Private ruling: Superannuation death benefits dependant - financial dependency
Date of advice: 25 July 2024
Published: 2 September 2024
Ruling period: Year ended 30 June 2022
Date scheme commenced: xx/xx 2022

Ruling: Q1: Is the Beneficiary a death benefits dependant of the Deceased according to section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997), due to being a person who was a dependant of the Deceased just before he died? | A1: Yes. Summary The Beneficiary was a dependant of the Deceased just before he died. Paragraph 302-195(1) of the ITAA 1997 is satisfied and therefore, the Beneficiary is a death benefits dependent of the Deceased.

Relevant facts and circumstances: The Beneficiary is the adult child of the Deceased. The Deceased passed away on xx/xx 2022 (Date of Death). During the xxxx-xx income year, the Deceased's superannuation fund (the Fund) paid superannuation lump sums totalling $x,xxx,xxx to the Deceased's (the Estate). The Beneficiary applied for a private ruling on xx/xx 2024. The following statements have been made regarding the relationship between the Beneficiary and the Deceased: • The Estate is shared between the Deceased's family and friends. The Beneficiary's share of funds has been transferred to a testamentary trust, which was created in the Deceased's Will. • The Beneficiary did not live with the Deceased. • The Deceased provided full financial support throughout the Beneficiary's life. • The Beneficiary has required this financial support from the Deceased as XXX has been unable to maintain a job due to their significant health issues. • The Deceased provided the Beneficiary with a regular monthly allowance and additional lump sum payments. This financial support allowed the Beneficiary to maintain their normal standard of living. • Financial records of the xxxxxxx Family Trust (the Family Trust), which was controlled by the Deceased, illustrate the Beneficiary received the following amounts in the last five financial years: i. 2018 - $xxx,xxx ii. 2019 - $xxx,xxx iii. 2020 - $xxx,xxx iv. 2021 - $xx,xxx v. 2022 (up to Date of Death) - $xx,xxx • The purpose of the financial support was to enable the payment of necessities, including food and groceries, credit card debts, utilities, home repairs, private health insurance, medical and dental care, recreation, entertainment and motor vehicle transportation. • The Deceased provided the Beneficiary with the property which is their main residence. While the Beneficiary is the legal owner, the property was funded by the Family Trust. The Deceased did register a mortgage over the property, which is held by the Estate's Trustees, to ensure the capital was protected and controlled by the Deceased and the Trustees. • The Beneficiary does not derive any income or distributions from the Family Trust, nor does she own any investment properties or other significant assets. • The Deceased's Will created a capital protected testamentary trust (the Trust). While there are two beneficiaries (collectively, the Beneficiaries) to the Trust (the Beneficiary and their child), the Beneficiary (the Deceased's child) is the main beneficiary. • The Trust was created by the Deceased as a means to protect the Beneficiary's inheritance, as he was concerned about the child's welfare, and their ability to manage their own financial affairs. • During the Beneficiary's lifetime, the Trust must allocate annual amounts of $xxx,xxx to the Beneficiary, and $xx,xxx to the Beneficiary's child (both adjusted for CPI, and net of tax). • In each financial year, after the portions are allocated to the Beneficiaries, it is at the Trustees' discretion to determine the balance of the net income that will be paid to either or both of the Beneficiaries, or accumulated to the capital of the Trust. • The Trustee also has discretion to make loans to the Beneficiary, make contributions to a complying superannuation fund on behalf of the Beneficiary, or acquire an annuity or pension that provides for the payment of benefits to the Beneficiary. In support of the application, the Beneficiary provided the documentation listed below: • A statement from the Beneficiary's tax agent outlining: i. The distribution of the Estate; ii. An explanation of the Trust; and iii. The Beneficiary's background and their level of financial dependency on the Deceased • The Will of the Deceased, signed and dated xx/xx 2021 • Death Certificate of the Deceased, showing Date of Death as xx/xx 2022 • PAYG Payment Summary - Superannuation Lump Sum, from payer (the Fund) to payee (the Estate), totalling payment of $x,xxx,xxx as