Tax deductions for income protection cover premiums.
Income Protection Cover provides a lump sum payment in the event that the policyholder suffers a serious illness or injury and is unable to work. This benefit is usually paid monthly in arrears.
Income Protection premiums are fully tax-deductible unless there is some benefit paid as a lump-sum for death, injury or disablement. In this instance, the premium payment will not be tax deductible.
In the event that that the policyholder has a Income Protection plan that is bundled with Life Cover, TPD or Income policy, their insurance provider is able to inform them how much can be claimed as a tax deduction.
There are many people who take out various insurance plans, including income protection insurance, which is a type of cover designed to protect a certain percentage of your income in the event that you cannot work and earn your wage due to sickness or injury. Many of these people may not be aware that their income protection cover premiums could be tax deductible. It is worth bearing in mind that the Australian Taxation Office is likely to approve tax deductions for insurance premiums on a product that relates to the generation of assessable income, which income protection cover does.
However, there are cases where you may not be able to deduct the premiums on your income protection cover, so you need to work out when you should and should not class this cover as tax deductible.
Can I prepay income protection premiums and reduce this year’s tax?
- YES! If you're looking to take out income protection, or, if you already have a policy, you can prepay your premiums for up to 12 months.
- What does this mean? What this means is that you may be able to bring forward a tax deduction from the following year into this financial year.
- How does this help? This could potentially mean reducing your taxable income this financial year.
Tax treatment of income protection premiums
In general, income protection insurance premiums should be tax deductible because they are related to assessable income. However, you need to be certain that if and when you claim on your income protection insurance premiums, you are actually entitled to do so – otherwise you could find yourself in hot water with the tax office.
Below are some examples of when income protection insurance premiums may be or may not be tax deductible:
- When you have a standalone income insurance protection plan: Many people take out standalone income protection insurance to protect themselves against financial hardship in the event of being unable to work due to sickness and injury. If this is the case, and you have a simple, standalone plan, you should find that your premiums are tax deductible and should therefore claim for their accordingly.
- Combined income insurance protection plan: Some people who take out income protection insurance plans take them out alongside other forms of cover as a combined plan, such as disability of death cover. If this is the case you may still be able to claim for the income protection insurance element of the plan but not for the remainder of the plan. Therefore, in order to ensure accurate deductions you may need to speak to your insurer to calculate the split between the different elements of the plan, so that you know how much of your total premium is tax deductible.
- Combined plans without the split: If you have taken out a combined income protection and other insurance plan, as detailed above, but you are unable to get the split in terms of how much of your premium goes towards the income protection element of the plan, then you will most likely be able to claim for it.
Income protection provided through superannuation
Premiums for income protection provided through superannuation are generally not tax deductible unless the person is self employed. If the person is a self-employed worker, tax deductions are available on super contributions and any additional contributions that are made.
Benefit paid for income protection within superannuation are paid as taxable income and attract Pay As You Go (PAYG) Withholding tax.
Clarifying whether your income protection premiums are deductible
Although there are general guidelines with regards to when income protection insurance premiums are tax-deductible and when they are not, it is important to bear in mind that there can be grey areas and therefore further clarification may be needed. Things are not always as clear cut as we would like them to be when it comes to both insurance and tax, so the two combined can certainly create some confusion!
Seeking clarification, however, should not be a difficult task, as there are three main places where you can get the information that you want with regards to claiming and eligibility.
- Your insurance provider: If you have a combined income protection plan and you are unsure as to how much of your premium would be tax-deductible you should speak to your insurance provider, as you should then be able to get the split between your income protection cover and any other insurance cover that forms part of the plan but which is not tax deductible.
- The Australian Taxation Office: If you have any doubts as to whether your income protection insurance premiums are tax deductible, it is best to check with the Australian Taxation Office, as this is where you will get the most up to date and accurate advice with regards to any queries. Make sure that, if you have doubts, you do not just claim anyway, as otherwise you could find yourself with a problem.
- Your accountant: If you have an accountant you may find that he or she can offer advice on whether you are entitled to claim for your income protection insurance premiums.