TPD insurance and tax in Australia

Is TPD insurance tax-deductible and am I taxed on a TPD payout?

DISCLAIMER: This article contains general advice and does not consider your own personal circumstances. It is not tax advice and the general nature of this material may not be applicable to you. You should obtain professional advice and verify our interpretation before relying on the information contained in our article.

The tax rules for TPD insurance will vary depending on whether the policy is held inside or outside of super. As a general rule of thumb:

If the policy was bought:1. Outside of super 2. Inside of super
Premiums
  • Not tax-deductible
  • Tax-deductible
Payouts/benefits
  • Not taxed
  • Partially taxed (varies with your age)

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How are the different types of TPD insurance taxed in Australia?

Policy type When does it pay benefits?Are premiums usually tax-deductible?Are benefits usually taxable?
Own occupation TPDIf you are medically recognised as unable to work your own occupationNoNo
Any occupation TPDIf you are medically recognised as unable to work any occupationNoNo
Superannuation TPDIf you are recognised as being permanently disabled by the super's trusteeYes*Yes*
Keyman insurance (revenue purpose)If the insured business person dies, becomes disabled or is unable to workYesYes
Keyman insurance (capital purpose)If the insured business person dies, becomes disabled or is unable to workNoNo

*You can receive tax-deductions up to a certain amount. The amount of tax you pay on benefit will vary with your age and other factors.

superannuation

How is tax treated inside super?

Type of super policyTax-deductible?Benefits tax assessable?
Superannuation or SMSF “any occupation"Yes (up to a cap)Partially (depending on age)
Superannuation or SMSF “own occupation"Not availableNot available

Why is only 'Any Occupation' tax deductible?

  • Effective as of 1 July 2011, TPD insurance premiums are only fully tax-deductible if with a complying super fund, if you are paying a policy that covers a TPD definition that meets the conditions of a “disability super benefit”. This is more closely related to an "Any Occupation" definition.

      Premiums and benefits: Tax rates when inside super

      How much of my premium is tax-deductible?

      For premiums that are held inside super, they are 100% tax-deductible as long as the TPD definition is "Any Occupation". A super fund can claim a full deduction on the premium paid which can then be passed on to you.

      Pre-tax contribution caps

      There is a cap on how much of your pre-tax income you can contribute towards your super. Caps are as follows:

      Financial yearYour ageCap on pre-tax contributions
      2017-18Any age$25,000
      2016-17Over than 49 on 30 June 2016$30,000
      Under 49 on 30 June 2015$35,000
      2015-1649 and over on 30 June 2015$30,000
      Under 49 on 30 June 2014$35,000

      How much is a TPD payout taxed?

      When you receive a TPD payout it is usually split into two components for tax purposes.

      1. The tax-free component. This is the component of your payout that won't be taxed.
      2. A taxed component. This the rest of your payout, which is subject to tax.

      1. How is the tax-free component determined?

      This is dependent on how far you are to retirement, how much of your payout is withdrawn and how long you have had the policy for. Here's how it's calculated:

      Tax free component=(Total benefit amount) x (Days to retirement)
      divided by
      (Service days + days to retirement)
      • Total benefit amount: Total payout amount that's taken out of your super.
      • Days to retirement: How many days until you reach age 65 (or to your set retirement date).
      • Service days: Number of days you have held your policy to the date you are disabled.

      How does it work?

      See how it works with this example.

      Jim’s TPD policy pays $1 million as lump sum benefits, he turns 65 exactly 1,000 days from now, and he has 500 service days with his current super fund. His formula would be:

      1,000,000 x [1,000/(500+1000)] = 666,666

      This means that out of his $1 million benefit payment total, $666,666 will be tax free, and $333,333 will be taxed at a rate of 20%.

      2. How is the taxed component determined?

      This is dependent on your age and what source your premiums were paid from originally e.g. pre-tax income.

      Here's an example of how it works:

      Source of payment
      How was your TPD paid for originally?A taxed sourceAn un-taxed source
      Example:Personal contribution from you that's already been taxed.Salary sacrifice from your employer that has not been taxed yet.
      Age Tax rates
      60 and over0%15%
      Preservation age but under age 600% (benefit must be under $195,000)15% (benefit must be under $195,000)
      15% (if the benefit is over $195,000)30% (if the benefit is over $195,000)
      Under preservation age20%

      Not including the Medicare Levy. Information is accurate for the 2016/17 financial year. Source: Miller Super Solutions.