follows: i. Payment date xx/xx 2022; taxed element $ x,xxx,xxx; tax-free component $x, xxx,xxx; tax withheld $x ii. Payment date xx/xx 2022; taxed element $ xxx,xxx; tax-free component $ xxx,xxx; tax withheld $x iii. Payment date xx/xx 2023; taxed element $ xx,xxx; tax-free component $ xxx,xxx; tax withheld $x iv. Payment date xx/xx 2023; taxed element $xxx; tax-free component $xxx; tax withheld $x v. Payment date xx/xx 2023; taxed element $xx; tax-free component $xx; tax withheld $x • Bank statements for the Family Trust, covering the following periods: i. Account ending in xxxx: a. 1 July 2017 to 29 June 2018 b. 30 June 2018 to 28 June 2019 c. 29 June 2019 to 30 June 2020 d. 1 July 2020 to 30 June 2021 e. 1 July 2021to 28 February 2022 ii. Account ending in xxxx: a. 1 July 2017 to 29 June 2018 b. 30 June 2018 to 28 June 2019 c. 29 June 2019 to 30 June 2020 d. 1 July 2020 to 30 June 2021 e. 1 February 2022 to 28 February 2022 • Bank statements for the Beneficiary's account ending in xxxx, covering the following periods: a. 5 January 2021 to 4 March 2021 b. 5 March 2021 to 9 April 2021 c. 10 April 2021 to 4 May 2021 d. 5 May 2021 to 2 July 2021 e. 3 July 2021 to 4 January 2022 f. 5 January 2022 to 15 February 2022 • The provided bank statements contain the following transactions, all of which represent transfers from the Family Trust account ending in xxxx to the Beneficiary's account ending in xxxx, verified by bank statements for both parties: i. 8 February 2021 - $x,xxx ii. 22 February 2021 - $x,xxx iii. 9 March 2021 - $x,xxx iv. 22 March 2021 - $x,xxx v. 6 April 2021 - $x,xxx vi. 19 April 2021 - $x,xxx vii. 3 May 2021 - $x,xxx viii. 17 May 2021 - $x,xxx ix. 31 May 2021 - $x,xxx x. 15 June 2021 - $x,xxx xi. 28 June 2021 - $x,xxx xii. 12 July 2021 - $x,xxx xiii. 28 July 2021 - $x,xxx xiv. 9 August 2021 - $x,xxx xv. 23 August 2021 - $x,xxx xvi. 6 September 2021 - $x,xxx xvii. 20 September 2021 - $x,xxx xviii. 4 October 2021 - $x,xxx xix. 18 October 2021 - $x,xxx xx. 1 November 2021 - $x,xxx xxi. 15 November 2021 - $x,xxx xxii. 29 November 2021 - $x,xxx xxiii. 13 December 2021 - $x,xxx xxiv. 29 December 2021 - $x,xxx xxv. 10 January 2022 - $x,xxx xxvi. 24 January 2022 - $x,xxx xxvii. 7 February 2022 - $x,xxx • The statements also show the following deposits into the Beneficiary's account, which the Beneficiary claims are from the Deceased: i. xx/xx 2021 - $x,xxx 'Cash and/or Cheque Deposit' ii. xx/xx 2021 - $x,xxx 'Cheques Deposit' • Bank statement for the Family Trust, for period xx/xx 2018 to xx/xx 2018 (account ending xxxx) showing the withdrawal of $xxx,xxx.xx on xx/xx 2018, purportedly for the settlement of the property at xxxx. • Excel spreadsheet of transactions from the Family Trust accounts ending in xxxx and xxxx, highlighting both electronic funds transfer (EFT) and cheque transactions covering the financial years 2018 to 2022. • Cheque book butts from funds the Deceased provided to the Beneficiary (accounts ending in xxxx and xxxx), covering financial years 2018 to 2020, as follows: i. 21 July 2017 - $x,xxx (Payee 'xxxx) ii. 28 August 2017 - $x,xxx (Payee 'xxxx) iii. 20 September 2017 - $x,xxx iv. 26 September 2017 - $x,xxx (Payee 'xxxx) v. 5 October 2017 - $x,xxx vi. 14 October 2017 - $x,xxx (Payee 'xxxx) vii. 10 October 2017 - $x,xxx viii. 20 November 2017 - $x,xxx (Payee 'xxxx') ix. 19 December 2017 - $x,xxx (Payee 'xxxx) x. 21 December 2017 - $x,xxx (Payee 'xxxx') xi. 10 January 2018 - $x,xxx (Payee 'xxxx') xii. 14 March 2018 - $x,xxx xiii. 15 March 2018 - $x,xxx (Payee 'xxxx') xiv. 9 April 2018 - $x,xxx (Payee 'xxxx') xv. 26 July 2018 - $x,xxx (Payee 'xxxx') xvi. 1 March 2019 - $x,xxx (Payee 'xxxx') xvii. 11 July 2018 - $x,xxx xviii. 23 July 2018 - $x,xxx (Payee 'xxxx') xix. 22 August 2018 - $x,xxx (Payee 'xxxx'') xx. 12 September 2018 - $x,xxx xxi. 12 September 2018 - $x,xxx (Payee 'xxxx') xxii. 22 September 2018 - $x,xxx xxiii. 22 September 2018 - $x,xxx xxiv. 4 October 2018 - $x,xxx (Payee 'xxxx) xxv. 7 October 2018 - $x,xxx (Payee 'xxxx) xxvi. 18 October 2018 - $x,xxx xxvii. 24 October 2018 - $x,xxx xxviii. 3 December 2018 - $x,xxx (Payee 'xxxx) xxix. 20 December 2018 - $x,xxx (Payee 'xxxx) xxx. 4 January 2019 - $x,xxx xxxi. 12 January 2019 - $x,xxx (Payee 'xxxx) xxxii. 13 January 2019 - $x,xxx (Payee 'xxxx') xxxiii. 1 March 2019 - $x,xxx (Payee 'xxxx') xxxiv. 31 May 2019 - $x,xxx (Payee 'xxxx') xxxv. 30 June 2019 - $x,xxx xxxvi. 11 July 2019 - $x,xxx xxxvii. 13 August 2019 - $x,xxx xxxviii. 11 September 2019 - $x,xxx xxxix. 11 September 2019 - $x,xxx xl. 16 September 2019 - $x,xxx xli. 15 October 2019 - $x,xxx xlii. 28 October 2019 - $x,xxx xliii. 