Processing Employees Death Benefits Payments
By Paolo, 12.03.2023
Employees’ Death Benefits Payments occur when an employee passes away. Broadly, this term includes the following payment types:
- unpaid worked wages;
- unused entitlements (Annual Leave and Long Service Leave);
- unused RDO;
- unused Personal Leave (if the relevant Industrial Instrument requires Personal Leave to be paid out at termination);
- any lump sums (gratuity payment) the employer may choose or be required to pay on top of the standard wages and entitlements;
- any Workers’ Compensation payments lump sums (in the instance the death occurred in the workplace);
- unpaid superannuation contributions.
Although (hopefully) a rare occurrence, payments following the death of an employee, are some of the most difficult payments to process, as their STP Reporting requirements and applicable tax withholding vary depending on the payment type and on deemed Beneficiary.
It is the Employer’s responsibility to correctly identify the deceased employee’s beneficiaries before making any Death Benefits Payments.
It is important to know that these payments, unlike any other Termination payment types, are not time-bound. Therefore, in the event of an employee’s passing, employers should not rush to process any final payments and take their time to obtain the required legal documents to identify the Beneficiaries.
Identify Death Benefits Payments’ Beneficiaries
Once an employee passes away, employers cannot make any further payments into the deceased employee’s bank account. The only payments that may still be permitted to the deceased employee’s account are Superannuation payments.
The first task is for the Employer to determine the deceased employee’s beneficiary by requesting specific legal documentation from either an immediate family member, the deceased employee’s appointed legal representative or the employee’s next of kin.
There are three possible types of beneficiaries.
A Dependant
The definition of Dependant for Death Benefits Payments varies between the ATO (which determines the reporting and taxation of unpaid wages and entitlements) and the Superannuation Industry Supervision Act or SIS (which determines the payments of the deceased employee’s superannuation).
ATO (Tax Dependant)
For the purpose of making Death Benefits Payments, the ATO defines the following family members of the deceased employee as Dependants:
- spouse or de facto partner;
- a child of the deceased under 18 years old (including adopted and step-children);
- the deceased sons or daughters of the deceased older than 18 years old, but still financially dependent on the deceased at the time of their death;
- a person in an interdependency relationship with the deceased, including:
- two people who have a close personal relationship;
- they live together;
- one or each of them provides the other with financial, domestic support, or personal care.
SIS (Super Dependant)
For the purpose of making Superannuation Payments, SIS defines one of the following family members of the deceased employee as Dependants:
- their spouse or de facto partner;
- a child of the deceased of any age (including adopted and step-children);
- a person in an interdependency relationship with the deceased, including:
- two people who have a close personal relationship;
- they live together;
- one or each of them provides the other with financial, domestic support, or personal care.
A Trustee
A Trustee is a person or an entity that is legally appointed to receive the Death Benefits Payments and distribute these payments together with other assets that are part of the deceased employee’s estate.
A Non-Dependant
The ATO defines as a Tax Non-Dependant for Death Benefits Payments, any adult sons or daughters of the deceased employee who were not financially dependent on the deceased, at the time of their death (even if living in the same household).
As SIS includes the deceased employee’s sons and daughters of all ages in their definition of Dependants, this automatically excludes the definition of Non-Dependant beneficiaries when dealing with Super Payments of a deceased estate.
Required Documentation to correctly identify Beneficiaries
It is the responsibility of the employer or their registered Tax Agent to correctly identify the Death Benefits Payments’ beneficiary prior to making any payments. Identifying the correct beneficiary also impacts both the STP Reporting category and the applicable tax calculation of the Death Benefits Payments.
Upon being notified of an employee’s passing, the employer should first terminate the deceased employee’s record and report the termination via STP, using the following details:
- Termination Date > The date the employee is deceased;
- Termination Reason > Deceased
The Employer should then contact the deceased employee’s next of kin or appointed legal representative and ask them to provide the required documentation to identify the Beneficiary. As there are no time limits to make these payments, the Employer can use discretion and allow a respectful length of time prior to contacting the deceased employee’s next of kin.
There are three types of legal documents that are deemed acceptable in correctly identifying the beneficiary of Death Benefits Payments.
Grant of Probate
Probate is the process of proving and registering in the State Supreme Court the last will of the deceased. An Executor, Administrator, Legal Representative or next of kin can apply for Probate.
The Grant of Probate is the legal document that identifies the deceased beneficiary (executor) by the State Supreme Court.
Letter of Administration with the will annexed
This is a letter issued by a legal representative that states the deceased has left a valid will but the executor is not in a position to grant it.
Letter of Administration
This is a letter issued by a legal representative that states the deceased did not leave a will or left an invalid or disputed will. In this instance, the Death Benefits Payments are made to the closest dependant of the deceased (spouse and children under 18 years old).
Statutory Declaration
In absence of a Grant of Probate or a Letter of Administration, the employer can accept a Statutory Declaration from the deceased next of kin identifying the deceased beneficiary.
