If you’ve had a successful TPD claim, you may be wondering how much you’ll be taxed on your payout.
Generally speaking, there is no tax payable on a personal TPD claim. However, if your payout has been paid into your superannuation fund, you will pay tax when you withdraw any amount of money from there.
So, for most people, the tax they’ll be paying is not the tax on the TPD claim but is instead tax on the superannuation withdrawal.
We explain more about this in our video here and below in this article.
DISCLAIMER – The information provided in this blog is general and does not consider your individual financial needs or objectives. It does not constitute personal advice. We recommend seeking out professional and independent financial, legal and tax advice which has been designed for your individual situation before acting on any information contained below.
Tax on TPD Payout in Super
There are two different types of tax you could pay when taking money from superannuation after a TPD claim payout.
- A lump sum, which has a flat tax rate of up to 22%.
- Disability pension payments, which is taxed at your marginal tax rate.
Tax on TPD Lump Sum Payout
Firstly, after receiving a TPD claim, your superannuation will be broken up into two segments – a taxable and a tax-free portion.
The taxable and tax-free portions are based on a formula to do with your age, which is quite complicated. More information can be found on the ATO website here.
However, here’s an example of how it might work:
Example of Tax on Lump Sum Payment
Let’s say a person received a total permanent disablement policy for $1 million, and hypothetically speaking, had a 50% taxable component and a 50% tax-free component.
If the fictitious person decided to withdraw the full $1 million as a lump sum, they would need to pay tax on $500,000, the taxable component, at the tax rate of 22%.
So, in this example, they would pay $110,000 of tax to withdraw the $1million of TPD claim.
Now, before you ask, no, you can’t just withdraw the tax-free component. You can make any size withdrawal you want, but the proportions of taxable and tax-free will remain the same.
So, in this example – with a 50% taxable portion, and a 50% tax-free portion – if this person was to withdraw $100,000, then $50,000 will be taxable, so, $50,000 will be tax-free.
Tax on TPD Disability Pension
Rather than withdrawing a lump sum payment, some people choose to start a disability pension and draw pension payments.
The tax rate on pension payments is not a flat rate of 22%, but will instead be calculated at your Marginal Tax Rate.
This means the amount of tax you’re going to pay will be dependent on your taxable income.
An example of Tax on TPD Disability Pension
In this example the fictitious person started with disability pension amounting to $1 million and draws a pension income of $40,000 per annum.
As in the example above, 50% is taxable and 50% is tax-free. So, 50% of $40,000, or $20,000, will be taxed at their marginal tax rate.
Now, in Australia, $20,000 of taxable income will mean they won’t pay any tax at all because of the $18,200 tax-free threshold and the low-income tax offset.
So, in this example, that person could draw that income tax-free for as long as the money remained within the pension.
But if they have other taxable income, that will impact the amount of tax payable on those pension payments, subject to their levels of income.
Tax on TPD Payout
For some payout recipients, one of the above options will be most suitable. However, in some cases, you may benefit from a combination of both.
Do you have any further questions about the tax you may pay in the event of withdrawing a TPD claim from superannuation? Please get in touch with Precision Wealth Management today.
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