The Australian Taxation Office (ATO) states that you can claim the cost of any payment made for insurance that covers you against the loss of your income, so your income protection insurance premiums should be tax-deductible if bought as a standalone policy.
DISCLAIMER: This article contains general information and does not consider your personal circumstances. It does not contain tax advice, and you should consult a tax professional to check if the information applies to you.
How do I qualify for an income protection tax deduction?
Here's how you can qualify for an income protection tax deduction:
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 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.
If you combined your income protection with your death and disability insurance policy, you can claim a tax deduction for the portion of the premiums used to pay for income protection, as long as you can provide evidence of what that portion is. You can ask your insurance provider for further information on how much of your joint policy can be considered tax-deductible.
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:
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.
The amount of money that you will receive back from your tax claim will depend on:
How much you have paid for income protection
Your marginal tax rate (the highest tax rate that you pay)
Tax rates for Australian residents 2019–20
Tax on this income
0 – $18,200
$18,201 – $37,000
19c for each $1 over $18,200
$37,001 – $90,000
$3,572 plus 32.5c for each $1 over $37,000
$90,001 – $180,000
$20,797 plus 37c for each $1 over $90,000
$180,001 and over
$54,097 plus 45c for each $1 over $180,000
Foreign resident tax rates 2019–20
Tax on this income
0 – $90,000
32.5c for each $1
$90,001 – $180,000
$29,250 plus 37c for each $1 over $90,000
$180,001 and over
$62,550 plus 45c for each $1 over $180,000
Breakdown of how your deduction is calculated
Example: Tax savings with income protection for the 2019–20 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.:
Common questions around income protection insurance and tax
Are income protection insurance premiums tax-deductible?
Provided the benefit is paid in regular instalments replacing a regular income
Are the benefits paid under an income protection policy taxable?
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?
GST is only payable on fire and general types of insurance, not life insurance
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.
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*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.
Will Eve is the lead publisher of the global team at Finder. He was previously the group publisher for insurance for Finder Australia. Will has a Bachelor of Communications from the University of Technology Sydney. He loves the challenge of launching Finder into new markets while helping grow Finder’s global team.
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