid to the Estate, and that no tax was withheld from the death benefit. The PAYG payment summary further shows that the death benefit was made up of a tax-free component and a taxable component - taxed element. In the 2011-12 income year, two superannuation lump sum death benefits were paid in respect of the deceased by another fund trustee. The PAYG payment summaries-superannuation lump sum for the 2011-12 income year for each death benefit disclose that each death benefit was paid to the Estate, and that no tax was withheld from either benefit. Each PAYG payment summary further shows that each benefit was made up of a taxable component - taxed element and a taxable component - untaxed element. The beneficiary has used a portion of these death benefits to extinguish the mortgage on the family home, and is now using the balance of the benefits to compliment their income.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 27AAB, | Income Tax Assessment Act 1936 Subsection 101A(3), | Income Tax Assessment Act 1997 Section 302-10, | Income Tax Assessment Act 1997 Subsection 302-10(1), | Income Tax Assessment Act 1997 Subsection 302-10(3), | Income Tax Assessment Act 1997 Paragraph 302-10(3)(b), | Income Tax Assessment Act 1997 Section 302-60, | Income Tax Assessment Act 1997 Section 302-140, | 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 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 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 Act 1997 Subsection 302-200(2), | Income Tax Assessment Act 1997 Section 307-5, | Income Tax Assessment Act 1997 Subsection 307-5(1), | Income Tax Assessment Act 1997 Section 307-65 and | Income Tax Assessment Act 1997 Subsection 995-1(1). Summary | It is considered that an interdependency relationship did not exist between the beneficiary and the deceased prior to the deceased's death. Therefore, it is considered that the beneficiary is not a death benefits dependant of the deceased. | The tax-free component of the superannuation death benefit paid by one fund trustee is not assessable income and is not exempt income in the hands of the Trustee of the Estate, and it is not included in the assessable income of the Estate for the 2010-11 income year. The taxable component-taxed element of this death benefit is assessable income in the hands of the Trustee of the Estate, and it is included in the assessable income of the Estate for this income year. | The taxable components of the death benefits paid by the other fund trustee are assessable income in the hands of the Trustee of the Estate, and these amounts are included in the assessable income of the Estate for the 2011-12 income year. | The non-dependant beneficiary is not liable to pay income tax on the amounts of each death benefit which were distributed from the Estate. | Detailed reasoning | Superannuation death benefits | 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 receiving the superannuation death benefit is a dependant of the deceased, and whether the death benefit is paid as a superannuation lump sum or as a superannuation income stream. The term 'death benefits dependant' is defined in subdivision 302-D of the ITAA 1997. | Superannuation lump sum | A superannuation lump sum is described in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream. | Section 307-5 of the ITAA 1997 defines what is a 'superannuation benefit'. Item 1, column 3 of the table contained in subsection 307-5(1) states a 'superannuation death benefit' is: | A payment to you from a superannuation fund, after another person's death, because the other person was a fund member. | The deceased passed away during the middle of the 2010-11 income year. As a result of the deceased's death, three superannuation lump sum death benefits were paid directly to the deceased's estate (the Estate) late in the 2010-11 income year and early in the 2011-12 income year. | Each death benefit was paid by the respective fund trustees after the deceased's death, because the deceased was a fund member. Therefore each benefit is a superannuation death benefit within the meaning of subsection 307-5(1) of the ITAA 1997. | 'Death Benefits Dependant' in relation to the superannuation death benefit | 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. | Subsection 302-195(1) of the ITAA 1997 defines a death benefits dependant to include a person with whom the deceased had an interdependency relationship under section 302-200 just before the deceased died (paragraph 302-195(1)(c)). | If an interdependency relationship existed between the beneficiary and the deceased in the period before the deceased's death, then the beneficiary will be a death benefits dependant of the deceased. | Interdependency relationship | The term 'interdependency relationship' is defined in section 302-200 of the ITAA 1997. Subsections 302-200(1) and 302-200(2) of the ITAA 1997 state: | Two persons (whether or not related by family) have an interdependency relationship under this section if: | · they have a close personal relationship; and | · they live together; and | · one or each of them provides the other with financial support; and | · one or each of them provides the other with domestic support and personal care. | In addition, 2 persons (whether or not related by family) also have an interdependency relationship under this section if: | · they have a close personal relationship; and | · they do not satisfy one or more of there requirements of an interdependency relationship mentioned in paragraphs (1)(b), (c) and (d); and | · the reason they do not satisfy those requirements is that either or both of them suffer from a physical, intellectual or psychiatric disability. | 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 conditions in subsection 302-200(2) of the ITAA 1997, must be satisfied for a person to be in an 'interdependency relationship' with another person just before the other person died. It is proposed to deal with each of the conditions in subsection 302-200(1) of the ITAA 1997 in turn. | Close personal relationship | The first requirement to be satisfied is specified in paragraph 302-200(1)(a) of the ITAA 1997. This provision states that two persons (whether or not related by family) must have a 'close personal relationship'. | A