TPD Insurance And Tax In Australia

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

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

If the policy was bought:1. Outside of super (standalone)2. Inside of super (bundle)
  • Not tax-deductible
  • Tax-deductible
  • Not taxed

This article will go into more depth and explain you can expect to pay tax on TPD and how this will also change with your age.

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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.

Tax treatment of TPD Insurance premiums within super

Effective as of 1 July 2011, TPD insurance premiums are only fully tax-deductible if with a complying super fund, if the policy definition meets the conditions of a “disability super benefit,” which means:

  1. You suffer from a physical or mental disability;
  2. You are unlikely to ever work again in a capacity in which you suited to by education, training or experience;
  3. You can provide evidence of condition (1) and (2), certified by two medical practitioners;
  4. You are covered under TPD any occupation cover.

Are premiums tax deductible if my TPD is 'Any Occupation'

Under the any occupation definition, your TPD insurance premiums are 100% tax deductible, provided that the disability super benefit definition is met.

Are premiums tax deductible if my TPD is 'Own Occupation'

Own Occupation TPD Insurance is no longer offered in a superannuation environment.

Tax on TPD Insurance benefits when held inside super

The benefit amount received from TPD insurance held outside a superannuation environment is generally exempt from Capital Gains Tax. However, when held inside super fund, a portion of your TPD insurance benefit may be subject to tax. A part of the benefit received will be tax free, while the remaining will be taxed depending on how you choose to receive your benefit payment - lump sum or monthly instalments.

Tax on Lump Sum and Income Stream TPD Benefit

Your AgeLump SumIncome Stream
Over 60 years oldTax free on the total benefit received.Tax free
At preservation age, but less than 60 years oldThe first $175,000 of the taxable component is tax free and the remaining is taxed at 15%, including the Medicare levy.Taxable component is taxed at marginal rates, minus a 15% tax offset.
Below the preservation ageTaxable component is subject to tax at 20%, including the Medicare levy.No tax applicable on tax-free component, and the remaining balance is taxed at marginal tax rates, minus the 15% tax offset.

Calculating the Tax Free Portion

The tax-free portion is calculated using the following formula:

Additional tax-free = total benefit amount x [days to retirement / (service days + days to retirement)] 

Days to retirement: The number of days from the day that you are no longer able to work up until your retirement date.

Last retirement date: The date you reach 65 years old, or the date of which your employment would have been terminated as a result of your age.

Service days: Number of days in the service period for the lump sum.

Source: ATO, 2013; Quinn, 2013; Raffo, 2013

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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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.

William Eve

Will is a personal finance writer for 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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2 Responses to TPD Insurance And Tax In Australia

  1. Default Gravatar
    Leigh | August 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
      Richard | August 10, 2016

      Hi Leigh,

      Thanks for your question. 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,

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