Is income protection insurance tax-deductible?
Income protection insurance is tax deductible in most cases, but there's a few quirks to be aware of.
Key takeaways
- Premiums for income protection held outside super are generally tax-deductible.
- Claiming can reduce your annual premium significantly depending on your marginal tax rate.
- Only around 7% of Australians know income protection premiums are tax-deductible.
Do I qualify for an income protection tax deduction?
If you've bought a standalone income protection insurance policy, then you could get some money back on your annual tax return. Under Australian Taxation Office (ATO) rules, you're allowed to claim the cost of premiums you pay for insurance against the loss of your income, but note:
- Tax claims are made on premiums you've actually paid for during the financial year.
💡 Quick tip: You could choose to pay for a year's worth of premiums upfront, and then claim the whole amount on your tax return. - Tax is applicable to any income protection payouts you receive for lost income. You'll need to keep track of any payments you get so that you can accurately file your return.
The ATO states that you won't be able to claim a deduction for any part of a premium if:
- A policy "compensates you for such things as physical injury".
- The policy taken out is through your superannuation and premiums are paid using your contributions.
Income protection is all about insuring your earnings. So, you can't claim any tax benefits that are not deemed to be replacing income. This rules out claims on many life insurances that tend to pay out 'lump sum' benefits after certain events, like trauma insurance, critical illness insurance or TPD cover.
Finder survey: Do Australians know that income protection is tax deductible?
| Response | Male | Female |
|---|---|---|
| Yes | 7.98% | 6.15% |
| No | 4.45% | 4.04% |
Source: Finder survey by Pure Profile of 1110 Australians, December 2023
What if I have a bundled life and income protection policy?
- If your income protection insurance is bundled with a life policy, you may claim a tax deduction for the portion of the premiums used to pay for income protection.
- You can't claim deductions for other elements of the bundled policy.
- For instance, if your total premium is $200 a month but the premiums you pay for income protection is $90 a month, only $90 per month is tax-deductible.
Is there GST on income protection insurance?
No GST is added to your income protection insurance premiums. It is exempt from GST in Australia, because it's classified as a financial service.
Is income protection insurance in super tax deductible?
For income protection that's held in your superannuation, the super fund is essentially the owner of the policy and so it's not something you would be able to claim tax against. That said, you may be entitled to receive a tax deduction if you are self-employed.
Ultimately, whether or not you can get a tax deduction will depend on your specific circumstances. That's why it's a good idea to seek professional advice from a qualified tax consultant.
How much can I save on my policy if I claim tax?
This depends on your annual earnings and marginal tax rate. Consider the examples below for a policy that costs $800 p.a.
| Policyholder's annual earnings | Annual premium to insurer | Marginal tax rate | Tax refund | Final cost of cover |
|---|---|---|---|---|
| Over $190,000 | $800 | 45% | $360 | $440 |
| Between $135,001 and $190,000 | $800 | 37% | $296 | $504 |
| Between $45,001 and $135,000 | $800 | 30% | $240 | $560 |
Tax rates for Australian residents 2024–25
| Taxable income | Tax on this income |
|---|---|
| 0 – $18,200 | Nil |
| $18,201 – $45,000 | 16 cents for each $1 over $18,200 |
| $45,001 – $135,000 | $4,288 plus 30c for each $1 over $45,000 |
| $135,001 – $180,000 | $31,288 plus 37c for each $1 over $135,000 |
| $190,001 and over | $51,638 plus 45c for each $1 over $190,000 |
Foreign resident tax rates 2024–25
| Taxable income | Tax on this income |
|---|---|
| 0 – $135,000 | 30 cents for each $1 |
| $135,001 – $190,000 | $40,500 plus 37 cents for each $1 over $120,000 |
| $190,001 and over | $61,850 plus 45 cents for each $1 over $180,000 |
Source: ATO
How can I make a claim for a tax deduction?
When it's time to complete your tax return, you'll be able to enter any claimable amount of your premium as a work tax deduction. This can usually be found in the "Other deductions" category of your return.
Your income protection provider should send you a tax statement annually. You could ask your insurer to send you one if you've not received a form in the run up to the end of the financial year.
Also, if you prepay your income protection before 30 June, you can claim your tax deduction in the current financial year, e.g. you pay 12 months of premium in advance to receive a tax deduction.
"It was a genuine lifeline"
"I was diagnosed with cancer when I was 37. I was very fortunate that my road to recovery was quick and straightforward and my employer was great about giving me time off and holding my job for me during treatment. But my income protection policy and later my critical illness policy were a genuine lifeline – the money they provided meant we didn't need to stress about money, and could fully concentrate on my health."
3 common tax questions about income protection insurance
| Question | Answer | Conditions |
|---|---|---|
| Are income protection insurance premiums tax-deductible? | Yes | Provided the benefit is paid in regular instalments replacing a regular income, and the policy is not held inside super. |
| Are benefits paid under an income protection policy taxable? | Yes | The benefit payments are treated as income by the Australian Taxation Office and are therefore taxable. |
| Do I pay GST on income protection premium costs? | No | GST is only payable on fire and general types of insurance, but not with this type of life insurance. |
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Finder Score - Income Protection
Income Protection is a little complicated and a lot overwhelming. That's why we made the Finder Score, to make it easier to compare Life Insurance products against each other. Our experts analysed over 21 products and gave each one a score rank out of 10, to make it easier to compare Income Protection products against each other.
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