A death benefit eligible termination payment is a payment made by the deceased’s employer for unused sick leave, a gratuity, or golden handshake following the employee’s death. The payment is made either to the deceased employee’s estate or directly to a beneficiary.
Payments to the deceased employee’s estate are generally taxed to the trustee (executor of the estate) at the same tax rates as if the payment went directly to a beneficiary.
The tax payable on a death benefit employment termination payment depends on whether the beneficiary is a death benefit dependent or not, and also the total amount paid.
A deceased person’s death benefit dependents include their spouse (who can be the same or different sex), children under the age of 18, a person who is financially dependent, or a person with whom the deceased had an ‘interdependency relationship’ e.g. close friends sharing a house.
Up to $190,000 can be paid to a death benefit dependent tax free. In contrast, if paid to a non-dependent it will be taxed at a maximum tax rate of 32%. The amount of death benefits received in excess of $190,000 is taxed at 47% to all beneficiaries.
If the total death benefit eligible termination payment paid is going to be larger than $190,000, it should be paid by the employer directly to the relevant beneficiaries, rather than to the relevant executor. This is because each beneficiary then gets the benefit of up to $190,000 tax free, whereas the executor only gets $190,000 in total tax free.
The team at C&D Restructure and Taxation Advisory are here to help. As part of the Vault Group we can offer the full suite of financial products and advice to help you navigate the business landscape. Schedule a meeting here via Calendly or give us a call on 1300 1 VAULT (1300 182 858)