Death benefit dependant: Can an interdependency relationship exist between deceased child and parent?

June 22, 2016

This article looks at whether a parent and deceased child can be in an interdependency relationship for the purpose of satisfying the definition of death benefit dependant in the Income Tax Assessment Act 1997 (Cth) ('ITAA97'). This article follows the AAT decision in TBCL and Commissioner of Taxation (Taxation) [2016] AATA 264 ('TBCL').
 
The facts of TBCL were as follows:
 

  •  On 5 June 2013, the son of Mr and Mrs TBCL was killed in a motorbike accident. At the time of his death he was 22 years old and was employed as a pilot. Mr and Mrs TBCL became the administrators of their deceased son’s estate.
  •  The son had lived with Mr and Mrs TBCL for all of his life except between 2007 and 2009 when he was studying interstate to become a pilot.
  •  The superannuation scheme of the employer of the son included a life insurance policy. In May 2014, the insurer of the life insurance policy paid the sum in the amount of $500,000 to the son’s estate.
  •  Mr and Mrs TBCL applied for a private binding ruling that the sum paid by the insurer was not assessable income because they were both death benefit dependants under s 302-60 of the ITAA97.

 
Before this matter reached the AAT, the Commissioner ruled that Mr and Mrs TBCL were not death benefit dependants of their son since the information provided in Mr and Mrs TBCL's ATO private binding ruling application did not satisfy the Commissioner that an interdependency relationship existed. The Commissioner's ruling was subsequently upheld by the AAT.
 
The AAT's comments in this matter are interesting. The AAT did not rule out that Mr and Mrs TBCL were death benefit dependants, but rather, and similar to the Commissioner, determined that Mr and Mrs TBCL's private binding ruling application did not have the requisite facts needed to satisfy the requirements in the ITAA97 that an interdependency relationship existed. At the conclusion of the decision, the AAT even went as far as to ask that the Commissioner request that Mr and Mrs TBCL make another private binding ruling application.
 
The AAT's decision in this matter raises the importance of making sure an ATO private binding ruling application contains specific facts that directly address the requirements under the ITAA97. Additionally and more importantly, the AAT's decision does not rule out the possibility that a parent can be a death benefit dependant of their deceased child. 
 
What is a death benefit dependant?
The starting point is why would a parent of a deceased child want to be a death benefit dependant? The reason: s 302-60 of the ITAA97, which provides that a superannuation lump sum received as a result of the death of a person of whom the recipient is a death benefits dependant is not assessable income nor is it exempt income.
 
This means that money paid out by the insurer in the case of TBCL would not be assessable income in the hands of the estate (and therefore indirectly his parents) if they were death benefit dependants.
 
This leads to the question, who then can be a death benefit dependant? A death benefit dependant is defined under s 302-195(1) of the ITAA97, which provides:
A death benefits dependant, of a person who has died, is:
 
the deceased person’s *spouse or former spouse; or 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.
 
If we look back at TBCL, the parents, for obvious reasons, would not be the spouse or the child of their son. For whether the deceased son satisfied s 302-195(1)(d) of the ITAA97, whether his parents were dependent on him, it is more likely that the deceased son was dependent on his parents and not the other way around. Hence the only clear avenue for Mr and Mrs TBCL to be a death benefit dependant was whether they were in an interdependency relationship with their son.
 
What is an interdependency relationship?
The definition of ‘interdependency relationship’ is found under s 302-200 of the ITAA97, which provides:
 
(1) 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.
 
Each of these requirements must be satisfied and importantly, must be true just before the death of the deceased person (see s 302-195(1)(c) of the ITAA97 above).
 
To assist with determining whether there is an interdependency relationship, reg 302-200.01 of the Income Tax Assessment Regulations 1997 (Cth) (‘ITAR97’) provides matters that should be taken into account in determining whether two people are in an interdependency relationship. It says:
 
(1) For paragraph 302-200(3)(a) of the Act, this regulation sets out matters that are to be taken into account in determining whether 2 persons have an interdependency relationship.
 
(2) The matters are:
(a) all of the circumstances of the relationship between the persons, including (where relevant):

  • the duration of the relationship; and
  • whether or not a sexual relationship exists; and
  • the ownership, use and acquisition of property; and
  • the degree of mutual commitment to a shared life; and
  • the care and support of children; and
  • the reputation and public aspects of the relationship; and
  • the degree of emotional support; and
  • the extent to which the relationship is one of mere convenience; and
  • any evidence suggesting that the parties intend the relationship to be permanent; and

(b) the existence of a statutory declaration signed by 1 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 with the other person.
 
In TBCL, the AAT looked at each of the above matters and found that that the facts presented to the Commissioner were not indicative of interdependency relationship. In particular, the AAT considered whether Mr and Mrs TBCL’s intention to convert their garage into a private living space would be captured within the ambit of reg 302-200.01(2)(a)(iii) of the ITAR97. Unfortunately for Mr and Mrs TBCL, the AAT noted that the intention to convert the garage was not within the ambit of the regulations, but rather what is captured is the actual use of the property just before death.
 
Furthermore, the requirement that the relationship was close personal relationship under s 302-200 of the ITAA97 was not satisfied since the AAT noted at paragraph 37 that:
 
[Mr and Mrs TBCL’s] reference to “love, care, affection and psychological assistance” does not refer to any facts which provide a basis for any indication that there was such a relationship
 
Of course, this requirement would be difficult to satisfy as most parent and child relationships would be of love, care and affection. But it should be borne in mind that when the interdependency provisions were drafted, they were drafted with same sex couples in mind. The then Prime Minister, the Hon John Howard MP explained in his Press Conference of 27 May 2004, that:
 
The change we’re announcing today will provide greater certainty for the payment of superannuation death benefits for those involved in interdependency relationships, including of course members of same sex relationships. 
 
Further, the explanatory statement to the Income Tax Amendment Regulations 2005 (No. 7) (Cth) which inserted reg 8A to the then Income Tax Regulations 1936 (Cth), stated that:
Generally speaking, it is not expected that children will be in an interdependency relationship with their parents.
 
While the above does make clear where the legislative intent was, it does not rule out the possibility of an interdependency relationship between parent and child.
 
Finally, the AAT’s comments in regards to domestic support and personal care are important as well. Both domestic and personal care, not one or the other, must have occurred just before death for s 302-200(1)(d) of the ITAA97 to be satisfied. Personal care is the harder test to satisfy since reg 302-200.02 of the ITAR97 requires that ‘1 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 mere friend or flatmate’. This is further elaborated by the examples provided in reg 302-200.02(2) of the ITAR97 which refer to ‘significant care’ when a person is unwell or suffering emotionally. Of course, in TBCL, no facts were presented to suggest that either Mr or Mrs TBCL provided significant personal care to their son in the manner stipulated by the regulations or vice versa.
 
Can an interdependency relationship exist between adult child and their deceased parent?
 
Yes. The requirements that need to be satisfied will still be the same.
 
Conclusion
 
This article has only covered one aspect of who can be a death benefit dependant under s 302-60 of the ITAA97. There are of course other relationships and facts that may assist in establishing an independency relationship between two people, including if one of those people had a disability.
 
As always, you should seek the opinion of a legal practitioner who practices in SMSF law and can advise whether an interdependency relationship exists. 
 
*        *        *
 
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Published by Leenane Templeton by permission of DBA Lawyers.  Written by Gary Chau, Lawyer and Bryce Figot, Director of DBA Lawyers.

21 June 2016

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