What types of payments can employers make?
The reporting and Tax treatment of Death Benefits Payments vary depending on the type of payment made and to whom the payment is made. There are three types of Death Benefits Payments:
- Standard Payments
These include both unpaid worked wages and unused entitlements (Annual Leave and Long Service Leave) - Death Benefits Employment Termination Payments
These include any unused RDO, unused Personal Leave (if payable at termination by the Industrial Instrument) and any Lump Sums (Gratuity payments or Workers’ Compensations Lump Sums) - Superannuation Contribution Payments
Standard Payments
Unpaid worked wages and unused Annual and Long Service Leave entitlements paid to the beneficiary of a deceased employee are not paid through payroll.
The Employer must calculate the value of any unpaid worked wages and unused entitlements and accrue it on the Business Balance Sheet by posting this value to a clearing account.
These payments are made Tax Free and recorded via Accounts Payable to the Beneficiary and therefore they do not appear in the deceased or Beneficiary’s Income Statement.
There isn’t a specific legal document required to provide the breakdown of these payments to the employee’s beneficiary or estate’s legal representatives. The Employer can simply issue a Letter or a Remittance Advice detailing the breakdown of such payments.
Death Benefits Employment Termination Payments
These payments can be made through payroll by recording the deceased employee beneficiary as an employee record (using the Employment Start Date: 01/01/1800).
The STP Reporting and Tax Treatment vary depending on the Beneficiary:
| Beneficiary | Payment Thresholds | STP Reporting | Tax % |
| Dependant | Up to the Annual ETP Cap* | Not Reportable | Nil |
| Over the Annual ETP Cap* | ETP Death Type D | 47% | |
| Trustee | Any Amount | ETP Death Type T | Nil |
| Non-Dependant | Up to the Annual ETP Cap* | ETP Death Type N | 32% |
| Over the Annual ETP Cap* | ETP Death Type N | 47% |
* The Annual ETP Cap is indexed every year. You can find the current ETP Cap on the ATO Website.
The Employer is required to issue an ETP Income Statement or Payment Summary, detailing the ETP Amount and applicable Tax withheld and forward it to the Beneficiary.
As Employee Death Benefits are a rare occurrence and they are not mandatory to report via STP, the majority of small business payroll solutions (including Xero and MYOB) do not support these types of Termination Payments.
In this instance, the ETP payments can be processed via Accounts Payable. A manual Employment Termination Payments form can be downloaded from the ATO Website and posted to the Beneficiary.
Superannuation Contribution Payments
Any unpaid super contributions can be paid into the deceased employee’s nominated fund, provided the fund is still active and the Superfund is willing to accept the payment after the employee is deceased.
If the Super Contribution payment is rejected, then the value of the unpaid super can be added to the unpaid wages and entitlements and paid directly to the Beneficiary via Accounts Payable. Under Section 23(9A) of the Superannuation Guarantee Administration Act 1992 SGAA, this payment is still deemed a valid Superannuation Contribution.
What can employers do if the Death Benefits Payments remain unclaimed?
If after a certain time, the accrued unpaid wages and unused entitlements remain unclaimed, the Employer can contact the following Government Agencies and enquire about the best course to handle these payments.
- ACT – Public Trustee and Guardian for the ACT
- NSW – NSW Trustee and Guardian
- NT – Northern Territory Office of the Public Trustee
- QLD – Public Trustee of Queensland
- SA – Public Trustee South Australia
- TAS – Public Trustee Tasmania
- VIC – Public Trustee Victoria
- WA – Public Trustee Western Australia
The process of making Employee’s Death Benefits Payments is a complex and delicate task, that requires knowledge and experience in both Payroll Reporting and an understanding of applicable taxation.
Australian Payroll remains one of the most complex Industrial Legislation in the world. Your business should seriously consider outsourcing this task to a knowledgeable professional.
References
https://www.ato.gov.au/business/payg-withholding/when-a-worker-leaves/#:~:text=benefits tax (FBT)-,Death of an employee,the death of the employee.
https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/death-benefits/
https://www.ato.gov.au/Individuals/Jobs-and-employment-types/In-detail/Termination-payments/Recipients-of-death-benefit-termination-payments/#:~:text=ETP cap for death benefits,-We index the&text=The ETP cap in 2021,life benefit ETP cap amount.
https://www.ato.gov.au/rates/schedule-11—tax-table-for-employment-termination-payments/?page=7
https://www.ato.gov.au/forms/payg-payment-summary—employment-termination-payment-from-1-july-2012/
https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?page=18
https://moneysmart.gov.au/find-unclaimed-money/money-held-by-state-governments
Disclaimer
This blog and attached resources are of general nature designed for informational and educational purposes only. They should not be construed as professional financial advice for your individual business. Should you need such advice, consult a licensed financial or tax advisor.
