How a TPD payout from super is taxed
A TPD lump sum from super is a disability super benefit, and the tax depends on your age when it's paid and the components of the benefit. The tax-free component is never taxed. The taxable component is taxed only if you're under 60. Most funds pay a taxed element; an untaxed element is mostly found in public sector funds.
| Part of the payout | Under 60 | 60 and over |
|---|---|---|
| Tax-free component (including the disability uplift) | No tax | No tax |
| Taxable component, taxed element (most funds) | Your marginal rate or 22%, whichever is lower | No tax |
| Taxable component, untaxed element (mostly public sector funds) | Your marginal rate or 32%, whichever is lower, up to the untaxed plan cap | Your marginal rate or 17%, whichever is lower, up to the untaxed plan cap |
The tax-free uplift for disability benefits
When a fund pays a disability lump sum, the ATO increases the tax-free component to reflect the years you would have kept working if you hadn't become disabled. The extra tax-free amount is the payout multiplied by your days to retirement, divided by your service days plus your days to retirement, with any day in both periods counted once.
- Days to retirement run from the day you became unable to work to your last retirement day, which is generally your 65th birthday.
- Service days run from the start of your service period to the day the benefit is paid. The service period generally starts on the day you joined the fund, or the day you started with an employer that paid into it if that was earlier, and a rollover from another fund can take it back further.
- The younger you were when you stopped work, the larger the uplift and the smaller the taxable part.
| Step | Figure |
|---|---|
| Born 1 July 1981, so the last retirement day (65th birthday) is 1 July 2046 | |
| Stopped being able to work on 1 January 2026: days to retirement | 7,486 |
| Joined the fund on 1 July 2010, paid on 1 October 2026: service days | 5,936 |
| Days in both periods counted once: 1 July 2010 to 1 July 2046 | 13,149 |
| Tax-free uplift: $500,000 × 7,486 ÷ 13,149 | $284,660 |
| Taxable component: $500,000 less $284,660 | $215,340 |
| Maximum tax at 22% | $47,375 |
| Amount received, at least | $452,625 |
What you need for the lower tax
The ATO says that to get the concessional tax treatment on super withdrawn because of permanent incapacity, you must be certified by at least two medical practitioners. Your fund must be satisfied you have a permanent physical or mental condition that's likely to stop you from ever working again in a job you're qualified for by education, training or experience. That trustee decision is separate from the insurer's decision on your TPD claim, so a claim through super has two steps. See TPD insurance for how the definitions and the claim process work.
TPD held outside super
A TPD payment under a policy you own outside super isn't income. The ATO says a payment for total and permanent disability under a policy is capital, and in some circumstances might be assessable as a capital gain, so ask a registered tax agent how it applies to you. Premiums for TPD cover you hold personally aren't tax deductible.
Before you rely on the estimate
Your fund works out the components of your benefit, and the tax depends on your age on the day it's paid. Ask the fund for a benefit statement showing the tax-free and taxable amounts, and check your service period start date with it. A registered tax agent can confirm your own position, including whether your marginal rate is below 22%.
Common questions
Is a TPD payout taxed in Australia?
It depends where the cover is held and your age. A TPD lump sum from super is tax-free from 60. Under 60, its taxable component is taxed at up to 22% including the Medicare levy, after a tax-free uplift for disability benefits. A TPD payment under a policy you own outside super is capital, not income, although the ATO says it might be assessable as a capital gain in some circumstances.
How much tax do I pay on a TPD payout from super?
If you're under 60, the taxable component is taxed at your marginal rate or 22%, whichever is lower. The ATO first increases the tax-free part of a disability lump sum in proportion to the days you had left until 65, so the tax always works out at less than 22% of the whole payout. The calculator on this page estimates it.
Is TPD tax-free after 60?
Yes, for a lump sum from a taxed super fund. From 60, the tax-free component and the taxed element of a super lump sum aren't taxed. An untaxed element, mostly found in public sector funds, is still taxed at up to 17% including the Medicare levy.
Why is my TPD payout less than my cover amount?
Usually because of tax. Moneysmart warns that a TPD payout from super might be taxed at up to 22% if you're under 60, so the money you receive may not match the cover you thought you had. The tax-free uplift reduces that, so check the components on your fund's benefit statement.
What do I need to get the lower tax on a TPD payout?
The ATO says you must be certified by at least two medical practitioners as unlikely ever to work again in a job you're qualified for by education, training or experience. Your super fund must also be satisfied you meet the permanent incapacity condition of release before it pays you.
General information only
This calculator applies the ATO's published rules to the figures you enter. It doesn't know your fund's records, your other income or any untaxed element, so your actual tax may differ. Confirm your position with your fund, the ATO or a registered tax agent.
