A disability benefit is a payment you receive if you suffer from physical or mental ill health and two legally qualified medical practitioners have certified that, because of your ill health, it is unlikely you can ever be gainfully employed in a capacity for which your education, experience or training makes you reasonably qualified.
You are considered to be gainfully employed if you are employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.
You can receive a disability benefit from your super fund or from your employer as either a lump sum or as an income stream.
Your disability benefit from your super fund will be made up of a:
- tax-free component
- taxable component.
The tax-free component is the part of the benefit that is not assessable and is not included in your tax return.
The taxable component is the part of your benefit that is assessable. It may consist of a taxed element and/or an untaxed element:
- A taxed element is the amount of your benefit that has already had some tax paid on it within the fund. Depending on your age, your fund may need to withhold additional tax when the amount is paid to you. You may need to include this amount in your tax return as assessable income.
Amounts you receive after you turn 60 are not assessable and no tax will be withheld from these payments.
- An untaxed element is the amount of your benefit that hasn't had any tax paid on it within the fund. Your fund will need to withhold tax when the amount is paid to you. You must include this amount in your tax return as assessable income. (Example of untaxed super funds)
Your fund will provide you with a payment summary which will outline the tax-free and the taxable components of your disability benefit.
The tax on the taxable components of your benefit will depend on your age when you receive the payment and if your benefit has an untaxed element.
The tax-free component of your lump sum disability benefit is calculated by your fund. Your fund will modify the calculation so that your tax-free component is increased to broadly reflect the period of time where you would have been expected to be gainfully employed.
No tax is payable on the tax-free component of your lump sum benefit. This amount will always be tax-free.
The table below shows the maximum amount of tax payable on your benefit. This amount will be withheld by your fund.
Your age
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Tax payable
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60 or over
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No tax is payable, unless your benefit has an untaxed element.
See note 1 if your benefit has an untaxed element.
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At or above your preservation age and under 60
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No tax is payable up to the low rate cap amount ($165,000 for 2011-12; $175,000 for 2012-13). Amounts over the cap will be taxed up to a maximum of 15%.
See note 2 if your benefit has an untaxed element.
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Under your preservation age
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You will be taxed a maximum of 20% of your benefit.
See note 3 if your benefit has an untaxed element.
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Notes:
- The untaxed element of your benefit will be taxed at 15% up to the untaxed plan cap amount ($1.205 million for 2011-12; $1.255 million for 2012-13). Amounts over the cap will be taxed at the top marginal rate.
- The untaxed element of your benefit will be taxed at 15% up to the low-rate cap amount. Amounts over the low-rate cap will be taxed at 30% up to the untaxed plan cap amount ($1.205 million for 2011-12; $1.255 million for 2012-13). Amounts above the untaxed plan cap will be taxed at the top marginal rate.
- The untaxed element of your benefit will be taxed at 30% up to the untaxed plan cap amount ($1.205 million for 2011-12; $1.255 million for 2012-13). Amounts above the untaxed plan cap will be taxed at the top marginal rate.
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A Medicare levy of 1.5% will also apply to these tax rates. The flood levy may also apply in 2011-12.
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The tax on the taxable components of your benefit will depend on your age when you receive the payment and if your benefit has an untaxed element.
You will not pay tax on the tax-free component of your income stream. This amount will always be tax-free.
The table below shows the maximum amount of tax payable on your benefit. This amount will be withheld by your fund.
Your age
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Tax payable
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60 or over
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No tax is payable, unless your benefit has an untaxed element.
See note 4 if your benefit has an untaxed element.
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Under 60
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You will be taxed at your marginal rate and you are entitled to a tax offset of 15% of the taxable component of your income stream. You will need to include your payment in your assessable income for the year.
See note 5 if your benefit has an untaxed element.
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Notes:
- The untaxed element of your benefit will be taxed at your marginal tax rate. You will receive a tax offset equal to 10% of the untaxed element of your income stream. Your fund will adjust the amount of tax it withholds to take the tax offset into account. You must include the untaxed element in your assessable income for the year.
- The untaxed element of your benefit will be taxed at your marginal rate and must be included in your assessable income for the year. No tax offset is available in respect of the amount of the benefit that is from an untaxed element. You will receive a tax offset equal to 15% of the taxed element. Your fund will adjust the amount of tax it withholds to take the tax offset into account.
If your disability payment is tax-free then you do not need to include it in your income tax return.
If your disability payment is taxable, either all or just part of it, then you will receive a payment summary from your super fund with details of the tax-free and the taxable components of your benefit, plus the amount of any tax offset you may be entitled to.
You must include any taxable component of your disability benefit as part of your assessable income for the year.
Last Modified: Tuesday, 26 June 2012