Tax treatment of death benefits
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.
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)
- 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
Two people will typically have an interdependency relationship if:
- they have a close personal relationship and
- they live together and
- one or each of them provides the other with financial support and
- one or each of them provides the other with domestic and personal care
If two people have a close personal relationship but do not satisfy the other conditions referred to above because
either or both of them suffer from a physical, intellectual or psychiatric disability they may nevertheless have an
interdependency relationship.
The Government has introduced legislation to remove discrimination against same-sex couples in a range of
Commonwealth legislation including tax legislation. As a result of these changes, the range of beneficiaries who can qualify as dependants has been broadened to include a same-sex de facto partner and a child of either partner of a same-sex de facto relationship with effect from 1 July 2008.
