Taxation of death benefits
A superannuation death benefit refers to a payment from a superannuation fund after the death of one of its members.
Although such a payment is usually in the form of a lump-sum, income streams may be paid to certain dependants of the deceased member.
The Superannuation Industry (Supervision) Act 1993 (Cth) (‘SIS Act’) and the superannuation fund’s trust deed determine who can receive superannuation death benefit payments.
The SIS Act provides that superannuation death benefits may only be paid to:
- “Dependants” as defined in the SIS Act; or
- The deceased member’s legal personal representative (which is usually the executor of their deceased estate).
Where neither of the above class of persons can be identified, the trustee of the superannuation fund has the statutory power to nominate any person as a recipient of a superannuation death benefit payment, whose power may be modified by the terms of the fund’s trust deed.
The tax treatment of superannuation death benefits will depend on whether their recipients are ‘dependants’ as relevantly defined in the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997′).
Definition of ‘dependant’
Dependant under the SIS Act
Sub-section 10(1) of the SIS Act says that the meaning of a dependant of a person who has died:
“…includes the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship.”
This inclusive definition means that a ‘dependant’ in the ordinary meaning of the term is also covered (i.e. a person who is financially dependent on the deceased).
The Australian Prudential Regulation Authority (APRA) Superannuation Circular No. I.C.2 states that ‘dependant’ in the SIS Act means:
“…any person who was financially dependent on the member at the time of the member’s death.”
Dependant under the ITAA 1997
Sub-section 302-195(1) of the ITAA 1997 defines a dependant of a deceased person as:
- The deceased person’s spouse or former spouse;
- The deceased person’s child aged less than 18;
- Any other person with whom the deceased person had an ‘interdependency relationship’ just before he or she died; or
- Any other person who was financially dependant on the deceased just before he or she died.
In addition, sub-section 302-195(2) of the ITAA 1997 further includes in this definition a person who receives a lump-sum benefit as a result of the death of another person who died in the line of duty as a member of various forces, e.g. the Defence Force.
These two definitions of ‘dependant’ are compared in Table 1.
What does being an ‘interdependent’ mean?
Section 10A of the SIS Act and section 302-200 of the ITAA provide that, for there to be an interdependency relationship, two people (whether or not related by family) must show that they:
- Have a close personal relationship;
- Live together;
- 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.
Each of the above elements must be satisfied, and must be true for the time period immediately preceding the death of the deceased person.
Two people could also be in an interdependency relationship if they have a close personal relationship and the only reason they fail to satisfy all the conditions in section 302-200 is that either or both of them suffer from a physical, intellectual or psychiatric disability, or they are temporarily living apart because, for example, one is overseas or in jail.
Regulation 1.04AAAA of the Superannuation Industry (Supervision) Regulations 1994 (Cth) assists trustees of superannuation funds, by specifying matters to be taken into account and circumstances in which an interdependency relationship exists. The sorts of factors trustees may consider include:
- Duration of relationship;
- Whether or not a sexual relationship exists;
- Ownership, use and acquisition of property;
- Care and support of children;
- Reputation and public aspects of the relationship;
- Any evidence suggesting that the parties intend the relationship to be permanent; and
- The existence of a statutory declaration signed by one of the persons to the effect that they are, or (in the case of a statutory declaration made after the end of the relationship) were, in an interdependency relationship with the other person.
It is not necessary to show that each of these factors exists in order for an interdependency relationship to exist. Instead, each factor is to be given the appropriate weighting depending on the circumstances.
Examples of interdependency relationships may include those between siblings or between an adult child who lives with and cares for an ageing parent on a long-term basis.
Recent case outcomes covering the concept of interdependency
TBCL and Commissioner of Taxation
A recent Administrative Appeals Tribunal (AAT) decision in TBCL and Commissioner of Taxation1 considered the definition of interdependence in more detail.
This case involved a 22-year-old boy who passed away on 5 June 2013 following a motorbike accident.
His parents were the administrators of his deceased estate. Their son had lived with them all his life except for a brief three-year period where he was studying interstate. Their son’s superannuation scheme had term life insurance coverage, and in May 2014, an amount totalling $500,000 was paid to the son’s estate.
His parents applied for — and were unsuccessful — in obtaining a private binding ruling (PBR), which would confirm these monies could be received by them tax-free because they were his death benefit dependents, or more specifically, in an interdependency relationship with their son. They then took the matter to the AAT, which subsequently upheld the Commissioner of Taxation’s ruling.
As part of their decision, the AAT noted that while they were not specifically ruling out the possibility that the parents were their son’s death benefit dependant, the parent’s initial application for a PBR didn’t have specific facts which would satisfactorily indicate the presence of an interdependency relationship.
Lessons learned from this case
There are two key take-outs from the TBCL case.
Firstly, this is renewed support for the prevailing view that while it would be unexpected for children to be in an interdependency relationship with their parent, it doesn’t mean this scenario can’t ever occur.
With term life insurance through superannuation now a commonplace employer benefit provided to a broad spectrum of employees across the Australian workforce, such reinforcement is indeed welcome news for parents in the heartbreaking situation of having an adult child pre-decease them in similar circumstances to the TBCL case.
Secondly, this outcome clearly illustrates that lay-persons should strongly consider engaging a suitably qualified professional to prepare a PBR, rather than preparing their own.
The downstream benefits of a favourable ruling from the Commissioner of Taxation or AAT clearly outweigh any reasonable associated advice cost involved to ensure an appropriately drafted PBR application is submitted.
FOOTNOTE
1. TBCL and Commissioner of Taxation [2016] AATA 264
Catherine Chivers is the manager for strategic advice at Perpetual Private.
