Tax on a TPD payout and how super lump sums are taxed (2026)
Tax on a TPD payout depends on where the policy sits and your age. A TPD lump sum paid from super has a tax-free component and a taxable component. From age 60, it is tax free. Below 60, capped rates may apply to the taxable component, and a disability boost can enlarge the tax-free part.
Key takeaways
Is there tax on a TPD payout?
It depends. The tax on a TPD payout turns on two things. One is whether the policy sits inside super. The other is your age when the payout arrives. TPD cover is often held through a super fund, and our guide to TPD claims in Queensland explains how those claims work.
If the fund pays your TPD benefit, it is a super benefit. So the super tax rules in the Income Tax Assessment Act 1997 apply, not the rules for personal injury damages. By contrast, damages from a negligence claim are generally not taxable, as our compensation guide notes.
This page is general information, not tax or financial advice. Tax law is federal, so these rules apply in Queensland the same way as elsewhere. However, your fund’s payment summary and a registered tax agent are the best guides to your own figures.
Tax-free and taxable components of a TPD payout
Every super lump sum has two parts. The tax-free component is never assessable income. The taxable component may attract tax, depending on your age. Your fund works out both parts and shows them on the payment summary it gives you.
In addition, the taxable component can include an “element untaxed in the fund”. That happens mainly in some public sector schemes, where the fund itself has not paid tax on contributions. Different, higher rates can apply to that element (ITAA 1997 Subdiv 301-C). So ask your fund whether your benefit has one.
How age changes the tax on a TPD payout
The Income Tax Assessment Act 1997 sets the rates by age band. The rates below are maximum rates, which the Act achieves through tax offsets. Also, they apply to the element taxed in the fund.
|
Your age when paid |
Tax-free component |
Taxable component of a lump sum |
Section |
|---|---|---|---|
|
60 or over |
Not assessable |
Not assessable (all super benefits are tax free) |
s 301-10 |
|
Preservation age to 59 |
Not assessable |
0% up to your low rate cap amount, then no more than 15% |
ss 301-15, 301-20 |
|
Under preservation age |
Not assessable |
No more than 20% |
ss 301-30, 301-35 |
What is your preservation age?
Your preservation age depends on your date of birth. The ITAA 1997 dictionary takes the definition from Part 6 of the Superannuation Industry (Supervision) Regulations 1994, reg 6.01.
|
Date of birth |
Preservation age |
|---|---|
|
Before 1 July 1960 |
55 |
|
1 July 1960 to 30 June 1961 |
56 |
|
From 1 July 1961 to 30 June 1962 |
57 |
|
1 July 1962 to 30 June 1963 |
58 |
|
From 1 July 1963 to 30 June 1964 |
59 |
|
After 30 June 1964 |
60 |
How the disability boost reduces tax on a TPD payout
A special rule can shrink the taxable part of a disability lump sum. Under ITAA 1997 s 307-145, the fund increases the tax-free component of a “disability superannuation benefit”. This boost can cut the tax on a TPD payout a great deal.
To count, two legally qualified medical practitioners must certify something specific. They must certify that, because of ill-health, you are unlikely ever to work in a job you are reasonably qualified for by education, experience or training (ITAA 1997 s 995-1).
The extra tax-free amount uses a formula. The fund multiplies the benefit by your days to retirement. Then it divides by your service days plus your days to retirement. “Days to retirement” runs from the day you stopped being capable of gainful employment to your last retirement day. For most people, that is the day you would turn 65.
As a result, the younger you are when you stop work, the larger the share that becomes tax free. However, the tax-free component can never exceed the benefit itself. Your fund does this calculation, so ask it to show the working if anything looks unclear.
The low rate cap
If you are between your preservation age and 59, the first part of the taxable component attracts 0% tax. Your low rate cap amount sets the size of that part (ITAA 1997 s 307-345).
The cap started at $140,000 in 2007–08, and indexation increases it over time. It is also a lifetime limit, because lump sums you used in one year reduce your cap for the next. We could not read the 2026–27 figure on an official page. So check the current amount on the ATO’s super tax pages.
TPD paid as an income stream
Some funds can pay a disability benefit as regular payments instead of a lump sum. Under your preservation age, the taxable component of an income stream is assessable income. However, if the payments are a disability superannuation benefit, you receive a 15% tax offset (ITAA 1997 s 301-40).
Between preservation age and 59, an income stream’s taxable component also attracts a 15% offset (s 301-25). From 60, it is generally tax free (s 301-10).
Tax on a TPD payout from insurance outside super
You may hold TPD cover directly with an insurer, not through super. In that case, the super rules above do not apply. The ATO’s guidance on income protection insurance treats TPD cover outside super differently from income protection. It says premiums for the TPD part are not deductible because that cover is capital in nature.
Two capital gains tax exemptions may also affect the tax on a TPD payout of this kind. First, Income Tax Assessment Act 1997 s 118-37 disregards gains from compensation for a personal illness or injury. Section 118-300 covers some life insurance policies held by the original owner.
Because the wording of each policy matters, we don’t say how the tax on a TPD payout from a particular policy works. Instead, ask the insurer for its tax statement and check it with a registered tax agent.
Practical steps before you receive the money
A few simple checks can help you understand the tax on your TPD payout before the fund pays it. First, ask your fund for an estimate of the tax-free and taxable components. Next, ask whether the benefit includes an element untaxed in the fund.
Then, check that your medical certificates meet the disability superannuation benefit test, because they affect the boost. Finally, get advice from a registered tax agent or financial adviser before you decide anything.
If your fund rejects the claim instead, our guide on challenging a rejected TPD claim explains the complaint steps. And if you are also on WorkCover, see claiming TPD and WorkCover at the same time.
Frequently asked questions
Sources
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About the author
Marshall Fenech, Editor
Marshall Fenech is the editor of Compare Personal Injury Lawyer QLD. He researches Queensland personal injury law firms and claim rules, checks every fact against public sources such as the Queensland Law Society, MAIC, WorkCover Queensland and Queensland legislation, and dates each check. He does not give legal advice.
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