Tax treatment of death benefits
Special tax treatment applies to lump sum and pension payments made as a result of your death. The actual tax payable can depend on who receives the benefit (whether they are a dependant or not) and whether it is paid to that person as a lump sum or a pension payment.
For tax purposes, the definition of dependant includes:
- your spouse or former spouse
- your child (less than age 18)
- a person with whom you had an interdependency relationship (refer below for further details), and
- a person who was otherwise your dependant just before you died. Typically this would be someone who was financially dependent on you just before you died.
Death benefit lump sums
Death benefits paid as a lump sum to a dependant are tax free. Death benefit lump sums paid to a non-dependant will generally be taxed but at concessional rates1.
The tax arrangements applying to lump sum death benefits that are paid to your estate will depend on whether or not the beneficiaries of the estate who have benefited, or are expected to benefit, from the death benefit are dependants. To the extent that the beneficiaries are dependants, the benefit will be tax free. Your legal personal representative will generally be required to pay tax on the death benefit to the extent that the beneficiaries, or expected beneficiaries are non-dependants.
Refund of contributions tax
If a lump sum death benefit is directly paid to your spouse, former spouse or child we may increase the death benefit to compensate for income tax paid on relevant contributions and investment earnings while your benefits were accumulating if certain criteria are met. Please note, where the lump sum death benefit is paid to your spouse, former spouse or child through your estate, additional documentation may be required in order for us to increase the lump sum.
Any increase is conditional upon the Fund being eligible for, and able to use, the associated tax deduction in that tax year. The trustee has full discretion to identify which beneficiaries, if any, may receive this additional benefit.
1 In certain circumstances, an individual who is not otherwise a dependant for tax purposes will be treated as a tax dependant if they receive a death benefit lump sum in relation to a person who died in the line of duty as either:
- a member of the defence force
- a member of the Australian Federal Police force
- a member of a State or Territory Police Force or
- a protective service officer.