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.
Key Summary:
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.
Review Your Income Protection Options
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Hi there,
Just wondering if the general 75% income protection claimable payout is taxed as well? Eg. If I am covered for 75% of my salary is that 75% taxed? If so what would be my claimable percentage figure be after tax if it were to be 75%?
Thanks
Riley
Hi Riley,
Thank you for reaching out. If you were to make a claim on your Income Protection policy, you’d generally receive up to 75% pre-disability monthly earning income tax-free at the time the payment is made to you. However, any payout you receive must be declared on your income tax return, just like your regular salary, because it provides you with an income while you are unable to work.
This means that the tax you pay on the income protection benefit received will be determined by the tax bracket you’ll now fit into for the year. You will then be taxed accordingly, and the responsibility is yours to pay the relevant tax liability after your return is completed.
For example, if your 75% monthly income equates to a yearly amount of $37,000 then you’ll have to pay $3,571.81 (excluding Medicare levies) in tax (as per 2017-2018 tax rates).
If you’ve changed jobs or received a salary increase and are unsure if your current policy provides you with the appropriate amount of cover, feel free to fill in the above quote form to receive a detailed comparison of Income Protection quotes.
Kind regards.
Anneke
Good Morning Anneke,
What is the situation where the policy is owned by the individual’s private company and the company pays the premium on behalf of the insured (the individual)? The company is also the owner of the policy, but the insurance documents do not state the words Pty limited after the end of the name just the name itself.
If a claim is made on the policy who is assessed for tax on the money received from the insurance company. I have found tax references where if a trustee of a self-managed super fund owns a policy and receives claim funds then it is not assessable to the trustee but passed on to the individual if they can receive the money by virtue of a clause in the trust deed.
I cannot find any such reference where a company owns a policy and pays the premium and re dives the claim funds. Your assistance, pointing to your references, would be most helpful.
Regards John
Hi John,
If the full company name is not listed as the beneficiary, please complete and send the insurer an updated beneficiary form, signed by the policy owner(s). If it’s an Australian business, you might want to also add your Australian Business Number.
Regarding the taxation of your policy, be sure to check whether it’s keyman insurance, business expense insurance or SMSF. Tax treatment will be different depending on which type of policy it is.
Keyman insurance: Protects the company against possible costs associated with the loss of a key person, for example the business owner. The business purchases a policy and pays the premium making it the policy owner and may nominate itself as beneficiary.
Tax treatment of keyman insurance generally depends on whether the purpose of the cover is for capital or revenue purposes protection and of any policy ownership considerations.
Business expense insurance: Generally, helps ensure that the fixed expenses of a business will still be paid should the business owner be unable to work due to sickness or accident. The policy is generally owned by the life insured (business owner).
SMSF life insurance: If the life insurance policy is taken through your Self-Managed Super Fund, there might be other tax benefits to the fund.
For further assistance regarding the insurance side of things, please give us a call on 1300 743 254. Please note, this is general advice only. Please speak to your tax consultant or accountant for further information.
Hi There
Following a heart attack, I received a payout from the Trauma component of my Income Protection policy equal to 6 months of a predetermined monthly benefit, being payable once only. I have read a ruling, the link below which states that this payout is not assessable. Can you please confirm, thank you Russ
http://law.ato.gov.au/atolaw/view.htm?docid=%22AID%2FAID2004942%2F00001%22
Hi Russell
Thanks for the question. It is an interesting one.
Please note I am not a tax agent or Tax accountant and cannot provide any taxation advice therefore you need to seek a professional opinion from a tax professional in relation to this further and your tax obligations around this; however I am happy to provide you with factual information on income protection benefit payments.
Firstly the link you provided specifically refers to a terminal illness benefit paid under the Trauma benefit linked to an income protection policy which is not necessarily the same situation / benefit you have outlined above (refer to the relevant PDS).
In general when an income protection policy is paid out due to a trauma or a specified injury benefit component from an income protection policy from a claims perspective they view it as an advanced monthly benefit payment, not an additional lump sum on top of the monthly benefit (while this is the general rule across the providers this may not always be the case therefore refer to the PDS).
Therefore I would have this clarified from your insurer and then discuss this in detail with your relevant tax agent or accountant before making any decisions.