11 November 2019 - $x,xxx xliv. 8 January 2020 - $x,xxx xlv. 9 February 2020 - $x,xxx • Original Trust Deed for The Family Trust (formerly xxxx Family Trust), signed and dated xx/xx 1985, between settlor xxxx and Trustee xxxx. • Deed of Variation - Guarantee and mortgage matters, dated xx/xx 1985 • Deed of Variation - name change from xxxx Family Trust to xxxx Family Trust, dated xx/xx 2006, and signed by the Deceased as sole director and sole secretary of xxxx (trustee for The Family Trust). • Grant of Probate granted by the Supreme Court of Victoria Registrar of Probates, to xxxx and xxxx dated and signed xx/xx 2023 • Loan Agreement between the Deceased (Lender) and the Beneficiary (Borrower) signed and dated xx/xx 2018, in relation to the acquisition of the xxxx property, in the amount of $xxx,xxx plus all costs of acquisition. The loan agreement also references the following: i. funds being advanced from the Lender to the Borrower, to acquire the property at xxxx as her main residence ($x,xxx,xxx plus stamp duty and other costs of acquisition) ii. funds being advanced from the Lender to the Borrower, for various other expenses, in the amount of $x,xxx,xxx, up to xx/xx 2017 iii. funds being advanced from the Lender to the Borrower to renovate the xxxx property, and other accommodation, totalling approximately $xxx,xxx • Mortgage Agreement for xxxx, between Deceased and Beneficiary, dated xx/xx 2018 • Copy of Certificate of Title - xxxx, showing the Beneficiary as the sole proprietor and the Deceased as the mortgage holder • Copy of Certificate of Title - xxxx, showing the Beneficiary as the sole proprietor and the Deceased as the mortgage holder • Application by legal personal representatives xxxx and xxxx to transfer the mortgage for the property xxxx from the Deceased to the executors • Registration Confirmation Statement from Department of Environment, Land, Water and Planning showing Beneficiary as the registered sole proprietor and xxxx as the mortgage holder • Invoices for work at xxxx, totalling $xxx,xxx, dated from xx/xx 2018 to xx/xx 2019. Payment of invoices correlates with bank transfers from the Deceased's account, split over numerous dates in account ending xxxx • Email chain between xxxx Lawyers and the Deceased regarding the property settlement for xxxx • Bank cheques for the purchase of xxxx. Purchase price correlates with bank transfer from the Deceased's account ending in xxxx on xx/xx 2018. • Excerpt (page 4) from a Bank Cash Ledger for xxxx (xxxx A/c) showing the following additions to portfolio: i. xx/xx 2022 - $x,xxx,xxx ii. xx/xx 2022 - $xxx,xxx

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 302-10 | Income Tax Assessment Act 1997 Section 302-60 | Income Tax Assessment Act 1997 Section 302-145 | Income Tax Assessment Act 1997 Section 302-195 | Income Tax Assessment Act 1997 Section 302-200 | Income Tax Assessment (1997 Act) Regulations 2021 Section 302-200.01 | Income Tax Assessment (1997 Act) Regulations 2021 Section 302-200.02 | Taxation Administration Act 1953 Schedule 1Section 12-85

Reasons for decision: Detailed Reasoning - Meaning of death benefits dependant: Division 302 of the 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 and whether the amount is paid as a lump sum superannuation death benefit or a superannuation income stream death benefit. A superannuation death benefit is defined in section 307-5 of the ITAA 1997 as: a. A payment to you from a superannuation fund, after another person's death, because the other person was a fund member. 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, as defined in section 307-70 of the ITAA 1997. The taxable component of a superannuation death benefit paid as a lump sum to a non-dependant beneficiary is assessable income and is taxed under section 302-145 of the ITAA 1997. Where a person who was a dependant of the deceased receives a superannuation death benefit paid as a lump sum, the death benefit is not assessable income and is not exempt income, under section 302-60 of the ITAA 1997. 