Tax Treatment of Business Life Insurance

How is Key Person and Business Expenses Insurance Taxed?

One major concern for businesses that have taken out some form of protective cover, whether it is to cover employees or business expenses, is how the cover will be taxed. The taxation of life insurance owned by businesses depends on the type of policy and its purpose.

This is why it is so important to do your homework before committing to a policy. You don't want to have to go through all of the hassle of signing with a provider only to find out down the road that you are either over or underinsured or that the policy you have taken out does not cover the specific requirements you need.

Take the time to go through the relevant PDS or speak with a certified adviser, and make sure yo are getting the right cover for you.

DISCLAIMER: This article contains general advice and does not consider your own personal circumstances. It is not tax advice and the general nature of this material may not be applicable to you. You should obtain professional advice and verify our interpretation before relying on the information contained in our article.

Tax Treatment of Key Person Life Insurance

Each claim for key person insurance needs to be examined separately to determine whether or not it will be subject to taxation.

In the event that a benefit is paid for the key persons death, critical illness of total permanent disability, the premium payment is tax deductible.

Is the benefit payment assessable?

The benefit payments will be taxed under the employer’s assessable income under the Income Tax Assessment Act 1997.

If the cover has been taken out to reimburse the employer for the reduction in value of goodwill as a result of the key person’s death or to free up funds to repay a loan, both the premium payment and the benefit payment will be subject to tax.

Are benefits subject to capital gains tax?

No, provided the recipient is not the original beneficial owner.

Providing Evidence for Business Life Insurance Tax

Employers are required to provide evidence for the use of the insurance policy taken out. There really is no limit to the type of evidence that may be considered in determining the purpose for the employer taking out the cover.

Evidence should be gathered not only when the policy was first taken out but ideally around each premium payment. It is also beneficial to policy owners to be able to show what the policy benefit is actually used for. Importantly, the employer must claim the premium payments of the policy in order to have the benefit payment assessed for tax deduction.

When are Business Insurance Policies Not Liable for Tax?

  • Premium payments that can be proved to have been made to cover genuine business expense can be tax deductible though the benefit payments will be subject to tax.
  • Premium payments for the loss of revenue resulting from the death of a key person may be tax deductible but the benefit payment will be taxable under the employer’s income.
  • For unbundled policies that contain both insurance and an investment component where the premium can be distinguished separately, each part will be treated and assessed differently by the insurer.
  • Premium payments to purchase a partner's share of a business following their death will be subject to tax, as they would be seen as capital expenditure.
  • Funds provided to an ex-employee or their dependent will be seen as an employment termination payment and will be subject to tax.
  • Benefit payments on policies owned by the employee will be free from tax.
  • Key person insurance for trauma owned by an employee to cover the loss of a key person suffering trauma and the subsequent impact on the business will be subject to tax.

Business Expense Insurance Tax Treatment

Business Expenses Insurance works in much the same way as Income Protection Insurance only it is designed specifically for business owners. Business expenses provides an ongoing monthly benefit, usually for a maximum of 12 months, to cover various business costs if the business owner is forced to take time out of work due to illness or injury.

How is it taxed?

Business Expenses Insurance premiums are generally tax deductible.

Evidence is Key for Business Owners Looking to Claim Back on Tax

It’s crucial for all business owners looking to take out protective cover to have a clear understanding of the tax treatment of both premium and benefit payments. The best step for any business owners with key person policies or business expense insurance in place is to ensure they take the time to collect the necessary evidence of premium payments and how any benefit was used. Providing evidence of ongoing claim payments and how if the benefits were for capital growth or support for the employee will make the process of claiming any liable tax at claim time much more straightforward.

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Maurice Thach

An insurance researcher and writer for who loves finding an answer to the question "Am I covered for ________?" Maurice has also completed a Tier 1 Life Insurance and a Tier 2 General Insurance Certification under ASIC's Regulatory Guide 146. This means he can confidently provide general advice for life insurance and non-life insurance products.

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