Disclaimer – This article is general information and education only and is not intended to be financial or legal advice. The tax treatment of TPD benefits varies based on your personal circumstances, age, and the structure of how/where your policy is held. Always seek personalised advice from a financial adviser, tax agent, or superannuation/insurance lawyer.
After you’ve fought for and won your Total and Permanent Disability (TPD) claim, the next question is often:
👉 Do I have to pay tax on my payout?
The answer is: it depends.
Tax treatment is determined by:
- Where your policy is held (inside super vs outside super),
- Your age at the time of withdrawal, and
- How you take the payment (lump sum vs income stream).
This guide explains how taxation of TPD payouts works in Australia, the difference between super and non-super policies, and the key factors that impact the final amount you take home.
Key Definitions Simplified
| Term | Meaning | Notes |
|---|---|---|
| TPD benefit | Lump sum paid if you become permanently disabled. | May be inside or outside super. |
| Inside super | Policy is linked to your super fund; payout goes to your super account first. | Most common arrangement. |
| Outside super | Retail/standalone policy held directly with an insurer. | Payout is usually tax-free. |
| Tax-free component | Portion of super not taxed. | Based on contributions. |
| Taxable component | Portion of super subject to tax. | Rate varies depending on age. |
| Preservation age | Age when you can normally access super (55–60 depending on DOB). | Crucial for tax calculation. |
Tax on TPD Payouts Inside Super
For most Australians, TPD cover is held inside superannuation.
When a claim is approved:
- The payout is deposited into your super account.
- You then withdraw it as a super benefit (lump sum or income stream).
- Tax is applied depending on your age and the split of taxable vs tax-free components.
Lump Sum Withdrawals
| Age | Tax Treatment | Notes |
|---|---|---|
| Under preservation age | Tax-free component: 0% tax. Taxable component: taxed at 22% (incl. Medicare levy). | A small tax offset may slightly lower the rate. |
| Preservation age to 60 | Tax-free component: 0%. Taxable component: first $235,000* tax-free, remainder taxed at 17% (incl. Medicare levy). | *Low rate cap for 2023–24; indexed annually. |
| 60+ | Entire benefit tax-free. | Regardless of components. |
Income Streams
If you take your TPD benefit as a super income stream:
- Under 60: taxable portion taxed at marginal rates, less 15% offset.
- 60+: generally tax-free.
Tax on TPD Payouts Outside Super
If your TPD policy is a standalone policy outside super:
- The payout is tax-free.
- No preservation rules or super conditions apply.
- You receive the full lump sum.
👉 The main advantage is a guaranteed tax-free benefit, though premiums are usually higher than super-linked cover.
Worked Examples
Example 1 – John, age 45 (inside super)
- TPD benefit: $400,000
- Tax-free component: $100,000
- Taxable component: $300,000
- Under preservation age → 22% tax = $66,000.
- Net received: $334,000.
Example 2 – Sarah, age 58 (between preservation age & 60)
- TPD benefit: $400,000
- Tax-free: $100,000
- Taxable: $300,000
- First $235,000 tax-free, balance $65,000 taxed at 17% = $11,050.
- Net received: $388,950.
Example 3 – Michael, age 62 (inside super)
- TPD benefit: $400,000.
- Entire benefit tax-free (aged 60+).
- Net received: $400,000.
Example 4 – Lisa, age 40 (outside super)
- TPD benefit: $500,000 retail policy.
- Entire amount tax-free.
- Net received: $500,000.
Common Pitfalls
- Assuming all TPD payouts are tax-free – only true for outside super or if you’re 60+.
- Forgetting preservation age rules – tax liability often reduces significantly after reaching this age.
- Not understanding withdrawal structures – lump sum vs income stream can change your tax liability.
- Skipping financial advice – poor tax planning can cost tens of thousands unnecessarily.
Fast-Track Checklist: TPD Payouts and Tax
| Action | Why It Matters | Who to Consult |
|---|---|---|
| Check if policy is inside or outside super | Determines if tax applies. | Super fund / insurer. |
| Confirm your preservation age | Affects tax rate. | ATO calculator. |
| Request a breakdown of components | Know your taxable vs tax-free split. | Super fund statement. |
| Decide lump sum vs income stream | Impacts tax treatment. | Financial adviser. |
| Get tailored tax/legal advice | Ensures you maximise your benefit. | Lawyer / tax agent. |
FAQs
Can a TPD payout be tax-free?
Yes. Always tax-free if held outside super, or if taken from super at age 60+.
What if I’m under 60?
Part of your payout may be taxed (up to 22%) depending on your super components.
What is preservation age?
The age you can normally access your super (55–60 depending on date of birth).
Can I reduce the tax?
Yes. Structuring your withdrawal, using available offsets, or waiting until after preservation age can reduce tax liability.
Does it matter if AFCA or a court forced the payout?
No. Tax rules apply the same way regardless of how the payout was obtained.
Key Takeaways
- Outside super: TPD payouts are always tax-free.
- Inside super: payouts may be taxable depending on your age and component split.
- Under 60: tax of up to 22% may apply.
- 60+: payouts are always tax-free.
- Always review your superannuation components and seek professional advice before withdrawing.
Winning a TPD claim is life-changing, but before planning how to use your payout, you need to understand the tax consequences. While some TPD benefits are entirely tax-free, many super-linked policies attract tax unless you’ve reached preservation age or are aged 60+.
At TPD Claims Lawyers, we not only help Australians make successful claims, but also guide them through the critical “what happens next” stage. If you’re unsure about the tax on your payout, contact us for a free, no-obligation assessment and clear advice on your options.
Last updated: 3 September 2025