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From 1 July 2007 there will be major reforms to simplify the superannuation system. Due to these reforms, the information in this product may change. Updated information about superannuation will be available from this website progressively.
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To order a printed copy, please take note of the NAT number – NAT 2704-1.2007 - and select Online publications ordering service or phone the Publications Distribution Service on 1300 720 092.
Before you phone, check whether there are other publications you may need – this will save you time and help us. For each publication you order, please quote the full title.
An automated self-help publications ordering service is available 24 hours a day every day where you know the title of the publication. Alternatively, you can speak to an operator between 8.00am to 6.00pm Monday to Friday.
This publication can also be obtained from Tax Office shopfronts.
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In May 2006, the Treasurer announced major reforms to simplify the superannuation system. Part of this is a proposal to abolish reasonable benefit limits. If passed by Parliament, this will apply from 1 July 2007. RBL reporting requirements for 2006–07 remain unchanged. This guide will be revised if the simplification proposals are enacted.
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Eligible termination payments (ETPs) that are paid because of an employee’s death are called ‘death benefit ETPs’.
Any payment that would have been an ETP if your employee had been alive is a ‘death benefit ETP’. You may be paying the death benefit ETP to:
- an employee’s dependant
- a non-dependant, or
- the trustee of the employee’s estate.
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Employer death benefit ETPs can only be paid as cash payments. They cannot be rolled over to a superannuation fund.
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Special tax treatment of death benefit ETPs
The tax treatment of a death benefit ETP depends on whether the ETP is paid to:
- an employee’s dependant
- a non-dependant, or
- a trustee of the deceased’s estate.
Who is a dependant?
A dependant for a death benefit ETP is:
- a surviving spouse or de facto spouse
- an ex-spouse
- a child under 18 of the deceased
- any person who is financially dependent on the deceased employee at the time of the employee’s death, or at the time of the payment of the death benefit ETP, or
- any person with whom the deceased has an interdependency relationship.
Financially dependent on the deceased means the deceased employee contributed necessary financial support to maintain the dependant. Children over 18 must be financially dependent on the deceased employee to qualify as dependants.
An interdependency relationship is a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other.
A payment made to the executor of the deceased employee’s estate does not count as a payment made directly to a dependant.
Who is a non-dependant?
A person who does not fall into any of the categories listed above is classified as a non-dependant for a death benefit ETP.
Procedures for paying a death benefit ETP
You will need to know whether the person to whom you are paying the death benefit ETP is a dependant, a non-dependant or a trustee of the deceased’s estate.
A When paying a dependant
A death benefit ETP paid to a dependant is tax free up to the pension reasonable benefit limit (RBL) of the deceased.
- Make a cash payment (this payment cannot be rolled over) and
- do not withhold an amount from the payment
- do not prepare an ETP payment summary
- give the dependant a letter that explains why the person is receiving the payment and shows the payment amount
- report payments over $5,000 to the Tax Office for RBL purposes, and
- keep records of the payment and a copy of the RBL information reported for five years. You must give the recipient of the payment a copy of the information you reported to the Tax Office for RBL purposes.
B When paying a non-dependant
A death benefit ETP paid directly to a non-dependant is not tax free. It will be taxed in the hands of the recipient as an ordinary ETP.
- Calculate the eligible service period of the ETP and the ETP components using the details of the deceased person.
- Pay the ETP in cash (a death benefit ETP cannot be rolled over) and
- withhold the correct amounts from the payment (if any)
- prepare an ETP payment summary – payer to complete (NAT 2605) and give two copies to the person receiving the payment, within 14 days of the payment (ETP payment summaries are available from the Tax Office – use the name of the person receiving the payment on the ETP payment summary)
- send any amounts withheld to the Tax Office with your PAYG payments
- report the ETP payment summary information to the Tax Office with your annual PAYG reporting
- report payments over $5,000 to the Tax Office for RBL purposes by the 14th day of the month following the month in which the payment was made (you must give the recipient of the payment a copy of the information you reported to the Tax Office for RBL purposes), and
- keep your copy of the ETP payment summary and RBL information reported for five years.
