The General rule for claiming a deduction
The ATO states that “for insurance against the loss of your income”, and that you “must include any payment you received under the policy or loss of your income…on your tax return”. Such payments must be declared for the financial year in which it is received.
What does this mean?
The premium you pay on income protection insurance is tax deductible. So, at the end of the year you can claim 100% of this as an expense. If you were to make a claim on income protection insurance you will generally get 75% of your pre-disability income paid to you on a monthly basis, before tax.
However, you cannot claim a deduction for a premium or any part of a premium where the income protection policy is taken out through your superannuation and insurance premiums are deducted from your super fund. It would generally become a deductible expense to the Super fund not to you.
How do I Claim Income Protection on Tax?
You can claim income protection premiums as a tax deduction when you lodge your tax return. Your life insurance company should inform you of what amount is deductible in a premium statement which is sent out in July of each year. If you do not have this document make sure you contact your life insurer before you submit your return.
How much can I claim on income protection premiums?
The amount you can claim as a deduction on your income insurance premium is based on your marginal tax rate – which is set based on your annual assessable income.
Tax deduction example for 2014/15:
If your income protection premium is $100 per month and your annual income is $42,000 per annum, your premium after tax will be $70 per month. Your income fits into a 30% marginal tax rate brackets and you will receive 30% back when you do your tax return.
Claiming and understanding the eligible deductions on a yearly return can be complicated as there are a number of potential deductions depending on your personal circumstances therefore it is important to seek professional advice by talking to a tax agent or accountant before submitting your return to the ATO.