A TPD payout can attract tax when it leaves superannuation, and the amount depends on your age and how you take the benefit, so the answer is not the same for every claimant.
A TPD payout can be taxed, but not always, and not in the same way for everyone. Whether tax applies, and how much, depends on your age when you withdraw the money, whether you take it as a lump sum or leave it in super, and your service history with the fund. This article explains where that question comes from inside a TPD claim, and why the firm treats it as a matter for your accountant or financial adviser rather than something we can answer for you.
Why the payout sits inside superannuation at all
Most TPD cover is held through a life insurance policy owned by your superannuation fund, not a policy you hold personally. When a claim is accepted, the insurer does not pay directly to the member of the superannuation fund. Rather, the insurer pays it to the superannuation fund and it appears in the member’s account balance. From that point, ordinary superannuation rules apply to the money, including the rules about when it can be released and how it is taxed on release. Our guide to how much a TPD payout is worth explains how the underlying figure is calculated before it reaches this stage.
Because the benefit becomes part of your superannuation balance, it does not have its own separate tax rules. It is, however, subject to a specific withdrawal process quite different to an early release of superannuation.
The taxable and tax free components
A superannuation benefit is generally split into a tax free component and a taxable component. The tax free component usually reflects certain contributions already made from after tax income. The taxable component reflects the rest of the balance, including the insured TPD benefit itself.
Because a TPD payout adds a lump sum insurance benefit to your account, the Australian Taxation Office allows an amount of that benefit to be treated as tax free, calculated with reference to the number of days left between the date the disability arose and the date you would otherwise have reached a fixed retirement age under the fund rules. This is sometimes called the disability tax free uplift. It does not remove tax altogether. It simply increases the portion of the payout that is not taxed, before ordinary superannuation tax rules apply to what remains.
Whether you withdraw the money or leave it in super
How tax applies depends heavily on what you do with the money once it is in your account.
| If you | Then |
|---|---|
| Leave the money inside your superannuation account | It continues to be taxed under ordinary superannuation rules, not as income in your hands, until you meet a condition of release and withdraw it |
| Withdraw the taxable component as a lump sum before preservation age | Tax is generally withheld at the time of withdrawal, at a rate that depends on your age and the component involved |
| Withdraw the taxable component as a lump sum after reaching preservation age | Tax treatment is usually more favourable, and part or all of the withdrawal may be tax free depending on your age and circumstances |
| Take the benefit as an income stream rather than a lump sum, where your fund allows it | Different rules apply again, and the ongoing payments may be taxed differently from a one off lump sum |
Age is the factor that varies the outcome the most. The same payout can be taxed differently for two members of the same fund simply because of how old each of them is when the benefit is accepted and released.
Why the firm cannot answer this for you
Tae and Partners acts for claimants in the TPD claim itself: gathering the medical and occupational evidence, advocating on a claimant’s behalf to ensure the insurer’s definition of TPD is satisfied, and potentially pursuing a declined, constructively declined, or delayed claim through internal review or the Australian Financial Complaints Authority (AFCA) where appropriate.
Tax treatment of the payout is a separate question that arises only once the claim is accepted and the money is inside your superannuation account.
Your own tax position depends on your age, your eligible service date with the superannuation fund, whether you have other superannuation interests, and decisions you make about how and when to withdraw. Those facts are personal to you, and getting them wrong can be costly. The firm gives legal advice on the claim, not tax or financial advice on the payout, and this article does not state a tax rate, a threshold or an offset amount for that reason. Before deciding how to take a TPD benefit, it is worth speaking with your accountant or a financial adviser who can look at your full financial position.
Related questions that arise at the same time
Claimants asking about tax often have related questions in mind at the same time, including whether a payout affects other entitlements, and how the claim itself is defined in the first place. Our FAQ on what a TPD claim is will be a useful starting point if you are new to the process, and our FAQ on multiple super funds and TPD explains a separate issue that often comes up for members who have held more than one account over their working life.
What to do next
If your TPD claim has already been accepted and you are deciding how to release the benefit, treat the claim and the tax question as two separate steps. Confirm the claim outcome and the payout amount with the fund first, then take that information to your accountant or financial adviser before you choose how to withdraw. If your claim has not yet been accepted, our claim check is a starting point for working out whether you have grounds to claim, and our FAQ on time limits for personal injury claims in Australia is a reminder that strict timeframes can apply, so it is worth getting advice promptly. You can also contact us to discuss a claim directly.
Sources
- Australian Taxation Office, tax on superannuation death benefits and disability benefits.
- Australian Securities and Investments Commission, Report 633, Holes in the safety net: a review of TPD insurance claims, October 2019.