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)
Premiums 
  • Not tax-deductible
  • Tax-deductible
Payouts/benefits
  • Not taxed

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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 supers 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

*The proportion of the premium that's tax deductible will depend on the type of super policy.


How is tax treated inside super?

Type of super policyTax-deductible?Benefits tax assessable?
Superannuation or SMSF “any occupationYes, or partiallyPartially
Superannuation or SMSF “own occupationNot availableNot available

When are premiums tax-deductible

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.

You must meet the conditions of a “disability super benefit”. This must be an “any occupation” TPD policy (it cannot be an “own occupation” policy) which pays benefits when you meet all the following requirements:

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

Under the any occupation definition, your TPD insurance premiums are 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.

How much of my premium is tax-deductible?

These requirements are relatively standard for TPD insurance policies. If you meet these requirements, you get access to the following tax deductions depending on what type of TPD cover you have.

Superannuation TPD policy typeDeductible portion of premium
Any Occupation TPD bundled with life cover100%
Standalone Any Occupation TPD policy100%
Own Occupation TPD bundled with life cover80%
Standalone Own Occupation TPD policy67%

Key considerations

When deducting, remember:

  • Deductions for super policies only. These tax deductions only apply to policies held through superannuation funds.
  • Dual eligibility requirements. To be eligible for these your disability event must meet the requirements of both your insurer and your super fund.
  • Additional definitions. All types of policy may include additional definitions of “total and permanent disability”, such as cognitive loss or inability to perform daily tasks, without impacting your deductions.
  • Standalone vs bundled. “Standalone” refers to TPD-only policies while “bundled” refers to TPD policies linked with life insurance. This can affect your deductions.

Tax on TPD payouts when held inside super

How much you are taxed will depend on how your TPD benefit is paid out  and your age.

Your AgeLump sumIncome Stream
Over 60 Tax freeTax free
At preservation age, but under 60The 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.

How is preservation age determined?

If you were born before 1 July 1960 your preservation age is 55. If you were born on or after 1 July 1964, your preservation age is 60. If you were born between these dates find your preservation age here.

How do I calculate the tax-free component?

Use this formula to calculate the tax-free portion used for people below the preservation age.

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.

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%.

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

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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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 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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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. 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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