      Find out what preservation age is here.

      Am I eligible for TPD cover inside super?

      To purchase one of these policies in the first place you must:

      • Be a member of the complying super fund
      • Have an accumulating super benefit with regular contributions being made to your fund
      • Be under the age of 65, or aged 65-75 and able to pass the work test

      Tax treatment of TPD Insurance outside super

      Are TPD Insurance premiums tax-deductible?

      Premiums for TPD insurance policies that are held as standalone cover outside of superannuation environment are not tax-deductible. Unlike income protection, TPD insurance is not designed as a replacement income for the policy owner, instead it serves as financial compensation as a result of a permanent disability. Therefore, the premium payments cannot be claimed as part of assessable income and similarly to the benefit received.

      Are TPD Insurance payouts taxed?

      The benefit amount from TPD insurance policy will be tax-free when paid to the policyholder or nominated beneficiaries.


      Tips to find the right TPD Insurance Cover for your needs

      When deciding between TPD insurance cover that is held inside and outside of superannuation environment, tax should not be only aspect to consider. There are other factors that you may want to consider to determine which cover will provide adequate cover for your needs. Here are some tips to help you decide:

      • Understand the advantages and disadvantages of taking out TPD cover inside or outside of superannuation. While TPD insurance inside super may be tax-deductible and more cost-effective, there are specific conditions that still need to be met. This is not the case with cover obtained outside super.
      • Assess the features and benefits that are available with each policy. TPD cover within super is generally more affordable. However, standalone policies will generally offer more comprehensive protection through a broader range of benefits and features.
      • Link with your existing life cover. Instead of having two separate policies and paying more in premiums and having to manage to policies, you can bundle your TPD cover with your life insurance policy.
      • Compare multiple quotes to find the best deal. With hundreds of policies that are available in the market, you may be wondering how you’ll be able to find the right cover at the right price. Consider asking for help from an insurance consultant who has the expertise in finding a policy to match your needs, at a competitive price.

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      Provides a lump sum payment if you become totally and permanently disabled and are unable to return to work.
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      William Eve

      Will is a personal finance writer for finder.com.au specialising in content on insurance. While he cannot give personal advice to clients, Will enjoys explaining the intricacies of different types of protective cover to help individuals and businesses find affordable cover that won't leave them underinsured.

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      10 Responses

      1. Default Gravatar
        KuldeepAugust 7, 2017

        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?

        • Staff
          ArnoldAugust 8, 2017Staff

          Hi Kuldeep,

          Thanks for your inquiry.

          You may be able to claim some deductions which are not work related. They are:

          1. Interest and dividend deductions for investments
          2. Deductions for gifts and donations
          3. Deduction for the cost of managing your tax affairs.

          Some legal fees may be used as deductions. For more information please visit this government page.

          Hope this information helped.

          Cheers,
          Arnold

      2. Default Gravatar
        tanyaAugust 7, 2017

        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

        • Staff
          JonathanAugust 7, 2017Staff

          Hi Tanya, thanks for your inquiry.

          The taxability of the TPD payout will depend on whether it is held within the super policy. You can find out more about this in this guide.

          Best regards,

          Jonathan

      3. Default Gravatar
        JulieFebruary 15, 2017

        Can I claim tax back on the tax I paid on my TPD payout

        • Staff
          ZubairFebruary 15, 2017Staff

          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

      4. Default Gravatar
        BrianJanuary 9, 2017

        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?

        • Staff
          MauriceJanuary 10, 2017Staff

          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). You might find this page useful.

          Good luck!

          Maurice

      5. Default Gravatar
        LeighAugust 9, 2016

        I received $2300 gross from my super per month for a tdp claim through rest super. I am aged 52. Come tax time i am now forced to pay the tax dept $4,500 due to not enough tax being taken out of my monthly payment. Tried to talk to the insurance company who refuse to give me the % for correct tax and wether their is Medicare levy included. Can. You help me. My tax accountant ant advised me they should have taxed me at 20 to 22% whereby they seem to of only taxed me at 7% tax taken out was $160 approx. hope you can help.

        • Staff
          RichardAugust 10, 2016Staff

          Hi Leigh,

          Thanks for your question. finder.com.au is a comparison service and we cannot provide our users with personalised advice. You may want to contact the Insurance Law Service.

          I hope this was helpful,
          Richard

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