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 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. As the Beneficiary is the adult child of the Deceased, paragraphs 302-195(1)(a) and (b) of the ITAA 1997 are not applicable. The Beneficiary and the Deceased did not live together, as is required by paragraph 302-200(1)(b) of the ITAA 1997, therefore the interdependency relationship requirements of paragraph 302-195(c) of the ITAA 1997 are not satisfied. It is therefore necessary to consider if the Beneficiary was a dependant of the Deceased just before he died, as per paragraph 302-195(1)(d) of the ITAA 1997. The definition of death benefits dependant does not stipulate the nature or degree of dependency required to be a dependant of the Deceased person in paragraph 302-195(1)(d) of the ITAA 1997. However, it is generally accepted that this paragraph refers to financial dependence. There are a number of case law decisions that specify what is required to establish financial dependency. Specifically, the definition of dependency was addressed and interpreted in the High Court case of Kauri Timber Co (Tasmania) Pty Ltd v. Reeman (1973) 47 ALIR 184 (Kauri Timber) ; Gibbs J, in speaking to previous cases on the issue of dependency stated that: The principle underlying these authorities is the actual fact of dependency or reliance on the earnings of another for support that is the test. This was also reflected in Edwards v Postsuper Pty Ltd [2007] FCAFC 83 where the Full Court of the Federal Court agreed with the Tribunal that while the deceased provided many gifts to his family, it did not consider that would make the appellants and their family financially dependent on the deceased. Senior Member Pascoe in Re Malek v Federal Commissioner of Taxation [1999] AATA 678 (Malek) in providing his view on the meaning of dependence stated: 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. Further, in Malek , the evidence provided demonstrated that the Deceased was responsible for the mortgage repayments, maintenance and other expenses of the residence in which both the Deceased and the dependant lived. The Tribunal considered that the amounts provided by the Deceased were significant. In this case, the Deceased provided the Beneficiary with the relevant financial support required for the Beneficiary to maintain their normal standard of living. Evidence provided (as documented in the Facts above), shows a pattern of regular and continuous financial support during the period prior to the Deceased's passing. This support was provided from the bank accounts of xxxx, as (corporate) trustee for The Family Trust, the Deceased having all his personal funds placed within the trust. The Deceased was the sole director of the corporate trustee. Tax office records show that the Beneficiary was not employed and has had no previous income, either from an employer or from Centrelink benefits. Tax office records show welfare single parent welfare payments from 20XX to 20XX. The regular payments the Deceased made to the Beneficiary covered all their living expenses. In addition, the Deceased loaned the Beneficiary significant funds to purchase their home. In 20XX, the Deceased provided the Beneficiary funds to acquire their previous home at xxxx. The Deceased provided the Beneficiary further funds to purchase their current residence at xxxx. Both property purchases were in accordance with the provided loan agreement, which imposed no requirements on the Beneficiary to make any repayments. The Deceased also signed mortgage documents (as the mortgagee) for both properties. The Deceased made further payments for the maintenance of, and renovations to, the Beneficiary's current residence, totalling $xxx,xxx. The invoices provided stated the nature of the renovations completed. Family Trust bank statements provided show transactions which correlate with the costs outlined in the invoices. While the provided Certificate of Title bears no address, the land description has been confirmed by tax office records as being xxxx. This is the same address as that found on the Beneficiary's bank statements and can be confirmed as their place of residence. According to tax office records, the Beneficiary is the sole owner of this property. | Detailed Reasoning - Conclusion: Based on the evidence provided, the Commissioner is satisfied that the Beneficiary is a person who was substantially reliant on regular and continuous financial support from the Deceased, for their ordinary living expenses, supporting the test in Kauri Timber . As a result, paragraph 302-195(1)(d) of the ITAA 1997 is satisfied, and the Beneficiary is a death benefits dependant of the Deceased. | Detailed Reasoning - Other Relevant Comments: Division 12 of Schedule 1 to the Taxation Administration Act 1953 (TAA) sets out payments from which amounts must be withheld. In particular, section 12-85 of Schedule 1 to the TAA states: An entity must withhold an amount from any of the following payments it makes to an individual: (a) a *superannuation lump sum; (b) a payment that is an *employment termination payment or would be one except