An invalidity payment arises when a payment is made to a person who ceased work due to a disability (physical or mental). In order to qualify for the payment, two medical practitioners must certify that the person is unable to return to the work for which he or she is reasonably suited by education, training or experience. Disability is not limited to total disability (S27G ITAA 1936). Obviously by this criterion someone in a heavy manual occupation would more easily qualify for an invalidity payment, a bad back may kill a plasterer's career but won't make much difference to an accountant.

As for bona fide redundancy and approved early retirement schemes, there is a tax-free component, but it is calculated differently to the previous two payments.

The tax-free component is a portion of the ETP, you multiply the ETP by A/B, where A is the number of days from the date of termination to the normal retirement date, and B is the number of days from the start date to the normal retirement date.

It sounds a little complicated, but it isn't, I'll give an example.

If someone started working with an employer at the age of 35, on 26 June 1985, and their normal retirement date would have been their 65th birthday, on 4 April 2015, but they were disabled on 1 November 2001, the calculation goes as follows:

The total number of days this person would have worked would have been 10,874. (You can calculate this easily in Excel, subtract one date from another, format the answer cell as a number, you get the number of days between 26 June 1985 and 4 April 2015).

The number of days remaining in that person's career is the retire date minus the disability date, 4,902 days.

If the person got paid $250,000 on his retirement, the fraction which makes up the invalidity component is 4,902/10,874 or 45.08% of the ETP, $112,700. This sum is tax-free, and can be withdrawn as cash without any lump sum taxes, but unlike the tax-free portion of a bona fide redundancy or approved early retirement scheme this money is treated as an ETP, so it can be rolled over into a super fund with the rest of the ETP, where it will become an "Invalidity Component".