detailed explanation of the term 'close personal relationship' 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). This former provision dealt with interdependency relationships prior to 1 July 2007. Section 302-200 of the ITAA 1997 has replaced this former provision. According the SEM, a close personal relationship is one that involves a demonstrated and ongoing commitment to the emotional support and well-being of the parties concerned. Indicators of a close personal relationship may include: | · the duration of the relationship; | · the degree of mutual commitment to a shared life; | · the ownership, use and acquisition of property; and | · the reputation and public aspects of the relationship. | The facts show that a close familial relationship existed between the deceased and the beneficiary prior to, and at the time of, the deceased's death. | As noted in the facts, the deceased was a mentor to the beneficiary, who often confided in the deceased and sought the deceased's advice for major life decisions. The relationship between the beneficiary and the deceased was a normal familial relationship for a young person who was living with their parent. | However, of particular note is the following statement made in the Explanatory Statement (ES) to both the Superannuation Industry (Supervision) Amendment Regulations 2005 (No. 5) and the Income Tax Amendment Regulations 2005 (No. 7): 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. | Further, 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 facts did not show that the relationship which existed between the deceased and the beneficiary involves an ongoing mutual commitment a shared life. While both the deceased and the beneficiary may have intended to remain an important part of each other's lives, it is reasonable to assume that their relationship would have changed significantly over time. There is no evidence that the deceased and the beneficiary intended this relationship to be permanent. | Rather, it would be expected that the beneficiary would eventually move out the family home and secure independence from their parent once they were financially able to do so. | In addition, the deceased and the beneficiary did not jointly own and share property. The deceased made the mortgage payments on their home. | Both the deceased and the beneficiary considered themselves to be a tight family unit, providing financial and emotional support to each other. However, this would be typical of many parent/adult child relationships. | Therefore it is considered that whilst the relationship between the deceased and the beneficiary was one that a person would expect between a parent and an only child, it was not a close personal relationship as envisaged by paragraph 302-200(1)(a) of the ITAA 1997. | Consequently, it is considered that the requirement in paragraph 302-200(1)(a) of the ITAA 1997 has not been satisfied. | Cohabitation | The second requirement to be satisfied is specified in paragraph 302-200(1)(b) of the ITAA 1997, and it states that two persons (whether or not related by family) live together. | The facts show that the deceased and the beneficiary were residing together up until the time of the deceased's death. Therefore, the requirement in paragraph 302-200(1)(b) of the ITAA 1997 has been satisfied. | Financial support | The third requirement to be satisfied is specified in paragraph 302-200(1)(c) of the ITAA 1997, and it states that one or each of these two persons provides the other with financial support. | Unlike the situation where 'financial dependency' (substantial support) needs to be established, the requirement of '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 facts show that the deceased provided financial support to the beneficiary in the period prior to, and at the time of, the deceased's death. | Both the existence and the level of financial assistance provided by the deceased is established and it is not necessary to look at the level of financial support provided, but merely to establish that such support existed. | Therefore, it is considered that the requirement in paragraph 302-200(1)(c) of the ITAA 1997 has been satisfied. | Domestic support and personal care | The fourth requirement to be satisfied is specified in paragraph 302-200(1)(d) of the ITAA 1997, and it 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. | The term 'personal care' is also discussed by the New South Wales Supreme Court in Dridi v. Fillmore [2001] NSWSC 319 ( Dridi ). Master Macready stated, in regards to the term 'domestic support and personal care', that: | The expression [personal care] seems to be directed to a different level of reality such as assistance with mobility, personal hygiene and physical comfort. Such activities obviously however will include an element of emotional support… | However, it is the Commissioner's view that the wording of paragraph 2.16 of the SEM clearly envisages that a wider interpretation of what constitutes 'domestic support and personal care' is required, rather than the slightly narrower view given in cases such as Dridi . In this context the ES provides the following comment in respect of 'domestic support and personal care' as envisaged by paragraph 302-200(1)(d): | The preparation of a meal or assistance with medication when a person is unwell would not normally of itself satisfy this provision. More likely the kind of care and support normally provided in a close personal relationship would extend to constant care (for example, overnight), attending medical appointments with the person or the provision of personal and physical assistance where required. | The facts show that the deceased and the beneficiary provided domestic support to each other in the period prior to the deceased's death. | In addition to providing the beneficiary with meals, the deceased supported the beneficiary domestically by cleaning the house and doing the beneficiary's laundry. In return, the beneficiary was responsible for looking after the gardens and performing repairs to the house. | As noted above, the deceased and the beneficiary served as the primary emotional support for each other. | However, the facts show that the personal care both parties provided to each other during this period