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
-
Income Protection Insurance: The Definitions of Disability
Disability and insurance varies depending on the definition, which in turn can affect your claims payment -
Income Protection Insurance Guide for Women
Insurance for women is more tailored as income protection companies now offer specific benefits for women such as pregnancy premium waivers, part time work cover -
Income Protection Premiums for Women
Income protection premiums for women are different to men based on historical, health & probablity to claim factors -
Income Protection Insurance For Women
Insurance for women is becoming more important, especially now as women are often key income earners in the family & need their income protected -
Protecting Your Greatest Asset With Income Protection
Asset protection strategies come in all forms, however not many people know their personal income is probably their greatest asset, and can be covered by income protection -
Protecting Your Home With Income Protection
Protecting your home loan with a fully tax deductible income protection insurance policy has never made more sense
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