How Is Income Protection Taxed in Australia: The ATO Guidelines

Published: April 10, 2018

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.

Is income protection insurance tax deductible?

Yes, income protection insurance premiums in Australia are generally tax deductible for most taxpayers. 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.

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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

Source: Australian Taxation Office
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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2 Comments

  • Riley |

    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

    • SPECIALIST
      Anneke Aswegen |

      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