How Does the Tax Work?
Total & Permanent Disability (TPD) insurance can be held in a superannuation account or be held directly. Most people have Death and TPD insurance cover automatically set up within their superannuation account, particularly if their superannuation account was set up by their employer.
If you have a TPD claim approved and the insurance was held through your superannuation account the insured amount will be paid into your super account and added to your existing balance (there is no tax payable at this point). You then have access to withdraw a portion of or your entire superannuation account balance (except in certain rare circumstances).
TPD Withdrawal and Tax
If you do then make a withdrawal of your TPD and/or superannuation monies, and you are under your “superannuation preservation age” (which is between 55 and 60 years old, depending on when you were born), then you will pay tax when you go to withdraw these funds.
> See below for details on preservation age.
Your superannuation fund will withhold the tax and pay it to the ATO, they will also provide you with a PAYG summary. This tax withheld is a maximum rate and you may get some of the tax back at the end of the financial year (if a TPD claimant didn’t earn any other income during the financial year they make the withdrawal, then the maximum amount of tax they are likely to get back is roughly $4,000).
TPD Tax Rates
The tax rate to withdraw funds from superannuation for those under their preservation age is 22%.
HOWEVER, when you make a withdrawal after a TPD claim, the superannuation fund will perform a “tax-free uplift” calculation, meaning a portion of your withdrawal will be tax free.
This means everyone will have a different effective tax rate which could be anywhere between 1% and 18%. If you have more than one super account you will likely have a different tax rate on each of your superannuation accounts.
Warning: Consolidating your superannuation funds may increase the tax you pay when you withdraw your benefits.