Are TPD insurance premiums tax-deductible?

TPD premiums paid by an individual outside super are NOT tax-deductible to the individual. TPD premiums paid by a complying super fund inside super are deductible to the fund (for the proportion that corresponds to a liability to provide a "disability superannuation benefit").

Concessional contributions used to fund inside-super TPD premiums are taxed at 15% in the fund rather than at the member's marginal rate. That is the primary source of the apparent tax saving for cover held in super. References below are to the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).

TPD held outside super: not deductible

A TPD premium paid by an individual policyholder for personal cover is a capital outlay of a private nature. ATO Taxation Ruling TR 95/25 (and the broader ATO guidance on personal life insurance) treats personal TPD premiums as non-deductible.

The trade-off is that the lump-sum benefit, when paid, is generally not assessable income under ITAA 1997 s.118-37 (capital gains tax exemption for compensation or damages received for personal injury).

For a self-employed person trading through a company or trust, the company or trust may pay the premium, but it does not change the deductibility outcome for a personal TPD policy. A narrow business-purpose exception applies for key-person TPD held by an employer (where the employer is the policyholder, the benefit is for the employer, and the cover is for a revenue purpose). That sits outside the scope of this answer.

TPD held inside super: deductible to the fund

Where a complying super fund holds the policy and pays the premium, the fund can claim a deduction for the premium under ITAA 1997 s.295-465, to the extent the policy provides for a "disability superannuation benefit".

The definition of "disability superannuation benefit" in ITAA 1997 s.995-1 requires two medical practitioners to certify that, because of ill-health, it is unlikely the member can ever be gainfully employed in a capacity for which they are reasonably qualified.

The practical effect:

• Any Occupation TPD held inside super. The fund typically claims 100% of the premium as a deduction, on the basis that the policy aligns to the disability super benefit definition.
• Own Occupation TPD held inside super (pre-1 July 2014). The fund can claim only the proportion that aligns to the "disability superannuation benefit" definition. The Commissioner accepts a 67% default proportion under PCG 2017/D11 / TR 2012/6 where the policy is composite. The non-deductible portion has effectively been priced out of post-2014 retail super TPD because Own Occupation can no longer be acquired through super under SIS Reg 4.07D.
• Member contribution route. A member who funds the inside-super premium via a concessional (pre-tax) contribution pays 15% contributions tax inside the fund (instead of the marginal rate outside), and the fund then claims the premium deduction. The combined effect is that, for a member on a 32.5% or 37% or 45% marginal rate, holding TPD inside super reduces the after-tax cost of cover. ATO Taxation Determination TD 2018/2 and the ATO Self-Managed Super Fund guidance describe the mechanics.

Concessional contributions caps

Concessional super contributions are capped at $30,000 per financial year for 2025-26 (Australian Taxation Office concessional cap, indexed). Premiums funded by salary sacrifice or personal deductible contributions consume the cap before they reach the insurance policy.

The cap forces a real-cash trade-off for high earners with already-large contribution flows.

Insurance-only super funds and the 15% upfront rebate

Some insurance-only super funds (and some retail master trusts) offer an upfront 15% rebate or credit on premiums funded by rollover or contribution.

The rebate represents the tax deduction the trustee receives when claiming the premium against fund earnings, passed back to the member at the point of premium debit rather than spread across the year through investment performance. It is a cash-flow improvement, not a separate concession.

Worked illustrative comparison

Setup: a member on the 39% marginal rate (including Medicare) with a $1,000 nominal annual TPD premium.

Path A: outside super, personal funds

Calculation:

1. The member must end up with $1,000 of after-tax income to fund the premium.
2. Pre-tax salary required: $1,000 / (1 - 0.39).
3. Result: approximately $1,640 of pre-tax salary.

Pre-tax cost: $1,640.

Path B: inside super, funded by salary sacrifice

Calculation:

1. The member redirects $1,176 of pre-tax salary to super.
2. The fund deducts 15% contributions tax: $1,176 x 15% = $176.
3. Remaining inside the fund: $1,000.
4. The fund pays the $1,000 premium.
5. The fund then claims a deduction for the $1,000 premium, which offsets fund earnings tax.

Pre-tax cost: $1,176.

The pre-tax saving is $1,640 - $1,176 = $464 per year, before any payout-tax considerations.

Tax on the payout, not just the premium

Deductibility of premiums is one half of the cover-tax decision. Tax on the payout is the other. Summary:

• Outside super, paid to the life insured. Lump sum is tax-free (capital, not income).
• Inside super, member 60+. Lump sum is tax-free on withdrawal.
• Inside super, member preservation age to 59. Taxable component up to the low-rate cap ($245,000 for 2025-26, indexed) is tax-free. Excess is taxed at 15% plus Medicare.
• Inside super, member under preservation age. The "disability super benefit" tax-free uplift applies under ITAA 1997 s.307-145, increasing the tax-free component using the days-to-retirement formula. The remaining taxable component is taxed at 22% (20% plus Medicare).

The full payout-tax breakdown sits in how TPD insurance payouts are taxed.

What this means in practice

The inside-super premium discount is real for higher-marginal-rate earners. The payout-tax cost partially offsets it for members under 60, and fully offsets it for members under preservation age unless the taxable component is small.

For a personalised structure, get advice from a registered tax agent or financial adviser. This answer is general information about how the tax rules apply, not personal financial advice.

Cross-references:

• How TPD insurance works with superannuation.
• Can I have TPD insurance both inside and outside superannuation.
• Retail vs super life insurance guide.