Am I going to pay tax on my super TPD payout?

Across Australia, thousands of people are paying for total and permanent disability (TPD) insurance and other kinds of disability insurance through the hard earned money in their super funds. Many people are unaware they even have insurance. However, if you suffer from an injury or illness that means you are unable to work, finding out that it is available and that you may be eligible to claim a lump sum can come as a great relief. However, this relief may be short-lived if you find out you have to pay a large part of your payout to the taxman! Don’t worry – this blog provides practical information on what you need to know about the tax treatment of TPD and other insurance benefits. 

Read more here: Thinking of starting a family? Check your super! – Littles

Help! I’m worried I’m going to lose a big chunk of my TPD benefit!

‘Total and permanent disability’ (TPD) insurance is an insurance product that pays a lump sum benefit if you become sick or injured (or both) and unable are unable work again. Super funds are not the only source of TPD insurance. You could also be insured for TPD under other arrangements, including

  • your employment contract;
  • your workplace (or former workplace) enterprise bargaining agreement;
  • insurance that you purchased through a financial advisor or directly from an insurer; or
  • CTP insurance.

You may be entitled to claim on more than one policy, depending on your personal circumstances.

The tax treatment of a TPD benefit varies depending on whether the benefit is paid to you from a policy held by your super fund, or one that you have obtained directly.

Read more here: Help! How do I protect my super if I’ve been made redundant? – Littles

I have TPD insurance in my super

TPD benefits which are held in super are generally paid into your superannuation account. Once they are in the account, they usually form part of your superannuation account balance and any withdrawal will be taxed as if it is a superannuation withdrawal. Over the preservation age and not working? You won’t pay tax on the TPD benefit which is paid to you from your super account.

However, if you have not yet reached your preservation age, you will need to apply to withdraw the super money on the grounds of permanent incapacity (or potentially terminal illness). If this is the case, your withdrawal will be taxed, but you will usually get a discount due to your disability and work incapacity, provided that you give the super fund documents it can use to satisfy the ATO that you are permanently incapacitated. 

Read more here: If you’re starting a new job in 2021, you need to know about changes to super! – Littles

I have TPD insurance outside my super 

TPD benefits are not considered income and will usually be tax-free. However, it’s worth checking with your insurance fund or accountant just to be sure!

What about an income protection benefit?

Income protection or salary continuance benefits protect the income that you earn each month if you get sick or injured and cannot work or cannot work in the same capacity. They are usually  paid on a monthly basis, provided you continue to be unable to work due to illness and provide medical evidence to confirm. 

Read more here: I need to make an income protection insurance claim. Where do I start? – Littles

The important thing to understand from a tax perspective is that because income protection benefits are intended to replace your income, they are treated like income. As a result, the insurance company or superannuation fund that pays the benefit usually withholds the tax payable (and pay to the ATO on your behalf). 

Again, it’s worth making sure that tax is being withheld from your benefit and you are issued with a PAYG statement at the end of the financial year. Otherwise, you could end up with an unwelcome surprise come tax time!

Tax on terminal illness payouts

Death insurance benefits usually allow for terminal illness benefits to pe paid to you if you become ‘terminally ill’, as defined in the insurance policy. If your terminal illness benefit is held through your super, it will be paid into your super account (as with the TPD benefit) and form part of your superannuation account balance. However, unlike with a TPD claim, early access to superannuation on the grounds of terminal illness does not typically attract tax. As above – if the relevant death insurance policy is held outside super, it will be paid to you directly and there is not usually any tax to be paid.

Don’t delay – seek advice now

Do you have an injury or illness that prevents you from working, or just want to know more about what insurance you have under your super?  Get in touch with Littles for a free super claims check. We can help you understand what you’re entitled to. Know where you stand, and get peace of mind. 

Free advice and no upfront fees

Not only do we offer a FREE claims check – we handle most insurance claims on a no win, no fee basis. Our Head of TPD and General Insurance, Rowan McDonald, is an insurance law expert. If you think you might have a claim, get in touch with Rowan and his team for high quality legal advice. 

Please note that this information is intended to provide general guidance only. You should not act or refrain from acting on the basis of such information. Appropriate professional advice should be sought based upon your individual circumstances. For further information, please contact Littles.

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