Is income protection tax deductible in Australia?

Income protection insurance, also sometimes known as personal income protection, provides financial support if you become unwell or injured to the extent that you’re unable to work for a period of time. While premiums for this type of insurance are generally tax-deductible, you need to make sure you understand the tax implications. You may also need to seek professional tax advice.

In this guide, we’ll explain some things you need to know about income protection insurance and tax. We’ll also provide answers to commonly asked questions including:

• Can I claim income protection insurance on my tax return?
• Does income protection insurance incur GST costs?
• Do you pay tax on income protection payments?

While we have supplied some general guidelines in this article, for all queries about taxation specific to your situation, we recommend you seek advice from an accountant or a suitably qualified professional.

Can I claim income protection premium payments on my tax return?

In most cases, yes. According to the Australian Taxation Office (ATO), income protection insurance premiums are generally tax-deductible. The position can vary where cover is purchased as part of superannuation arrangements (for example, through an SMSF, or through an industry or retail super fund).

Income protection taxation example

Nicole takes out an income protection insurance and trauma policy with NobleOak to help cover her living expenses if she’s unable to work due to illness or injury.

She pays $260 a month premium for both policies, which includes:

• $190 for the income protection insurance policy
• $70 for the trauma insurance policy

At tax time, Nicole can claim a deduction for the $190 she pays towards income protection, as it’s designed to replace her income.

However, the $70 for trauma cover isn’t tax-deductible, because it’s considered capital in nature, i.e. not directly related to replacing lost income.

Who qualifies for an income protection premium payment tax deduction?

You’ll likely qualify for a tax deduction on income protection premium payments if:

• You pay for the policy yourself (not through your superannuation)
• The policy is specifically designed to replace your income, if you’re unable to work due to illness or injury
• You’re earning assessable income (e.g. from employment, sole trading, or investments)

Is there GST costs that you’ll need to pay on income protection insurance premium payments?

When the policy is issued by a registered life insurance company such as NobleOak, you don’t need to pay GST on income protection insurance premiums. This is because income protection insurance is generally classified as a financial service, which is GST-free under Australian tax law (when provided by a life insurer).

What tax deductions can you potentially claim for income protection insurance premium payments?

Generally, premium payments for income protection are tax deductible. In most cases you can claim a tax deduction for the portion of your income protection premium that directly relates to replacing your income if you can’t work due to illness or injury.

In some instances, your premium payments might not be tax deductible; we’ll explore these scenarios in the next section.

Can you claim income protection insurance on tax if it’s bundled with other policies?

As in the example that appeared earlier in the article, if your income protection insurance is bundled with other types of insurance (such as TPD insurance or trauma insurance) you can only claim the portion of your premium payment that’s for income protection, specifically.

Say, for example, you have a bundled policy for which the total monthly premium is $280. The income protection insurance component of this bundle is $200, and the TPD insurance component is $80. This means that only $200 per month of your total premium payment is tax deductible.

Things to consider when claiming your income protection insurance premium payments on tax

Before you claim your income protection premiums as deductions in your tax return, it’s worth checking a few important details. Not all policies are treated the same by the ATO. Listed below are a few things to be aware of.

Claiming a tax deduction on payments for a policy that’s funded by your super

If your income protection policy is held within your superannuation and premiums are paid from your super balance, you generally can’t claim a deduction in your personal tax return. The deduction may be available to the super fund instead.

Keeping records

The ATO may request evidence of your payments, so make sure you keep receipts, policy documents, and statements showing what you paid and what portion relates to income protection insurance premiums.

Assuming you’re not entitled to a deduction if you’re self-employed

Even if you’re self-employed or a sole trader, you may still be eligible to claim a deduction – as long as the policy is designed to replace your personal income and meets the usual criteria.

Timing and payment method can affect first-year claims

If you take out a policy close to the end of the financial year and pay monthly, you can generally only claim the amount you actually paid in that financial year – not the total annual premium. For example, if your policy starts in May and you pay monthly, you may only be able to claim two months’ worth of premiums that year.

Do you pay tax on income protection insurance benefit payments?

If you have income protection insurance, and you become unable to work due to illness or injury, you will most likely be entitled to benefit payments. You might be wondering if you’ll need to pay tax on the benefit payments you receive from your insurer.

In most cases, yes, income protection benefit payments are considered taxable income in Australia. Because these payments are designed to replace your regular income if you can’t work, the ATO treats them the same way it would treat wages or salary.

This means:

• You’ll need to declare any income protection payments you receive in your tax return.
• The payments are taxed at your marginal tax rate, just like other income.
• No PAYG tax is usually withheld, so you may need to set aside money to cover your tax liability at tax time.

If you’re receiving benefit payments, it’s a good idea to speak with a tax professional to ensure you’re meeting your obligations and managing your cash flow effectively.

What you need to declare

Because income protection benefits are designed to replace your regular earnings, any payments you receive from an income protection claim must be declared on your tax return as assessable income, according to the ATO.

Award-winning income protection insurance

NobleOak’s income protection insurance pays a monthly benefit of up to 70% of your regular income (before tax) if you can’t work due to a sickness or injury (subject to certain limits).

It’s easy to start a quote online, or you can call our team on 1300 041 494 to find out more.

Any financial product advice is general in nature only and does not take into account your individual circumstances, objectives, financial situation, or needs. Before acting on it, please consider the appropriateness of the information, having regard to those factors. Any third party websites or tools referred to are subject to their own terms and conditions and NobleOak Life Limited makes no representation or warranty as to any information on those websites. Persons deciding whether to acquire or continue to hold life insurance issued by NobleOak Life Limited should consider the relevant Product Disclosure Statement and Target Market Determination for the product. NobleOak Life Limited ABN 85 087 648 708 AFSL 247302.