that it is received more than 12 months after termination of employment. Under section 302-10 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 estate, that is, whether they are dependants or non-dependants of the deceased (for tax purposes). It is the responsibility of the legal personal representative to withhold/pay any superannuation death benefits tax from the deceased estate before it is distributed. If a trustee of a deceased estate receives a lump sum death benefit and all of the beneficiaries that have benefitted (or may be expected to benefit) from the benefit are dependants of the deceased, the entire benefit will be tax free to the estate. This is because the taxable component of such a benefit is not assessable income or exempt income, as per section 302-60 of the ITAA 1997. If, however, any part of the superannuation death benefit is payable under the will or on intestacy to a beneficiary who does not fall within that definition, the legal personal representative/trustee of the deceased estate will be responsible for withholding tax from the superannuation death benefit in accordance with section 12-85 of Schedule 1 to the TAA. Under section 302-145 of the ITAA 1997, if the beneficiaries that have benefitted (or may be expected to benefit) from the lump sum death benefit are not dependants, they will be subject to tax (on the taxable component) at the rates of 15% for the taxed element, and 30% for the untaxed element. Any tax free component will not be subject to tax. Where those who have benefitted (or are expected to benefit) include a mix of dependants and non-dependants of the deceased, a proportionate approach is required. Trustees must assess what part of the benefit was paid, or is expected to benefit, each beneficiary proportionate to the total benefit. The assessment must be based on a reasonable view of the facts known at the time, by 30 June of the year in which the payment is received. This requires a consider the nature and identity of each beneficiary, the trustees' level of knowledge at the time, as well as any other circumstances pertaining to the payment. This assessment is to be made only in relation to the lump sum death benefit itself and not income earned from it. For example, if the benefit is paid to a testamentary trust created under a will, only capital entitlements, rather than income entitlements, are to be considered. The proportionate approach only contemplates the benefit ultimately payable to the beneficiary or beneficiaries, and therefore doesn't take account of any part of the estate used to meet administration fees and costs. Note also that there is a proportioning rule that ensures that relevant components of a lump sum benefit can't be streamed to particular beneficiaries. Under the proportioning rule, the tax free and taxable components of the member's super benefit are taken to be paid in the same proportion as the tax free and taxable components of the member's interest in the super fund. For example, if 30% of a member's super interest consists of a tax free component and 70% consists of the taxable component, the benefit paid from it must also have a 30% tax free component and a 70% taxable component. The proportioning rule prevents a member choosing which components to withdraw when a super benefit is paid. This means that they cannot choose to withdraw just the tax free component. The proportioning rule is modified for super lump sum benefits that contain an untaxed element. Where the super interest existed just before 1 July 2007, a modified version of the proportioning rule is used to determine the tax free and taxable components, taking into account the crystallisation of the pre-July 1983 component. The tax free component for an untaxed element is only calculated when a lump sum benefit is withdrawn from the fund or rolled over into a taxed super fund. The modification to the proportioning rule means that the tax free component of the benefit is increased, and the untaxed element is reduced, by the lesser of the following amounts: • the amount worked out by applying the formula below, and • the amount of the untaxed element Original tax free component and untaxed element × No. of pre-July 1983 days in service period ÷ Total no of days in service period The proportioning rule does not apply to benefits that consist entirely of a tax free or taxable component. These include: • super co-contribution payments made up of a tax free component only • super guarantee payments made up of a taxable component only • contribution-splitting payments made up of a taxable component only.