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Is Income Protecting Tax Deductible in Australia?
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NEOSIncome protection insurance premiums in Australia are generally tax deductible when held outside of your super fund. The amount you can claim depends on your assessable income and your marginal tax rate. If you take this after-tax deduction into account, your income protection cost might be significantly less than the original premium you paid.
However, when you’re sick or injured and unable to work for longer than your waiting period, the income protection monthly benefit you receive will be taxed because the ATO views it as part of your assessable income.
Take note: We are not tax professionals. This article provides general information only. Please speak with an accountant or a tax specialist to answer any tax-related queries.
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How are income protection payments taxable according to the ATO?
According to the Australian Tax Office (ATO), income protection premiums are seen as an expense you have incurred protecting yourself against the loss of your income. You can thus claim back an amount determined by your marginal tax rate if your income protection policy is taken out separately to your superannuation.
You can claim your deduction when you complete your end of the financial year tax return.
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.
Marginal tax rates for 2018 to 2019
| Taxable Income Range | Tax Rate | Tax on this income |
|---|---|---|
| 0 – $18,200 | 0% | Nil |
| $18,201 – $37,000 | 19% | 19c for each $1 over $18,200 |
| $37,001 – $90,000 | 32.5% | $3,572 plus 32.5c for each $1 over $37,000 |
| $90,001 – $180,001 | 37% | $20,797 plus 37c for each $1 over $90,000 |
| $180,001 and over | 45% | $54,097 plus 45c for each $1 over $180,000 |
Source: Australian Taxation Office (June 2019)
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 tax return.
Example: 2019 Income protection tax deduction
Nick earns $100,000 per year and pays $100 premium a month income protection. As he earns between $90,001 and $180,000 per annum, Nick’s marginal tax rate for 2018/19 is 37%.
Nick will, thus:
- 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 your tax return
- Step 1: Income protection premiums paid monthly vs annually. If you pay monthly and only had your policy for a few months, be sure to only 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 statements generally specify the premiums paid between 1/7/2018 and 30/6/2019. If you have 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 premiums?
- 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 you 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 (SMSF), 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.
