by Erin Harding
Are you receiving a Total and Permanent Disability (TPD) payment this financial year from your superannuation fund? If so, there may be significant tax consequences.
TPD Payments
TPD payments are divided into tax-free and taxable components.
The tax-free component is not included in your taxable income and this amount is calculated based on the time you would have worked until retirement.
The taxable component is the remaining portion that is subject to superannuation lump sum tax rates. This component must be included in your tax return and is taxed at a flat rate. This tax rate applied is based on your age at the time the TPD payment is made:
- Under 55: 22% (including Medicare Levy)
- 55-59: 15% (including Medicare Levy)
- 60+: Tax free
Although the TPD payment will increase your taxable income, it won’t increase the tax on your other income sources. A lump sum tax offset is applied in your return to ensure that your other income is taxed as if you hadn’t received the TPD payment, while the TPD payment itself is taxed at the rates outlined above.
Tax Consequences
A large TPD payment can push your taxable income into a higher tax bracket, which can increase your Medicare Levy or make you liable for the Medicare Levy Surcharge if you don’t have private health insurance.
If you receive Centrelink benefits such as Disability Support Pension (DSP) or a Carer Payment, then a higher reported income could impact your eligibility to continue to receive these benefits.
Should the TPD payment increase your adjusted taxable income over the Division 293 threshold of $250,000, then you would also be liable to pay Division 293 tax. Division 293 tax is an additional 15% tax payment on the excess over the threshold, or on your concessional super contributions (whichever is less). The Division 293 tax is issued on a separate notice by the Tax Office following the lodgement of your return.
As there are a number of tax consequences that can occur from receiving a TPD payment, it is best to always seek professional advice. This can ensure that that you minimise your tax liability and structure your finances efficiently.
Case Study: $350,000 TPD Payment
The case study below illustrates the real-life impact of a TPD payment on tax.
In the 2024 year, Sam received a TPD payment of $350,000 and also $120,000 from workers’ compensation and income protection payments, with $28,000 tax withheld.
Out of the $350,000 TPD payment, $125,000 was non-taxable, while the remaining $225,000 was taxable, with $49,500 tax withheld (calculated at 22% of $225,000). Sam also made a personal superannuation contribution of $27,500 during the 2024 tax year.
Sam’s taxable income, excluding the TPD payment, is $92,500. This is calculated as the $120,000 received from workers’ compensation and income protection, minus the $27,500 superannuation contribution. The tax on this amount, based on the marginal tax rate including the Medicare Levy, is $22,380.
The tax on the taxable portion of the TPD payment ($225,000) at 22% is $49,500. This brings Sam’s total taxable income for the 2024 tax return to $317,500, with total income tax payable of $71,880 ($22,380 + $49,500). Since Sam had $77,500 in tax withheld from their income, their tax return would result in a refund of $5,620.
However, because Sam’s taxable income exceeds $250,000, they are subject to Division 293 tax. This tax is applied at 15% on the lesser of:
- The amount over $250,000 ($317,500 – $250,000 = $67,500), or
- Their concessional superannuation contributions ($27,500).
Since the concessional superannuation contributions of $27,500 is the lower amount, Sam’s Division 293 tax liability is $4,125. This amount is added to their income tax account, reducing their net tax refund to $1,495.
If Sam had not made a personal superannuation contribution of $27,500, their 2024 tax return would have resulted in tax payable of $3,867. However, they would not have incurred any Division 293 tax, as no superannuation contributions would have been made.
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