Insights
Is Income Protection Insurance Tax Deductible?
Written by Safety Nest
The short answer
Is Income protection insurance a deductible tax expense in Australia? Income protection insurance can provide essential financial support if you’re unable to work due to illness or injury, and may be tax-deductible for a policy held outside super, depending on your circumstances. The premiums paid for income protection insurance out of your personal cashflow/ savings are typically tax deductible, which means you can claim the cost of these premiums when you lodge your annual tax return. However, there are specific guidelines to understand about what you can and cannot claim.
What Makes Income Protection Insurance Tax Deductible?
Premiums that cover the loss of your income, such as salary or wages, are deductible as they are considered an expense incurred in earning assessable income. This applies if you purchase income protection insurance outside of superannuation.
You cannot claim tax deductions for:
- Policies paid through superannuation contributions
- Lump sum payments, such as benefits for trauma or critical illness
- Other types of cover bundled with life insurance that do not directly relate to income loss
What About Bundled Policies?
If your income protection policy has other benefits such as a payout for death or critical illness,, only the portion that relates to income protection will be tax deductible. For example, if you pay $300 per month in premiums and $150 is for income protection, only that $150 is tax deductible.
Claiming Tax Deductions Through Superannuation
If you hold income protection inside super, you generally cannot personally claim the premiums, because they are paid by the super fund from your balance rather than out of your own pocket. In some cases, depending on the structure of your super fund, the premiums paid may be considered as an expense to the superfund. This is typical with a Self Managed Super Fund. It is important you consult your accountant to discuss the advantages and disadvantages of these structures.
How Do I Claim My Tax Deduction for Income Protection?
To claim, ensure you keep records of your income protection premiums, including receipts or policy documents that detail the amounts paid. How any deduction is claimed depends on your circumstances. We are not tax agents, so check the ATO guidance or speak to a registered tax agent.
To make this easier for you, we will get the Income Protection tax notices from the insurers, and pass these on. These will detail your insurances as well as the premiums paid for taxation purposes.
It’s advisable to seek advice from a tax professional or the ATO to ensure you’re claiming the correct amount and understanding the guidelines that apply to your specific situation.
Claiming the deduction
How to claim your income protection deduction
Premiums paid from personal funds outside superannuation are often deductible, but it depends on how the policy is structured and on your circumstances. We are not tax agents, so confirm your own position with a registered tax agent or the ATO.
- 1
Keep your records
Keep records of your income protection premiums, including receipts or policy documents that detail the amounts paid.
- 2
Check how to claim it
How any deduction is claimed depends on your circumstances. Check the ATO guidance or ask a registered tax agent rather than relying on a general rule.
- 3
Separate any bundled cover
If your policy bundles other benefits such as death or critical illness, only the portion relating to income protection is deductible. Claim that portion alone.
- 4
Use the insurer tax notices
Where an insurer issues an annual premium statement or tax notice for an income protection policy, we can help you obtain a copy.
- 5
Check with a tax professional or the ATO
Seek advice from a tax professional or the ATO to confirm you are claiming the correct amount for your specific situation.
Final Tip
Always keep detailed records of your payments and consult a professional if you’re unsure about the specific tax benefits available to you. Feel free to get in touch with a Safety Nest Adviser by clicking on the “Get Started” button.
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