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.

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.
Premium/payout from policyOutside superInside super
Premiums you pay
  • Tax-deductible
  • Tax-deductible (up to a limit)*
Payouts you receive
  • Tax is payable
  • No tax payable (depends on your age)*

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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.

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:

  • 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. The example below highlights how the deduction affects Brian's taxable income. (We haven't considered any other deductions Brian might claim, or additional expenses such as repaying HELP fees, for this example.)

BeforeAfter
Salary$100,000$100,000
Less insurance deductionn/a-$1,367
Taxable income$100,000$98,633
Tax payable$24,632$24,126
Tax saving in 2016/2017*$506.13

*Including Medicare levy

Prepaying your income protection for immediate tax benefits

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

Taxable income
Tax on this income
$0–$18,200
Nil
$18,201–$37,000
19c for every dollar over $18,200
$37,001–$87,000
$3,572 + 32.5c for every dollar over $37,000
$87,001–$180,000
$19,822 + 37c for every dollar over $87,000
$180,001 and over
$54,232 plus 45c for every dollar over $180,000
Taxable income
Tax on this income
$0–$18,200
Nil
$18,201–$37,000
19c for every dollar over $18,200
$37,001–$80,000
$3,572 + 32.5c for every dollar over $37,000
$80,001–$180,000
$17,547 + 37c for every dollar over $80,000
$180,001 and over
$54,547 plus 45c for every dollar over $180,000

Source: ATO

Breakdown of how your deduction is calculated

Example: Tax savings with income protection for the 2016/17 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:

  1. Tax paid without deducting income protection
  2. Tax paid after deducting income protection

1. Calculation of Kylie's tax payable (without deducting income protection)

IncomeFigures
Salary from job$70,000
How much tax is paid for $70,000 in income (based on tax rates)$3,572 + 32.5c for every dollar over $37,000
1. Base amount of tax$3,572
2. Tax for every dollar over $37,000$33,000 over
multiply by 32.5c for every dollar over
= $10,725
Total tax $14,297
Plus Medicare levy*$1,400
  • Tax payable for Kylie 2016/17*
$15,697

*Learn more about the Medicare levy

2. Calculation of Kylie's tax payable (with income protection)

Kylie has income protection cover in place, payable at a cost of $900 per year. Income protection premiums are tax-deductible, so Kylie can claim the full amount of $900 to reduce her tax liability. As a result, her tax payable is calculated as the following:

IncomeFigures
Salary from job$70,000
Income protection premium deduction-$900
Taxable income $69,100
How much tax is paid for $69,100 in income (based on tax rates)$3,572 + 32.5c for every dollar over $37,000
Base amount of tax$3,572
Tax for every dollar over $37,000$32,100 over
multiply by 32.5c for every dollar over
= $10,432.50
Total tax$14,004.50
Plus Medicare levy$1,382
  • Tax payable LESS insurance deduction for Kylie 2015/16*
$15,386.50

*Learn more about the Medicare levy

3. Saving of $310.50


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 earningsAnnual premium to insurerMarginal tax rateTax refundFinal cost of cover
Over $180,000$80045%$360$440
Between $87,001 and $180,000$80037%$296$504
Between $37,001 and $87,000$80032.5%$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

QuestionAnswerConditions
Are income protection insurance premiums tax-deductible?YesProvided the benefit is paid in regular instalments replacing a regular income
Are the benefits paid under an income protection policy taxable?YesThe benefit payments are treated as income by the Australian Taxation Office and are therefore taxable
Do I pay GST on income protection premium costs?NoGST 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.

William Eve

Will is a personal finance writer for finder.com.au specialising in content on insurance. While he cannot give personal advice to clients, Will enjoys explaining the intricacies of different types of protective cover to help individuals and businesses find affordable cover that won't leave them underinsured.

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2 Responses

  1. Default Gravatar
    PeterAugust 11, 2016

    Hi
    I have a question on Tax Payable on Income Protection Payments.
    My wife was recently required to finish work due to serious illness and was paid a TPD payment, Lump Sum Superannuation and was also paid out in advance to 1/8/17 for an Income Protection Policy. She was initially paid Monthly by the Insurance Company (TAL) who then decided to Pay the Policy out. This total amount of Income Protection was included in my PAYG Summary for 2015/16 Financial year. Should this payment be included as assessable Income even though it relates to payment for a future date.

    Thanks

    Peter

    • Staff
      RichardAugust 11, 2016Staff

      Hi Peter,

      Thanks for your question. finder.com.au is a comparison service and we are not permitted to provide our users with personalised financial advice. You may wish to contact the Insurance Law Service.

      All the best,
      Richard

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