What is the definition of a tax dependant? It seems such a simple question, yet the answer continues to perplex clients, advisers, lawyers and the tribunals alike.
Why is it so important? Well, most obviously it’s because a tax dependant doesn’t need to pay tax on any component of a superannuation death benefit if they receive it as a lump sum.
Under section 302.195 of the Income Tax Assessment Act 1997 (ITAA97), a person is a tax dependant (or death benefits dependant) of a deceased person if, at the time of the deceased’s death, the person was:
• a surviving spouse or de facto spouse of the deceased, including different or same sex,
• a former spouse or de facto spouse of the deceased, including different or same sex,
• a child of the deceased aged under 18, or
• otherwise financially dependent on, or had an interdependency relationship with, the deceased.
Under section 302.200 of the ITAA97, an interdependency relationship exists if two people (whether or not related by family) have a close personal relationship, live together and one or each of them provides the other with financial support or domestic support and personal care.
Two people can still be in an interdependency relationship if they have a close personal relationship but do not meet one or more of the other requirements because either or both have a physical, intellectual or psychiatric disability.
Seems straightforward, doesn’t it? However, the application of these seemingly simple rules by the ATO and by the tribunals reveals otherwise.
In ATO private ruling PBR 1011839528938, issued on 26 August 2011, the ruling applicant was the main beneficiary of the deceased’s will and in a de facto relationship with the deceased for over five years. They were dependent on each other and had purchased a property and built a house, in which they lived. The house was sold when the applicant separated from the deceased over five years ago and the deceased went to work overseas. The parties were not living together at the time of the deceased’s death.
The ATO determined the applicant and the deceased were not in an interdependency relationship because they were not living together at the time of death. However, they were in a de facto relationship for more than five years. Therefore, the applicant was a former spouse, and consequently a death benefits dependant, of the deceased.
Later, in TBCL and Commissioner of Taxation (Taxation) [2016] AATA 264, the Administrative Appeals Tribunal (AAT) considered an appeal from the decision of the ATO that the applicants, being the parents of their deceased son, were not death benefits dependants of their son.
The son had lived with the applicants all of his life except between 2007 and 2009 when he was studying interstate. Upon completing his studies he returned to live at the applicants’ residence. The applicants provided significant financial support to their son while he was studying, and the three members of the household shared living expenses, assisted each other with domestic support and provided each other with love, care affection and psychological assistance.
When the son died in 2013, he was 22. The superannuation scheme of his employer included life insurance. The insurer paid $500,000 to the applicants in their capacity as administrators of their son’s estate.
The applicants sought a private ruling that the sum was not assessable income because they were each a death benefits dependant of their son. However, the commissioner disagreed. Their objections were disallowed. They subsequently applied to the AAT for review of the objection decisions.
The AAT considered the facts against various criteria in Income Tax Assessment Regulations 1997 regulations 302-200, 302-200.01 and 302-200.02 for determining whether two people have an interdependency relationship, and upheld the ATO’s decision that there was no interdependency relationship.
Compare this outcome to ATO Interpretive Decision 2014/22, in which the tax office determined an adult child who was paid a death benefit on the death of their parent was a death benefits dependant of the deceased parent where the adult child had given up work to care for their terminally ill parent and received no financial support from anyone, other than the parent, during that time.
In fact, the ATO confirmed the adult child was financially dependent on the parent and they had an interdependency relationship because they had a close relationship, they lived together, the parent provided financial support for the child, and the child provided significant care for the parent.
What can advisers learn from all this? We would suggest the following:
• whether a person is a death benefits dependant of another person on the basis of either financial dependency or having had an interdependency relationship is rarely an open and shut case,
• every case will be looked at on its own facts, so it pays to be meticulous in keeping records and the testimony of others such as family members, so as to evidence any claimed relationship, and
• with increasing life expectancy and the greater incidence of adult children caring for their elderly or sick parents, you can expect this issue to become increasingly important to your clients.