If you're looking for income protection or health insurance and also want to save on tax then make sure you read this post. Read more…
Is income protection insurance tax-deductible?
Income protection is tax-deductible outside of super. Here's how it works.
The Australian Taxation Office (ATO) states that any payment made for insurance that covers your regular income is regarded as tax-deductible, so your income protection insurance premiums may be tax-deductible if bought as a standalone policy.
|Premium/payout from policy||Outside super||Inside super|
|Premiums you pay|
Reduce your tax expenses and save on income protection in one go
How do I qualify for an income protection tax deduction?
Here's how you can qualify for an income protection tax deduction under the two types of income protection policies.
- Outside of super. The ATO allows you to claim a deduction for the cost of your premiums for income protection if the policy is held outside of your super fund.
- Super income protection. For funds inside super, it's a little bit trickier. Generally, full tax deductions are only available for self-employed workers.
Generally, you can only claim expenses as a tax deduction if they are incurred in the generation of their assessable income and are not of a capital, private or domestic nature.
When is income protection NOT tax-deductible?
You can't claim a deduction for a premium or any part of a premium:
- If the policy compensates you for incidents with a lump sum payment
- If the policy is provided through your super and the premiums are paid using your contributions
This generally refers to policies like:
- Life insurance
- Trauma insurance
- Critical illness insurance
Can I claim tax deductions for an income protection policy inside my super?
If you have a policy inside super you can generally receive a tax deduction if you are self-employed. The ATO states that personal contributions towards your super can be claimed as a tax deduction only if less than 10% of your income comes from income as an employee.
2017/2018 financial year changes
From 1 July 2017 tax rules around personal superannuation contributions will change. The 10% rule mentioned above will be removed. This means that a larger portion of taxpayers can make additional concessional contributions (towards their super) up to the concessional contribution limit and claim a tax deduction for doing so.
Source: Mark Chapman. Director of Communications, H & R Block.
What if I'm an employee?
If you are an employee you won't be able to claim a full tax deduction. However, contributions you make towards your super with your pre-tax earnings (e.g. salary sacrifice from your employer that hasn't been taxed yet) are taxed at 15%.
If the same contribution were to be taken out as income you would pay your marginal tax rate (which might be higher than 15%).
Can I bring my premium payments (for next year) forward to receive a deduction this financial year?
- 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.
Let's look at a hypothetical example of how this might work. Brian is a 30-year-old actuary earning $100,000 a year. He has an income protection policy that provides him with up to 75% of his monthly income should he be unable to work for an extended period of time. The premiums are $1,367 per year. In order to claim the tax deduction in the current financial year (2016–17), he has opted to pay the premiums up-front, prior to 30 June.
How much of a tax deduction can I claim?
The amount of money that you will receive back from your tax claim will depend on:
- Your income
- How much you have paid for income protection
- Your marginal tax rate (the highest tax rate that you pay)
Tax rates for Australian residents
Breakdown of how your deduction is calculated
Example: Tax savings with income protection for the 2017/18 financial year
Here's another hypothetical example. Kylie is a project manager and earns $70,000 annually. Here's how Kylie could save up to $310.50 in her post-tax income after claiming her income protection premiums:
- Tax paid without deducting income protection
- Tax paid after deducting income protection
How much can I save on my policy outside of super if I claim tax?
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|
|Between $87,001 and $180,000||$800||37%||$296||$504|
|Between $37,001 and $87,000||$800||32.5%||$260||$540|
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; further, 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. This is a big help in managing the ongoing cost of the cover. Other life insurance policies have their own effects on taxation such as the following:
Term life insurance will pay out benefits to your beneficiaries should you die, and to yourself if you're diagnosed with a terminal illness and only have 12 months to live. These benefit payments are generally tax-free. However, this tax-free status can be affected if the benefit is paid out through a superannuation fund or if the benefit is paid to a person who in not considered to be financially dependent on you.
Other insurances such as total and permanent disability and trauma insurance are treated in a similar manner as term life insurance in that there is no taxation deduction allowed for any premium payments but the benefit payments are generally tax-free.
Common questions around income protection insurance and tax
|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, not life insurance|
Read the guide to pre-paying income protection insurance for a tax-deduction.
*Benefits will be taxed if your premiums are tax-deductible. Check with your super fund. Note: This table is only a general guide and doesn't take into account your specific circumstances. It's a good idea to seek professional advice from a qualified tax consultant before applying the information to your personal circumstances.
Ask an Expert