How Is Income Protection Taxed in Australia: The ATO Guidelines
If you purchase an income protection policy before the end of the financial year, you can claim the premiums as a tax deduction on your June 2018 tax return.
Unlike other types of policies, income protection insurance can be tax deductible. The Australian Tax Office (ATO) generally views income protection premiums as an expense you have incurred protecting yourself against the loss of your income, which means you can claim money back if your income protection policy is taken out separate to your superannuation.
When unable to work for a specific period due to sickness or injury and claiming on your income protection insurance, the benefit payments you receive must also be included on your tax return as part of your assessable income.
This article provides general advice only and does not consider your individual circumstances. It is advisable that you speak with your accountant or tax agent as they will be able to help you through the tax on income protection process.
Only people who have paid premiums with their own money and is listed as the policy owner on their policy documents can generally claim this tax deduction.
You can claim your deduction when you complete your end of financial year tax return.
Marginal tax rates for 2017 to 2018
|Taxable income range||Tax rate||Amount of tax you'll pay|
|0 to $18,200||0%||Nil|
|$18,201 to $37,000||19%||19c for every dollar over $18,200|
|$37,001 to $87,000||32.5%||$3,572 + 32.5c for every dollar over $37,000|
|$87,001 to $180,000||37%||$19,822 + 37c for every dollar over $87,000|
|$180,001 and over||45%||$54,232 + 45c for every dollar over $180,000|
2018 Income protection tax deduction example
Nick earns $100,000 per year and pays a $100 premium per month for income protection.
As he earns between $87,001 and $180,000 per annum, Nick’s marginal tax rate for 2017/18 is 37%.
Monthly Nick will:
- Pay his income protection company $100 in premiums, and
- Be entitled to a tax refund of $37 from the ATO for his income protection premiums once he lodges his tax return.
How to claim income protection premiums on tax
- Step 1: Check the premiums you've already paid. If you pay monthly and only had your policy for a few months, be sure to just claim for those months. When paying premiums a year in advance, you can claim the whole amount on your tax return.
- Step 2: Ensure you receive a statement from your life insurance company detailing what amount is tax deductible. These are generally sent out in July and August and specify the premiums paid between 1/7/2017 and 30/6/2018. If you do not receive a statement, you should request one from your insurance company.
- Step 3: Include these details in the paperwork you submit to your accountant or if you complete your own tax return, include these details in the section D15 ‘Other Deductions’ category.
When can't you claim a tax deduction on your income protection premium?
- If you’ve linked or combined your income protection with another insurance policy, for example, life cover, trauma or TPD. Only the income protection portion of the premiums paid will generally be tax deductible.
- When you’ve taken out your income protection insurance through your super fund premiums are usually deducted from your super contributions. However, in the case of a self-managed super fund, the premiums may be deductible to the fund, and the savings passed onto you.
Do you pay tax on income protection payouts?
Yes, while your premiums are tax-deductible, the ATO stipulates that you must declare any money you receive for lost salary or wages under income protection insurance. The benefit you receive from your income protection claim will usually classify as part of your regular taxable income. Payouts are generally taxed at the marginal rate and must be declared on your tax return.
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