Written

For

The

Australian

-

Dollars

&

Sense:

The

tax

impact

of

TPD

insurance

payouts

into

super

Here's a tough scenario: you've paid TPD insurance premiums for years through your SMSF, finally need to claim after a serious illness, and then discover the tax office wants a slice on the way out. Doesn't feel right, does it?

This week in my Dollars & Sense column, Susan wrote in about her son — in his late 40s, unable to work after a long illness, and sitting on a TPD payout inside his SMSF. The good news is there's a lesser-known provision I think more Australians should be aware of: the "tax-free uplift."

Because he's under 60, any lump sum withdrawal from the taxable component would normally be taxed at 22 per cent, and an income stream would be taxed at marginal rates less a 15 per cent offset. But if two medical practitioners certify he's unlikely to ever be gainfully employed again in a role suited to his education, training or experience, the tax-free uplift can dramatically reduce the tax bill on a lump sum. It exists precisely so people forced out of work by illness aren't penalised compared with those who ride out their career to 60 and access super tax-free. In my view, it's one of the more compassionate corners of super law — but it only applies to lump sums, not income streams.

The second reader, Tom, is 68, still working part-time, and had maxed out his $360,000 bring-forward cap. My answer: yes, you can still contribute $30,000 in concessional contributions if you meet the 40-hours-in-30-days work test. And yes, a $3,000 after-tax spouse contribution can generate up to a $540 tax offset — though it phases out once your wife's income exceeds $37,000, and disappears entirely above $40,000.

A reminder too: at 75, the door closes on voluntary contributions. Plan accordingly.