C When paying the trustee of a deceased estate
There is no requirement to withhold amounts from a payment to the trustee of the deceased person’s estate. However, you must give the trustee an ETP payment summary showing the details of the death benefit ETP.
- Calculate the eligible service period of the ETP and the ETP components using the details of the deceased person.
- Pay the ETP in cash (a death benefit ETP cannot be rolled over) and
- do not withhold an amount from the payment
- prepare an ETP payment summary and give two copies to the person receiving the payment, within 14 days of the payment (ETP payment summaries are available from the Tax Office – use the name of the person receiving the payment on the ETP payment summary)
- report the ETP payment summary information to the Tax Office with your annual PAYG reporting
- report payments over $5,000 to the Tax Office for RBL purposes by the 14th day of the month following the month in which the payment was made (you must give the recipient of the payment a copy of the information you reported to the Tax Office for RBL purposes), and
- keep your copy of the ETP payment summary and RBL information reported for five years.
Withholding rates for death benefit ETPs paid to a non-dependant
Special withholding rates apply to death benefit ETPs paid to a non-dependant. A non-dependant may choose to give you a tax file number before you pay the death benefit ETP, but it is not compulsory for them to do so.
The special rates are set out below.
Component
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Paid to a non-dependant
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TFN provided
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TFN NOT provided
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Pre-July 1983 component
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Nil
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45%
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Post-June 1983 untaxed element
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30%
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45%
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These withholding rates are correct as at 1 July 2006 (you need to add the Medicare levy).
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Reporting for reasonable benefit limits
You must report each employer ETP cash payment over $5,000 to the Tax Office for RBL purposes. This applies whether a payment is made to a dependant, a non-dependant or a trustee of the deceased’s estate.
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For more information on reporting RBLs, refer to:
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About reasonable benefit limits
A death benefit ETP is counted towards the deceased person’s pension RBL. Amounts over this limit are taxed at higher rates at tax time. When the payment exceeds the deceased person’s pension RBL, the Tax Office will advise the person who received the payment.
There are a number of reporting and record keeping obligations relating to RBLs. You must:
- report the benefit using the name of the deceased
- report the payment by the 14th day of the month following the month in which the payment was made
- give the person receiving the payment a copy of the information you reported to the Tax Office, and
- keep a copy of the RBL information reported for five years after reporting a payment.
For further information or for a copy of our publications:
If you do not speak English well and want to talk to a tax officer, phone the Translating and Interpreting Service on 13 14 50 for help with your call.
If you have a hearing or speech impairment and have access to appropriate TTY or modem equipment, phone 13 36 77. If you do not have access to TTY or modem equipment, phone the Speech to Speech Relay Service on 1300 555 727.
How to use ‘NAT’ numbers
The NAT number is a unique national identifying number we give each of our publications. You can use this number to search for publications on our website and to quote the number over the phone when requesting a publication to be sent to you.
Our commitment to you
We are committed to providing you with advice and information you can rely on.
We make every effort to ensure that our advice and information is correct. If you follow advice in this publication and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we must still apply the law correctly. If that means you owe us money, we must ask you to pay it. However, we will not charge you a penalty or interest if you acted reasonably and in good faith.
If you make an honest mistake when you try to follow our advice and you owe us money as a result, we will not charge you a penalty. However, we will ask you to pay the money, and we may also charge you interest.
If correcting the mistake means we owe you money, we will pay it to you. We will also pay you any interest you are entitled to.
If you feel this publication does not fully cover your circumstances, please seek help from the Tax Office or a professional adviser.
The information in this publication is current at January 2007. We regularly revise our publications to take account of any changes to the law, so make sure that you have the latest information. If you are unsure, you can check for a more recent version on our website at www.ato.gov.au or contact us.
Last Modified: Saturday, 18 November 2006
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