Why Aren’t Medical Expenses Tax Deductible in Australia, Even on a TPD Pension?

A recent Tribunal decision confirmed that medical expenses remain private and non-deductible, even when they relate to a condition that forced early retirement and triggered a Total and Permanent Disability (TPD) pension. The ruling reinforces the way Australian tax law treats treatment costs and answers many common questions taxpayers have about whether medical bills can be claimed on tax.

A Case That Highlights a Common Misunderstanding

Australians dealing with long-term illness or disability often want to know whether the medical costs they incur - sometimes tens of thousands of dollars - can be claimed as a tax deduction. The recent case of Wannberg v Commissioner of Taxation [2025] ARTA 1561 provides a clear and authoritative answer.

In this case, the taxpayer had retired early due to significant medical issues and was receiving a TPD pension from their super fund. They incurred nearly $100,000 in medical treatments, believing the expenses were related to the income they were now receiving as a result of their disability.

The ATO denied the deduction.
The taxpayer appealed.
The Tribunal upheld the ATO’s decision.

The reasoning behind that decision tells us a lot about how medical expenses are treated under Australian tax law.

Can I claim any of my medical bills on tax?

Short answer: No

Medical treatment - including surgery, physiotherapy, specialist appointments, medications, and rehabilitation - is considered a private expense. The ATO does not classify these costs as related to earning income, which means they are not deductible.

The Tribunal confirmed this again in the Wannberg case: even when treatment is essential, ongoing, and directly related to the condition that caused financial hardship, the underlying tax treatment does not change.

Understanding Why the Deduction Was Denied

While complex on the surface, the Tribunal’s reasoning came down to a long-standing principle in tax law: deductions require a connection to income-earning activities.

This is where the ’nexus test’ becomes relevant.

The Nexus Test, Explained Simply

For an expense to be deductible, it must have a clear and direct connection to earning assessable income. This is often described as a “nexus” - a link between the expense and the income it helps to produce.

The Tribunal found that none of the taxpayer’s medical treatments met this test.
Why?

• Medical care helps you live and manage your health, not produce income.

• Treatment was not required to receive the TPD pension.

• The pension was not “earned” through ongoing work.

• Treatment remained a private and personal expense.

This aligns with previous ATO guidance and several earlier court decisions.

Are medical expenses tax-deductible in Australia?

Generally, no.

Aside from very limited and specific scenarios (e.g., some assessments required by law for certain professions), medical expenses do not qualify as tax deductions. This applies equally across all states and territories - the rules are set under federal legislation.

Does being on a TPD pension change the rules?

A TPD pension is not considered “earned income”. It is a benefit paid because someone cannot work, not because they are engaged in work. This distinction is essential.

Because no income-producing activity is taking place, there is no pathway for medical expenses to satisfy the nexus test. The Tribunal was explicit on this point: the source of the income being disability-related does not convert treatment costs into deductible expenses.

This applies to:

• TPD pensions

• Disability support pensions

• Rehabilitation payments

• Income protection payments (depending on structure)

• Insurance-based income streams inside super

The nature of the payment doesn’t transform medical costs into tax-deductible ones.

Treatment vs Assessment - The Key Distinction

A critical takeaway from the Wannberg case is understanding the difference between medical treatment and medical assessments, as this can determine whether an expense is deductible.

1. Medical treatment (not deductible)

Medical treatment is always considered private and non-deductible, regardless of its necessity or connection to a disability or condition. This includes:

• Surgeries

• Therapy

• Specialists

• Medications

• Mental health treatment

• Rehabilitation programs

• Alternative or allied health treatments

These expenses are personal and do not have a direct link to earning income, so they remain non-deductible.

2. Medical assessments (sometimes deductible)

In contrast, medical assessments may be deductible if they are required as part of the conditions of employment or to legally maintain a professional licence. The key here is that the assessment must be directly related to income-producing activity.

Examples of deductible medical assessments include:

• A truck driver’s compulsory medical exam

• A pilot’s annual medical certification

• Certain occupational medical clearances

In the Wannberg case, the taxpayer was no longer employed and did not need to maintain any job-related certifications, meaning medical assessments were not applicable in this situation.

How This Ruling Affects People Receiving TPD or Disability Income

The Wannberg decision provides us with some clarity on how the ATO views medical expenses for individuals receiving TPD pensions, disability income or similar benefits. In practical terms, the ruling reinforces several key realities.

1. Medical expenses will not reduce your tax bill

Even if treatment is ongoing, essential, life-sustaining or directly related to the condition that caused your disability, it is still considered a private expense. The Tribunal confirmed this remains true regardless of severity, cost or frequency.

2. A TPD Pension is passive, not earned income

A TPD benefit is paid because a person cannot work, not because they are working. Since there is no income-producing activity involved, there is no way to connect medical treatment of any kind to the production of that income. As a result, no deductions can be claimed against it.

3. Medical costs must be planned for as non-deductible.

For people living with long-term disability or chronic illness, this means out-of-pocket medical costs should be factored into financial planning. These expenses cannot be offset through tax deductions, even when they are substantial or recurring.

4. The ruling adds certainty (even if unwelcome)

The Tribunal’s decision aligns with existing ATO guidance and earlier case law. While the conclusion may feel unfair, it gives taxpayers and advisers clarity on how similar claims will be treated in the future, reducing the risk of disputes or unexpected assessments.

Planning Ahead: What You Can Do

While medical expenses aren't deductible, there are still ways to manage the financial impact of long-term healthcare needs. Consider discussing with your adviser:

• Private health insurance options: Reviewing your level of cover to ensure it aligns with current and future medical needs.

• Medicare levy exemptions or reductions (if eligible): Assessing whether your circumstances make you eligible for a partial or full reduction.

• Income protection considerations: Understanding what is (and isn’t) deductible, and how existing policies interact with TPD or disability income.

• Additional TPD or trauma cover: Ensuring your insurance strategy supports long-term medical and living costs.

• NDIS assessments (for eligible individuals): Exploring potential support for treatment, equipment, transport or daily living needs.

• Long-term budgeting for out-of-pocket costs: Building a plan that accounts for non-deductible treatment expenses over time.

• Understanding genuine deductible expenses: Identifying legitimate work-related costs, assessments or certification obligations.

• Whether an ATO private ruling is appropriate: Particularly if your situation involves unusual or complex circumstances.

Being proactive not only helps reduce financial stress but also minimises the risk of unexpected tax outcomes later on.

When to Seek Professional Advice

Tax rules around disability, early retirement, income protection and medical expenses can be technically complex - and emotionally overwhelming when combined with health concerns.

You should consider seeking professional advice if you are:

• unsure whether an expense is deductible

• receiving TPD or disability income

• facing significant medical costs

• preparing to lodge your return with large out-of-pocket expenses

• considering a private ruling

• wanting to understand the nexus test in your specific situation

Early guidance can help you stay compliant, avoid unnecessary disputes with the ATO and make confident, informed decisions about your finances.

How Cordner Advisory Can Help

Cordner Advisory supports clients navigating disability-related income streams, medical costs, early retirement, insurance payouts and complex tax questions. We can help you:

• Understand what expenses the ATO will and won’t accept

• Apply tax principles like the nexus test correctly

• Plan for non-deductible medical expenses

• Structure income streams tax-effectively

• Maximise available rebates and offsets

• Request ATO private rulings where needed

• Build a long-term financial strategy tailored to your situation

We’re here to provide you with clarity, confidence and practically support especially when life’s circumstances make financial decision making more challenging.