TPD payouts from super are taxable, but a special tax offset for permanent incapacity can significantly reduce the tax payable — sometimes to zero. Understanding how this works before you receive your payout can save you substantial money.
The permanent incapacity tax offset
If you are under your preservation age (currently between 57–60 depending on birth year) and receive a super benefit on grounds of permanent incapacity, the taxable component is taxed at a maximum of 15%, with a tax offset applied that can reduce this further. For many recipients, the effective tax rate ends up between 0% and 15%.
How it works in practice
The offset is calculated as 15% of the taxed element of your super benefit, applied as a credit against your income tax liability. This effectively ensures the taxed component of a TPD payout is taxed at a flat 15% rather than your marginal income tax rate.
Declaring permanent incapacity to your fund
To access this tax treatment, you need to tell your super fund that you are accessing the benefit on grounds of permanent incapacity. The fund then codes the payment accordingly with the ATO.
Get specific tax advice
Tax treatment of super payouts is complex and depends on your specific circumstances — age, super components, and how the benefit is paid. Always seek advice from a registered tax agent or financial adviser before receiving your payment. See also our guide to TPD taxation.
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