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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.
Hello.
I have had an income protection insurance policy for 13 years and due to a misunderstanding on my part I have not claimed this amount on my tax return. (I have done my own tax returns for those years.
Now that I know it is claimable, am I able to claim the accumulated amount for the past years on my tax return this year? Roughly the amount of premiums I have have paid over the years works out to approximately $5,00.00 to $7,000.00 per year.
Would be grateful for your advice
Regards
Hi Jeneene.
ComparingExpert and consultants are not tax specialists. Please contact your accountant or a tax professional for assistance with this particular query.
If I am paid income protection payments in the 2019 tax year that relate to earnings lost in the 2016 year, are they included as part of the 2016 year or 2019 year income?
Hello Daniel.
It’s best to contact your accountant or a tax specialist as ComparingExpert and consultants are not tax professionals.
Is a lumpsum payout (representing the entitlements of several past years i.e. payment in arrears) from salary continuance income protection insurance policy that was included in my company superannuation fund; tax-exempt if it was due to pain and suffering?
Hello Alfred.
ComparinExpert and consultants are not tax professionals. You might want to get advice from your accountant or a tax specialist and contact your super fund directly.
Hello.
I receive payments from a income protection insurance policy. Am I required to pay my tax for the premiums I receive as a PAYG taxpayer?
Hello John.
Generally, yes, because the income protection monthly payout you receive is classified by ATO as part of your regular income, you must pay tax on it. However, please confirm this with your accountant as ComparingExpert and consultants are not tax specialists.
Hi
I have been receiving monthly assistance from a CommInsure income protection policy whilst working part-time for the last 3 years because I am no longer able to carry out the work of my trade and can only do casual work part-time.
I am considering taking a commutation offer made to me but am concerned about the extensive tax obligations that I would incur. Is the total amount to be declared as income for that 1 particular financial year and will it be taxable at the marginal rate? If so you would be losing around $200,000 if a $450,000 payment.
Hi Ben. ComparingExpert and its team are not registered tax professionals. I suggest you reach out to your accountant or a tax specialist for clarification regarding this matter so you can feel completely confident in your decision.
All the best.
I am no longer able to work and I made a claim against my Income protection policy
My payments were back dated for two years resulting in three years of payments being in one financial year.
How do I pay tax on the income protection payment ?
Do I declare three years of payments in the one financial year or day I declare payments by the year to which they were paid?
Hi Michael,
ComparingExpert and consultants are not registered tax professionals. Please contact your accountant or a tax specialist with assistance to your query.
Hi,
Are you able to tell me if a crisis benefit (where a person is paid the equivalent of a monthly benefit for 6 months or 80% of salary, even if they are able to work e.g. after a cancer diagnosis) is taxable?
The crisis cover is an add-on to an income protection policy (and separated to trauma cover under a life insurance policy). I may still be able to work (or use sick leave) so will obviously still be taxed on that employment income. Are benefits also taxed if the insured person is still working (but also received a lump sum payout)?
Thanks
Luke
Hey Luke.
ComparingExpert and consultants are not registered tax advisers. It might be beneficial to seek guidance from your accountant or a tax professional.
According to ATO guidelines, for income protection policies providing a lump sum trauma benefit, 5% of the income protection premium would generally not be tax deductible. This is because the insured person could still potentially work and earn an income, thus the benefit does not replace lost income but is rather a capital payment.
To sum up, the taxability of the benefit is not determined by whether or not the life insured is absent from work.
In 2012/13 I received two lumps sum payments. I was also receiving Centrelink which was fully repaid in that year. My super was also totally paid to me.
Now the ATO have said I have a tax bill. I assumed all payments were tax-free, so I did not complete a tax return.
I wish to lodge an amended tax return and want to know how to treat the lump sum, but it does not have a type in the box.
Is the lump sum Taxable?
Hi Therese,
Generally, an income protection claim payout is subject to tax because ATO views it as part of your assessible income.
Kindly note, we are not tax professionals. Please seek guidance from your consultant or a tax specialist to assist you with your tax return.
Hi, I have a TSC policy with AMP Australia which I made a claim on. My claim has just been accepted. I currently live in New Zealand. Will I have to pay foreigner tax rate of 32.5% ? Thanks.
Hi. I’m not familiar with what TSC stands for. Are you perhaps referring to TPD or Trauma insurance? However, as your question mainly pertains to taxes I suggest seeking advice from an accountant or tax consultant and we are not able to provide taxation advice.
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.
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,
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