Understanding invalidity payments

Provides information about how the invalidity payment, which is part of an employment termination payment, is taxed.

What is an invalidity payment?

An invalidity payment is part of an employment termination payment (ETP) you receive from your employer as a result of sustaining a permanent disability.

You will receive an invalidity payment if your employment ceased as a result of ill-health and two medical practitioners have certified that it is unlikely you can ever be gainfully employed in an area for which you are reasonably qualified.

From 1 July 2007 your ETP will be made up of a taxable component and a tax-free component. The tax-free component will include:

• an invalidity segment, and
• a pre-July 1983 segment (if your service period began before 1 July 1983).

Read Understanding employment termination payments for more information about ETPs.

What is the invalidity segment of my ETP?

The invalidity segment of your ETP is calculated generally as the portion of your ETP which represents the time between the day your employment stopped and the day you would have retired. Generally the day you would have retired is your 65^th birthday.

How is my invalidity payment taxed?

Your invalidity payment is tax-free. However you will have to pay tax on the taxable component of your ETP. The amount of tax you pay on your ETP will depend on your age when you receive the payment and also if your service period began before 1 July 1983.

Can I roll my invalidity payment into my super?

You can not roll-over your invalidity payment into your super, unless your ETP is made under the transitional arrangements.

The transitional arrangements apply to ETPs made between 1 July 2007 and 30 June 2012 if you were entitled, as at 9 May 2006, to a payment specified under:

• a written contract
• an Australian or foreign law (or an instrument under such a law), or
• a workplace agreement under the Workplace Relations Act 1996.

Read Employment termination payments - transitional arrangements (NAT 70644, PDF, 100KB) for more information.