If you have an income protection policy that's held outside of super, it's generally tax deductible. This is because it's related to your income.
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.
However, it's important to keep in mind the following:
The ATO rules state that you won't be able to claim a deduction for any part of a premium if:
Income protection is all about insuring your earnings. So, you can't claim any tax benefits that are deemed not to be replacing income. This rules out claims on many life insurances that tend to pay out 'lump sum' benefits after certain events. These include trauma insurance, critical illness insurance or TPD cover.
When it comes to income protection that's held in your superannuation, the super fund is essentially the owner of the policy and so it's not something that 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.
| Response | Male | Female |
|---|---|---|
| Yes | 7.98% | 6.15% |
| No | 4.45% | 4.04% |
If you are eligible for a tax deduction, then the amount you can claim will depend on your taxable income, how much you've paid for income protection and your marginal tax rate (which is the biggest percentage rate of tax you pay).
This will depend 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 |
| 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 |
| 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
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.
| Question | Answer | Conditions |
|---|---|---|
| Are income protection insurance premiums tax-deductible? | Yes | Provided the benefit is paid in regular instalments replacing a regular income. |
| Are the 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. |
Income protection insurance tax-deductible premium costs are unique to income protection insurance in Australia, though they apply only if the benefit payments are paid as a regular payment to replace lost income.
Additionally, the benefits paid are treated as income and are therefore taxable in the normal way. If the benefit is paid as a lump sum, the premiums are no longer claimable as a tax deduction.
Read our guide to the various types of insurance available to the self-employed.
If you have more than one income protection policy they will both pay out – but don't expect to "double dip".
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Income protection insurance are generally tax-deductible, so read on to find out when premiums are tax-deductible and how much you can claim.
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