TPD insurance and tax
Your premiums may be tax-deductible if you bought TPD insurance through your super fund. That's not likely to be the case if you went direct with an insurer.
Key takeaways
- Temporary or Permanent Disability cover is typically held in your superannuation or as a stand-alone policy.
- If it's in your super, your TPD premiums are likely tax-deductible.
- Premiums for TPD held outside your superannuation are generally not tax deductible.
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Is TPD insurance taxed in Australia?
If you bought Total Permanent Disability (TPD) insurance through your super, then the premiums may be tax-deductible to your super fund. If you bought TPD insurance independently, through an insurer, the premiums are not tax-deductible.
Are TPD payouts taxed in Australia?
Generally, benefits are not taxed for policies bought independently outside of a super. However, if you bought your policy through super, some of your payout may be taxed.
| Outside of super | Inside of super | |
|---|---|---|
| Premiums | ❌ Not tax-deductible | ✅ Tax-deductible |
| Benefits | ✅ Not taxed | ⚠️ May be taxed |
Are TPD insurance premiums tax-deductible?
If you bought your TPD insurance independently – that means through an insurance company rather than a super fund – your premiums aren't tax-deductible.
However, if you have TPD insurance through your super, your fund may be eligible for a full or partial deduction. The amount your fund can deduct will depend on the type of cover you have.
| Type of TPD | How much of your premium a fund can deduct |
|---|---|
| Any occupation | 100% |
Any occupation with any of the following inclusions:
| 100% |
| Own occupation | 67% |
Own occupation with any of the following inclusions:
| 67% |
| Own occupation bundled with death (life) cover | 80% |
Own occupation bundled with death (life) cover and any of the following inclusions:
| 80% |
It's important to note that the tax deduction is available to the trustee of your superannuation fund, not to you personally. You may still see some benefits, however, as your super fund will usually apply this deduction to your superannuation balance.
If you have a self managed super fund, the situation may be different and potentially more complex, so it's worth speaking with a tax accountant or financial adviser.
Are TPD benefits taxed?
Sometimes. It depends on how you paid for your TPD insurance to begin with and whether you want to withdraw the money early from your super account.
- If you got TPD independently (outside of your super), the benefits generally aren't taxed. You'll get a lump sum if your claim is successful and it's yours to keep.
- If you got TPD through your super, the TPD benefit will be paid into your super account. If you choose to withdraw money from your super account early – that's between 55 and 60 years old depending on your date of birth – the money you withdraw will be taxed.
The standard tax rate when withdrawing super before retirement age is 22%. However, when withdrawing superannuation following a TPD claim, a portion of your withdrawal will be tax-free. Your super fund will apply a calculation based on your days of service, so the effective tax rate will be different for everybody.
How much are TPD benefits taxed?
If you bought your TPD insurance through your super fund and you claim a benefit, the money may be subject to tax. The amount will depend on your age, how you want to claim the payment and how much you already had in your super account.
| How you claim the money | What happens |
|---|---|
| Withdraw a lump sum before your preservation age | Must pay superannuation lump sum withdrawal tax on the taxable component at a rate of 20% plus Medicare levy. |
| Withdraw a lump sum after your preservation age but under age 60 | Must pay superannuation lump sum withdrawal tax on the taxable component at a rate of 15% plus Medicare levy. |
| Start an income stream | The taxable component of the annual income drawn will be taxable at your marginal tax rate, but with a 15% tax offset. |
| Leave the balance in super until you're 60 | If you wait until you're 60 to withdraw money from your super, it is tax-free. |
Speak to a broker for more information
We can only provide general advice, but issues like TPD and tax are very much individual issues. A life insurance and TPD broker can help you find cover that's tailored for your needs.
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Hi
Checking calculations.
If TPD is $529,988 Gross and the effective tax rate at 3.6%, what will be the tax-free component?
And the taxable portion will be calculated at 22%. Is this correct?
Hi Jay,
Unfortunately we are not licenced to provided personalised advice. The tax treatment of your claim may depend on whether your policy is taken out in your own name or through your super fund. Your question sounds like it relates to IP through superannuation, where the standard tax rate when withdrawing super before retirement age is 22%.
However, when withdrawing superannuation following a TPD claim, a portion of your withdrawal will be tax-free. Your super fund will apply a calculation based on your days of service, so the effective tax rate will be different for everybody.
Your best bet is to check this calculation with your income protection insurance provider or the ATO.
Hope this helps!
I received lump sum payment for my TPD claim from Super fund (1st super) and certain tax was withheld on part payment.
Can I claim legal fee that I paid to get this lump sum payment as tax deduction?
Hi Kuldeep,
Thanks for your inquiry.
You may be able to claim some deductions which are not work-related. They are:
Some legal fees may be used as deductions. For more information please visit ATO’s claiming deductions 2017 guide.
Hope this information helped.
Cheers,
Arnold
My partner who is 54 yrs old is receiving a payout of TPD can you tell us the tax rate it is for a fixed sum of $155000
Hi Tanya,
Thanks for your inquiry.
The taxability of the TPD payout will depend on whether it is held within the super policy.
Please feel free to read more about TPD insurance tax and learn more how it works.
Best regards,
Jonathan
Can I claim tax back on the tax I paid on my TPD payout
Hi Julie,
Thank you for your question.
Generally, you will not be able to claim a tax back on the tax payout. However, you can claim tax deductions on TPD premiums.
Cheers,
Zubair
I received 61000 from rest for a total and permanent disability the monies were paid into my super account with rest. I want to access this money so I can build a small house on my block of land. I am 58 years old. Do I have to pay tax, and if so, approx. at what rate/amount?
Hi Brian,
Thanks for your question. According to the Industry Super website, withdrawals from your super account before the age of 60 will generally be taxed.
The rate you’ll be taxed will depend on your personal circumstances. In general, the taxable component of a lump sum that’s withdrawn is taxed at 20% plus the medicare levy.
Note: There are other factors that may be taken into account e.g. if you have reached your preservation age, then you can usually receive a lump sum tax-free (up to a certain amount). Please feel free to read more about when super can be accessed.
Good luck!
Maurice