Salary continuance cover: gross pay, super and tax explained

What is salary continuance cover?

Salary continuance cover is another name for income protection insurance. It pays you a regular benefit if you cannot work because of illness or injury. The benefit replaces a portion of your usual salary – typically up to 75% – and is paid monthly after a waiting period (often 30, 60 or 90 days). The cover can be held personally or through your superannuation fund, where it is sometimes called 'temporary disability' or 'salary continuance' cover.

Unlike a wage, salary continuance cover is not a payment for work performed. It is an insurance benefit designed to help you meet living expenses while you are unable to earn an income. Because it replaces lost earnings, the Australian Taxation Office treats the benefit as assessable income. You must include it in your tax return, just like your normal salary.

How salary continuance cover is taxed

Deductibility of premiums

If you pay the premiums yourself from your after-tax income, you can claim a tax deduction for the portion that covers loss of income. The ATO gives the example of Deanne, who pays $250 a month for a combined income protection and personal injury policy. She can claim $175 for the income protection part, but not the $75 for personal injury cover because that is capital in nature.

You cannot claim a deduction if the policy is held through your super fund and the premiums are deducted from your super contributions. Similarly, premiums for life insurance, trauma insurance or critical care insurance are not deductible.

Tax on benefits

Any payment you receive under salary continuance cover is assessable income. This includes regular monthly payments and any lump sum that replaces lost earnings. If the payment is for personal injury or total and permanent disability, it may be treated as a capital gain rather than ordinary income – but that is less common for standard salary continuance policies.

Because the benefit is taxed as income, your take-home amount will be less than the gross benefit. For example, if you receive a gross benefit of $5,000 per month and your marginal tax rate is 30% plus 2% Medicare levy, you would owe about $1,600 in tax, leaving you with $3,400. The exact amount depends on your total income for the year.

Salary continuance cover and superannuation

Many Australians hold salary continuance cover through their super fund. This is convenient because premiums are paid from your super balance, but it has implications for tax and your retirement savings.

• No deduction for premiums: Because the premiums come from your super contributions (which are already taxed at 15%), you cannot claim a personal deduction.
• Benefits are taxable: When you receive a benefit from a super-based policy, it is taxed as income. The fund may withhold tax, or you may need to declare it in your tax return.
• Super contributions on top: Some policies include an additional payment into your super account while you are on claim, helping your retirement savings continue to grow.
• Super guarantee not payable: The 12% super guarantee (from 1 July 2026) applies to wages and salaries, not to insurance benefits. Your employer does not pay super on salary continuance payments.

If you have salary continuance cover through super, check your annual member statement or insurance guide for details on the waiting period, benefit period and any exclusions.

Salary continuance cover and the Salary Index

The Salary Index measures full-time adult ordinary-time earnings, with index 100 set at $108,352 per year (based on ABS Average Weekly Earnings, May 2026). Salary continuance cover is not a wage, but you can compare the benefit to the national line to understand its relative value.

For example, if your pre-disability salary is $90,000 and your policy pays 75%, your annual benefit would be $67,500. That is an index of 62.3 – well below the national average, but it is not intended to replace your full income. The benefit is designed to cover essential expenses while you recover.

If your salary is higher, say $150,000, a 75% benefit of $112,500 gives an index of 103.8, slightly above the national line. However, most policies cap the benefit at a fixed dollar amount or a percentage of your pre-disability earnings, so the index will vary.

How salary continuance cover affects Centrelink

If you receive Centrelink payments, salary continuance benefits can reduce your entitlement. The Social Security Guide explains that payments are treated as either compensation or ordinary income, depending on who paid the premiums and whether the policy has an offset clause.

• If you made contributions to the policy and the payments are not reduced by social security payments, the benefit is treated as ordinary income. Centrelink will assess it dollar for dollar against your payment rate.
• If the policy has an offset clause (meaning the insurer reduces the benefit by the amount of Centrelink you receive), the payments are treated as compensation. This can affect how Centrelink calculates your compensation recovery.
• Benefits paid from a super fund are always treated as ordinary income, regardless of who paid the premiums.

It is important to tell Centrelink about any salary continuance payments you receive, as failing to do so could result in an overpayment.

Practical example

Let's look at a concrete example using the pay guides and industries data.

Mia works in professional services (index 114.7) and earns $120,000 per year. She has salary continuance cover through her super fund that pays 75% of her salary after a 90-day waiting period, with a maximum benefit period of two years.

• Pre-disability salary: $120,000 (index 110.8)
• Gross benefit: $90,000 per year ($7,500 per month)
• Tax estimate (30% marginal rate + 2% Medicare): $28,800 tax, leaving $61,200 take-home
• Index of benefit: 83.1

Mia's benefit is below the national line, but it is still a significant safety net. She cannot claim a deduction for the premiums because they are paid from her super. The benefit is taxable, and she must declare it in her tax return.

If Mia also receives Centrelink payments, the $90,000 benefit would likely reduce her entitlement to nil, as it exceeds the income test thresholds.

Key considerations

• Waiting period: No payments are made during the waiting period (typically 30–90 days). You need savings or sick leave to cover that time.
• Benefit period: Most policies pay for two years, but some offer five years or to age 65. Check your policy.
• Definition of disability: You must be unable to perform the important duties of your usual job. Some policies have a stricter 'own occupation' definition.
• Offset clauses: Some policies reduce the benefit by any Centrelink or workers' compensation you receive. This can affect your total income.

For more on how different states and industries compare, see our states and industries pages. If you want to understand how your salary stacks up, use the Salary Index calculator.

Summary

Salary continuance cover is a valuable insurance product that replaces a portion of your income if you cannot work. The premiums are tax-deductible if you pay them personally, but not if they come from super. Benefits are taxable as income and may affect Centrelink payments. While not a wage, the benefit can be compared to the national line using the Salary Index to see its relative purchasing power.

Always read your policy documents carefully and seek professional advice if you are unsure about tax or social security implications.