Death benefit payment components
A death benefit employment termination payment (ETP) may have a tax-free and a taxable component.
The tax treatment of the taxable component depends on whether:
- you're a dependant of the deceased
- the payment exceeds the ETP cap.
ETP cap for death benefits
We index the ETP cap each year. The ETP cap in 2023–24 is $235,000.
The death benefit ETP cap amount is independent of the life benefit ETP cap amount. This means payments that count towards one cap will not count towards the other.
Meaning of dependant
You're a dependant of the deceased if, at the time of their death, you were one of the following:
- a surviving spouse
- a former spouse
- a child of the deceased who is less than 18 years old
- any other person who was financially dependent on the deceased
- any person who had an interdependency relationship with the deceased.
A spouse of the deceased includes another person (of any sex) who:
- was in a relationship with the deceased as registered under a prescribed state or territory law
- lived with the deceased on a genuine domestic basis in a relationship as a couple, although not legally married.
A child of the deceased includes:
- an adopted child, stepchild or ex-nuptial child
- a child of the deceased’s spouse
- a child of the deceased within the meaning of the Family Law Act 1975 (for example, a child who is considered to be a child of a person under a state or territory court order giving effect to a surrogacy agreement).
An interdependency relationship includes:
- a close personal relationship between two people who live together, where one or both provides for the financial and domestic support and personal care of the other
- a close personal relationship between two people who live together but do not satisfy one or more of the requirements mentioned in the previous dot point due to either or both of them suffering from a physical, intellectual or psychiatric disability.
Payment to a dependant
If you receive the ETP directly and not through a trust, tax is withheld (including Medicare levy) on the payment as follows:
- The tax-free component of the death benefit will not be subject to tax.
- The amount of the taxable component up to the ETP cap will be tax-free.
- Tax is withheld at 47% on the amount of the taxable component above the ETP cap.
You should receive a PAYG payment summary – employment termination payment from the deceased's former employer.
The taxable component above the ETP cap is the amount the employer will report on the payment summary.
Payment to a non-dependant
If you receive the ETP directly and not through a trust, tax is withheld (including Medicare levy) on the payment as follows:
- The tax-free component of the death benefit will not be subject to tax.
- Tax is withheld at 32% on the amount of the taxable component up to the ETP cap.
- Tax is withheld at 47% on the amount of the taxable component above the ETP cap.
You include the taxable component in your assessable income.
Payment to the trustee of a deceased estate
If the payment goes to the trustee of a deceased estate, the trustee pays tax on the death benefit ETP. Tax is withheld in the same way it would be if the payment was made to a dependant or non-dependant. The exception is that the Medicare levy (2% for 2023–24) does not apply.
The trustee of the deceased estate will receive a PAYG payment summary – employment termination payment from the deceased's employer.
The payment summary will show both the tax-free and taxable components of the ETP.