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||2. Inside of super|
- How are the different types of TPD insurance taxed ?
- How is tax treated inside super?
- Tax rates and deductions on super premiums and benefit
|Policy type||When does it pay benefits?||Are premiums usually tax-deductible?||Are benefits usually taxable?|
|Own occupation TPD||If you are medically recognised as unable to work your own occupation||No||No|
|Any occupation TPD||If you are medically recognised as unable to work any occupation||No||No|
|Superannuation TPD||If you are recognised as being permanently disabled by the supers trustee||Yes*||Yes*|
|Keyman insurance (revenue purpose)||If the insured business person dies, becomes disabled or is unable to work||Yes||Yes|
|Keyman insurance (capital purpose)||If the insured business person dies, becomes disabled or is unable to work||No||No|
|Type of super policy||Tax-deductible?||Benefits tax assessable?|
|Superannuation or SMSF “any occupation"||Yes (up to a cap)||Partially (depending on age)|
|Superannuation or SMSF “own occupation"||Not available||Not 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.
What does 'Any Occupation' cover?
Any Occupation pays our a lump sum if you meet the following requirements:
- You suffer from a physical or mental disability;
- You are unlikely to ever work again in a capacity in which you suited to by education, training or experience;
- You can provide evidence of condition (1) and (2), certified by two medical practitioners;
- You are covered under TPD any occupation cover.
What if I have an 'Own Occupation' bought before July 2011?
Own Occupation TPD Insurance is no longer offered in a superannuation environment. However, if you bought a policy before Jul 2011 you can receive tax deductions as follows:
|TPD (own occupation)||67%|
|TPD (own occupation) with any of these modifications:(a) activities of daily living(b) cognitive loss(c) loss of limb||67%|
|TPD (own-occupation) combined with life insurance||80%|
|TPD (own-occupation) combined with life insurancewith any of these modifications:(a) activities of daily living(b) cognitive loss(c) loss of limb||80%|
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 year||Your age||Cap on pre-tax contributions|
|2016-17||Over than 49 on 30 June 2016||$30,000|
|Under 49 on 30 June 2015||$35,000|
|2015-16||49 and over on 30 June 2015||$30,000|
|Under 49 on 30 June 2014||$35,000|
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.
When you receive a TPD payout it is usually split into two components for tax purposes.
- The tax-free component. This is the component of your payout that won't be taxed.
- A taxed component. This the rest of your payout, which is subject to tax.
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)|
|(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%.
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 source||An un-taxed source|
|Example:||Personal contribution from you that's already been taxed.||Salary sacrifice from your employer that has not been taxed yet.|
|60 and over||0%||15%|
|Preservation age but under age 60||0% (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 age||20%|
Not including the Medicare Levy. Information is accurate for the 2016/17 financial year. Source: Miller Super Solutions.
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
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.
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.