was not of the extent and nature envisaged by the legislation. | In light of the foregoing and in the context of both paragraph 2.16 of the SEM and the comment from the ES quoted above, it is considered that the requirement in paragraph 302-200(1)(d) of the ITAA 1997 has not been satisfied. | Application of subsection 302-200(2) of the ITAA 1997 | Subsection 302-200(2) of the ITAA 1997 will only apply where the requirement of paragraph 302-200(1)(a) is satisfied. | As discussed above, the requirement in paragraph 302-200(1)(a) has not been satisfied. | Accordingly, subsection 302-200(2) of the ITAA 1997 does not apply in this instance. | The beneficiary was not in an interdependency relationship with the deceased | In view of all the above, it is considered that an interdependency relationship in accordance with section 302-200 of the ITAA 1997 did not exist between the beneficiary and the deceased in the period just before the deceased's death. This is because the requirements specified in paragraphs 302-200(1)(a) and 302-200(1)(d) of the ITAA 1997 have not been satisfied. | Therefore the beneficiary is not considered to be a death benefits dependant of the deceased within the meaning of paragraph 302-195(1)(c) of the ITAA 1997. | As each benefit was received by the Estate after 1 July 2007, the provisions of Division 302 of the ITAA 1997 apply to each benefit. | Superannuation lump sum death benefit paid to a trustee of a deceased estate | Section 302-10 of the ITAA 1997 deals with superannuation death benefits paid to the trustee of the deceased estate. Subsection 302-10(1) of the ITAA 1997 states: | This section applies to you if: | (a) you are the trustee of a deceased estate; and | (b) you receive a superannuation death benefit in your capacity as trustee. | Each of these superannuation death benefits were paid to the Executor of the Estate. | Therefore section 302-10 of the ITAA 1997 will apply to the Trustee of the Estate in relation to each death benefit. | In accordance with section 302-10 of the ITAA 1997, where a person who is not a dependant will benefit from 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 (subsection 302-10(3) of the ITAA 1997). | Subsection 101A(3) of the ITAA 1936 brings into the assessable income of the trust estate the amount of a superannuation death benefit received after the death of a taxpayer that is included in the assessable income of a deceased taxpayer under Division 302 of the ITAA 1997. | The tax treatment of the superannuation death benefits paid to the Estate | The PAYG payment summary-superannuation lump sum for the superannuation death benefit paid by a fund trustee late in the 2010-11 income year discloses that the death benefit was made up of a tax-free component and a taxable component - taxed element. | The PAYG payment summaries-superannuation lump sum for the death benefits paid by another fund trustee early in the 2011-12 income year discloses that each benefit was made up of a taxable component - taxed element and a taxable component - untaxed element. | No tax was withheld from either of these superannuation death benefits. | The beneficiary is the sole beneficiary of the Estate. It has been advised that all the assets of the Estate, after the extinguishment of relevant liabilities, have been distributed to the beneficiary. It follows, therefore, that the entire amounts of each these death benefits have been distributed to the non-dependant beneficiary of the Estate. | Therefore in accordance with subsection 302-10(3) of the ITAA 1997, each death benefit is treated as a superannuation death benefit to which the provisions of subdivision 302-C of the ITAA 1997 will apply. Each superannuation death benefit can be received by a non-dependant beneficiary as a superannuation lump sum only. | Section 302-140 of the ITAA 1997 provides that where a person receives a tax-free component of a superannuation lump sum and the recipient was not a death benefits dependant of the deceased, the tax-free component of the superannuation death benefit is not assessable income and is not exempt income in the recipient's hands. | Hence it follows that the recipient is not liable to pay tax on the tax-free component. | Therefore in relation to the death benefit paid late in the 2010-11 income year, the tax-free component is not included in the assessable income of the Estate under section 302-10 of the ITAA 1997. | However, the taxable component - taxed element of the three death benefit payments made to the Estate is assessable income in the hands of the Trustee of the Estate under subsection 302-145(1) of the ITAA 1997. | Subsection 302-145(2) of the ITAA 1997 provides that the recipient is entitled to a tax-offset that ensures that the rate of income tax on the taxable component-taxed element does not exceed 15%. Therefore, the Trustee of the Estate is entitled to a tax-offset to ensure that the rate of tax payable on the taxable component - taxed element of the death benefits paid in both the 2010-11 income year and the 2011-12 income year, does not exceed 15%. | Subsection 302-145(3) of the ITAA 1997 provides that the recipient is entitled to a tax-offset that ensures that the rate of income tax on the taxable component - untaxed element does not exceed 30%. Therefore in the 2011-12 income year, the Trustee of the Estate is entitled to a tax-offset to ensure that the rate of tax payable on the total taxable component - untaxed element of the death benefits paid early in that income year, does not exceed 30%. | The extent to which the beneficiary will benefit from the death benefits | Under paragraph 302-10(3)(b) of the ITAA 1997, each death benefit is taken to be income to which no beneficiary is presently entitled. Accordingly, the beneficiary was not presently entitled to each death benefit at the time each benefit was received by the Estate. Therefore, each benefit does not form part of the beneficiary's assessable income. | The amounts of each death benefit which were distributed from the Estate to the non-dependant beneficiary are will not be taxable in the beneficiary's hands, because each of these amounts represent distributions to the beneficiary of the corpus of the Estate.


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