When is Income Protection Tax Deductible?

Generally speaking when you hold an income protection policy in your own name the premiums are generally tax deductible to the individual. However it is important to know that only the portion of the premium that is protecting your income is deductible, if you have a combined policy that is covering you for other benefits such as life insurance or trauma insurance that portion of the policy will not be deductible.

As you can only claim the tax deduction as an individual, many people choose to hold income protection in their own personal name as opposed to holding it through superannuation.

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How am I eligible for the deduction?

The Australia Tax Office has a view that because income protection insurance premiums are there to protect your income which is tax assessable, they have the view that your premiums are tax deductible in nature.

Therefore if you have paid for your premiums with your own money and you are the listed policy owner on the policy, you will generally be able to claim the tax deduction in the year you paid the premiums, however if the premiums paid are for a future period you may only be able to claim the deduction in the year that the policy covers you for. This question is best to be handled by your accountant as each persons circumstance can be very different.

How do I claim the deduction?

The easiest way for you to claim your tax deduction is to wait for the relevant insurer you are insured with to send you out a statement highlighting exactly which premiums have gone towards your income protection cover.

Please note it takes insurers 4 – 6 weeks to generate these statements and you will need to wait till at least this time until you can ask the insurer to reissue the statement if you have misplaced it. 

From here you have two options:

Option 1:

You can take this information and present that to your accountant, and ask him where and how to include this information in your tax return and they can take care of it for you.

Option 2:

If you complete your own tax return, you should refer to the ATO website to find out which section you need to include this in. If you have any question about where this should be claimed, you should call the ATO or check with your accountant.

When will I not be able to claim a deduction?

Deductions are only available on premiums for insurance protecting income. It is generally not available on other forms of personal insurance such as Life Insurance, Trauma Insurance or TPD Insurance.

Generally lump sum polices such as life insurance, Total and Permanent Disability Insurance or trauma insurance when they are held in your personal name do not protect your personal exertion income, therefore the ATO’s view is that these are not tax deductible in a personal capacity.

The lump sum option

If you have elected to add the lump sum option (which is offered by select insurers) onto your income protection policy where if you are eligible they will pay you a lump sum benefit as apposed to the monthly benefit. This portion of the premium is generally not tax deductible.

How much of my premiums can I receive back?

The amount of money that you’ll receive back from your premiums will depend on what you income was and the rate of tax you pay in the relevant tax year.

Tax Rates for 2016/17

Taxable IncomeTax on this income
0 – $18,200Nil
$18,201 - $37,00019c for each $1 over $18,200
$37,001 - $80,000$3,572 plus 32.5c for each $1 over $37,000
$80,001 - $180,001$19,822 plus 37c for each $1 over $87,000
$180,001 and over$54,232 plus 45c for each $1 over $180,000

Tax Rates for 2015/16

Taxable IncomeTax on this income
0 - $18,200Nil
$18,201 - $37,00019c for each $1 over $18,200
$37,001 - $80,000$3,572 plus 32.5c for each $1 over $37,000
$80,001 - $180,001$17,547 plus 37c for each $1 over $80,000
$180,001 and over$54,547 plus 45c for each $1 over $180,000

Is income protection insurance paid through super tax deductible?

No, if your income protection is held within and paid for by your super fund, the premiums are not tax deductible.

Premium Deduction Case Study:

Here is an example of a plumber named Dave who 30 years of age, lives in New South Wales and earns a salary of $85,000 per year after any other related deductions he may already be eligible for.

  • From the 2015/16 Tax Tables you will see that his marginal tax bracket has a tax rate of 37% .
  • His income protection premiums were $1,010 for the year for his policy
  • He is the policy owner of his policy and the entire premium is for the income protection

Therefore in this example Dave would be eligible to receive $1,010 x 37% = $373.70 back from the ATO after he has lodged his tax return for the proportion of tax on his eligible premiums.

This is a general case study only and may not be indicative of any real-world scenarios.

What are the advantages of paying my income protection premiums annually?

The advantages of paying your premiums annually is that most life insurance companies give you a 5-8% discount for annual payments. If you have enough cash flow and paying yearly premiums doesn’t affect you too much, you may want to consider it as an option so you can save even more.

Please be advised that this is a general guide only and we are not registered tax agents under the Tax Agent Services Act 2009; and if you intend to rely on the advice to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law, you should request advice from a registered tax agent. Please consult your tax accountant or speak to one of our financial advisers for further information.

Published: May 22, 2017

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2 Comments

  • tim |

    I am 69 year of age, still working and hope to you so till at least 75.
    Income level about $150k and I am a consultant what is premium amount?

    • Russell SPECIALIST
      Russell |

      Hi Tim

      Apologies, as this time we don’t’ have any income protection policies that someone age 69 can obtain. While we get several requests no insurer that we have access to has ventured into this market opportunity as of yet.

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