Guide to Tax Payable on TPD Lump Sum Payments
Is a TPD Payout Taxable?
Congratulations, your TPD claim has been approved, and you are receiving a payout—a sizeable amount of money paid into your superannuation account. Next, you are probably questioning:
- Do you have to pay tax on a TPD payout?
- Is tax payable?
- How much tax will I pay?
Thankfully, when you have a successful claim, your TPD benefit is generally not considered taxable income and is tax-free. Providing you leave this money in your superannuation account until you reach retirement age.
Tax on TPD Payment in Super
You must pay tax if you are below your superannuation preservation age (which depends on when you were born) and withdraw funds from your TPD payout.
When you make a superannuation withdrawal of your TPD funds, your superannuation provider will issue you a PAYG summary, which has already deducted tax, to the Australian Tax Office.
During this process, they will tax you at the top rate, and you can retrieve some of this money on your annual tax return. For example, if you are not working and have no other source of income, you are highly likely to get some of this tax back at the end of the financial year.
What is the TPD Tax Rate?
Your TPD claim benefit will usually be taxed at 22%, but there will be an existing tax free component because your superannuation provider will do a tax-free uplift calculation.
Every Australian with a successful TPD payment will be taxed at a special rate ranging between 18% and 1%. Each can be taxed at varying rates if you have multiple super accounts and multiple TPD claims.
Essential Factors in TPD Tax Calculations – Tax Free Uplift
When withdrawing TPD money below the preservation age, you can be eligible for a tax-free uplift. Three taxable components are used to make this calculation.
- Your date of birth
- Your eligible service date: This is the date your superannuation account started. If you combine multiple super accounts into one, your service date is the youngest one.
- Your date last worked: This was when you ceased working due to your total and permanent disability. In most cases, it is not the date you acquired your medical condition but your job cessation date.
Basically, the time between when your Super account began and your date of last work is the taxable component and is taxed at 22%. The time between your date of previous work and your preservation age is tax-free.
Please know that superannuation funds do not always reliably calculate tax correctly. So, speaking with an experienced accountant or tax agent to confirm your tax commitment would be a good idea.
More about TPD Insurance Claims
Typical TPD Tax Calculation Error
Many people withdrawing TPD funds are overtaxed because the incorrect time is used as the last worked date. Sometimes, superannuation funds use the date they did your calculation or the time your claim was accepted. In this situation, you can pay too much tax because they are using a later date than when you ceased working.
What To Do If You Are Overtaxed
If the super fund takes too much tax, you could claim this back at the end of the financial year, but this is not always true. Your super fund sent incorrect information to the ATO, so they must rectify the error. You should ask them for an explanation of how they calculated your tax.
What are the Lump Sum Superannuation Withdrawal Rules?
Generally, you can access the funds in your super account once you have met a condition of release, like reaching your preservation age, or retirement. Once approved, you can choose to:
- withdraw a lump sum amount
- make a partial withdrawal
- roll over your super balance to begin an income stream.
What is the Superannuation Preservation Age?
If you are in an older age bracket, you may wish to delay withdrawing your TPD payout. In this case, you can take out $210,000 tax-free from your superannuation account once you have passed your preservation age. For people older than 60, all superannuation withdrawals are tax-free.
Date of Birth
Before 1 July 1960
1 July 1960 – 30 June 1961
1 July 1961 – 30 June 1962
1 July 1962 – 30 June 1962
1 July 1963 – 30 June 1963
From 1 July 1964
How to Reduce Your TPD Tax
Before withdrawing your TPD payout, you must understand your financial circumstances and tax obligations. It would be worthwhile speaking with a tax professional. They could save you thousands of dollars in taxes.
Summary of TPD Tax Obligations and Tax Free Uplift
Here is a simple breakdown of how tax applies to TPD payouts.
- If you are 60 or older, your TPD payout is tax-free.
- Below 60 years old, your tax commitment depends on your eligible service rate, which is usually the date you joined your super fund.
- If you are below your preservation age, some of your withdrawals will be tax-free, and the balance is taxed at 22%
- If you are below 60 years old but at your preservation age, withdrawals of $ 225,000 or less are tax-free.
- If you make a lump sum withdrawal over $225,000: some of this money will be tax-free.
How Does a TPD payout impact Centrelink payments?
If you receive social security benefits and are due a successful TPD payout, you will likely want to know how they work together.
When your TPD lump sum payment is approved, your funds will be deposited into your superannuation fund account. Centrelink will disregard your superannuation account balance from their means assessment until you are in the 65.5 to 67-year age range, which is the Centrelink Age Pension period. Other Centrelink benefits will also not be impacted, like child support payments.
If you withdraw some or all of your TPD payout from your superannuation fund account, this situation changes. In this circumstance, Centrelink may consider reassessing your financial situation and adjusting your social security payments.
We recommend you seek professional financial advice for potential strategies before withdrawing your TPD funds from your superannuation account. Typically, the Centrelink process is complex, and you want to be sure you are making the best decision.