Do you know if your income protection insurance is tax-deductible? If you hold an income protection insurance policy outside of your super fund, you could save on your next tax return.
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Is Income Protection Insurance Tax-Deductible?
Your income protection policy may be tax-deductible.
If you hold an income protection insurance policy outside of your super fund as a standalone policy product, you can usually claim some tax back.
However, you can only make tax deductions on the income protection insurance premiums you have paid during the same financial year.
Unlike other insurance policies premiums paid personally (life insurance premiums, disability insurance, TPD and trauma insurance), income protection plans have a different tax treatment.
Is Income Protection Insurance Taxed By The ATO?
Yes – if you receive a successfully claimed income protection lump sum payout, it is taxed by the Australian Tax Office (ATO).
This means that you will need to pay tax on the benefits you receive just like you would if it was your salary.
Here is how income protection payouts are taxed in Australia:
- If your policy is owned inside of your super fund: your super fund will usually coordinate your tax rate.
- If your policy is owned outside of your superannuation fund (ie. through an insurance company): your payouts are generally taxed at the normal tax rate.
How Do I Qualify For An Income Protection Tax Deduction?
Only the insurance premiums you pay to protect your income are tax-deductible.
You also must ensure you declare any payments you received under your income protection payout in your tax return. This ensures you get the right amount of tax back without receiving a hefty tax fine later down the track.
What Are Some Of The Factors That Affect How Much of an Income Protection Insurance Tax Deduction I Can Claim?
If you are eligible for a life insurance tax deduction, there are several factors that may affect how much you can claim
Your tax deduction amount depends on:
- how much you have paid for your income protection insurance
- your marginal tax rate (the biggest percentage rate of tax you pay)
- the proportion of your premium which relates specifically to income protection (you may pay additional fees which may not be tax deductible)
You also can’t claim a deduction personally if your income protection policy:
- is held through your super fund and the premiums are deducted from your contributions
- pays you a capital sum to compensate you for injury.
How Is Income Protection Taxed If You Are Self-Employed?
If you are self-employed, your income protection premiums are usually tax-deductible.
You are taxed exactly the same by the Australian Tax Office if you are self-employed or an employee – you will be taxed at the usual tax rates.
Income protection insurance payouts are generally taxed at a normal tax rate also.
When Can Fringe Benefits Tax Be Claimed For Income Protection Premiums?
Many employers offer income protection insurance policies for their employees as an additional benefit. This means as an employee, you do not have to pay the income protection premiums and you are automatically covered under your employment.
It is also possible for this arrangement to be set up as a self-owned policy where the employee holds the insurance policy but it is paid for by their employer.
For employees: your income protection insurance premiums are not subject to fringe benefits tax (FBT).
This is because it would otherwise be tax-deductible if you were paying for it personally.
For employers: the income protection premium should be tax-deductible as an employer/company.
Can I Claim Income Protection Tax Deductions Through Superannuation Premiums?
No – if you hold income protection through your super fund, you can not claim a tax deduction if the premiums you pay are rolled over from another super fund, or deducted from your super contributions (as they usually are).
In What Circumstances Won’t I Be Able To Get A Tax Deduction?
If you hold your income protection policy through your super fund (rather than an insurance company), you will not be able to claim a tax deduction personally – your super fund gets to claim the tax deduction instead.
How do I claim tax back on income protection?
To claim tax deductions on your income protection premiums, you can claim this through your yearly EOFY tax return. Most insurers provide a tax notice at the EOFY with all your figures and amounts ready to go.
You can label your income protection premiums under the ‘Other Deductions’ on your tax return.
Depending on your personal circumstances, you may be able to save on tax with your income protection insurance policy.
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