The Accountants

Income Protection Tax Deductions: What You Need to Know

Income protection insurance is an essential safeguard for many Australians, ensuring financial stability in case of illness or injury that prevents them from working. What many don’t realise is that the cost of income protection premiums can be tax-deductible, helping to reduce taxable income. If you’re looking to optimise your tax return, here’s everything you need to know about claiming deductions for income protection insurance.

1. What is Income Protection Insurance?

Income protection insurance is designed to replace a portion of your income if you’re unable to work due to illness or injury. Policies typically cover up to 75% of your pre-tax income and can provide payments for a set period, such as two years, five years, or until retirement age.

This type of insurance provides a safety net, allowing you to cover essential expenses like rent, mortgage repayments, utility bills, and daily living costs while you recover.

2. Can You Claim Income Protection Premiums on Your Tax Return?

Yes! The Australian Taxation Office (ATO) allows individuals to claim a deduction on the premiums paid for income protection insurance if the policy covers loss of income. However, there are important rules to understand:

• Only the portion of the premium that covers income loss is deductible. If your policy includes benefits such as lump sum payments for death, total permanent disability (TPD), or trauma cover, those portions are not tax-deductible.
• Policies paid through superannuation funds are generally not deductible, as the fund, not the individual, is making the payments.
• Premiums must be paid by you personally—if your employer pays for your policy, you cannot claim it as a deduction.

3. How Much Can You Claim?

The amount you can claim depends on how much you’ve paid in premiums throughout the financial year. If you’ve paid $2,000 in premiums for an eligible income protection policy, you can claim that full amount as a tax deduction.

• Example: Sarah, a full-time marketing manager, pays $1,500 annually for an income protection policy that solely covers loss of income. When lodging her tax return, she claims the full $1,500 as a deduction, reducing her taxable income and, ultimately, the amount of tax she pays.

4. What Records Do You Need to Keep?

To successfully claim your income protection insurance deduction, the ATO requires you to maintain records, including:

• Policy statements showing premium amounts and coverage details.
• Receipts or bank statements proving payments made.
• Correspondence from your insurer confirming that the policy covers income loss.

It’s recommended to keep these records for at least five years in case of an ATO audit.

5. Common Mistakes to Avoid When Claiming Income Protection Deductions

• Claiming Non-Deductible Portions: If your policy includes life, trauma, or TPD insurance, you must separate those amounts and only claim the deductible portion.
• Claiming Superannuation-Paid Policies: If your income protection insurance is paid through your super fund, you generally cannot claim it on your tax return.
• Forgetting to Claim: Many people overlook this deduction, leaving money on the table that could reduce their taxable income.
• Not Keeping Records: Without proper documentation, the ATO may disallow your claim.

6. Why is Claiming Income Protection Insurance Important?

• Lowers Your Taxable Income: Claiming your premiums can reduce the amount of tax you owe at the end of the financial year.
• Encourages Financial Security: Since income protection insurance provides vital financial support in case of illness or injury, claiming the deduction makes the policy even more affordable.
• Maximises Your Refund: Every deduction helps—if you’re paying for a policy, you should take full advantage of the tax benefits available.

7. How to Claim Income Protection Insurance on Your Tax Return

When lodging your tax return, your income protection premium should be entered under the “Other Deductions” section. If you’re unsure, a registered tax agent can help ensure you’re claiming the correct amount while complying with ATO guidelines.

8. Take Action: Claim Your Deduction Today!

Don’t miss out on a valuable tax deduction that can save you money. If you have an income protection policy, check your premium details and ensure you’re claiming everything you’re entitled to.

If you’re unsure about whether your policy qualifies, speak to a tax professional who can guide you through the process and help you maximise your return. Take control of your financial future and make sure your tax return works for you!

The Team at The Accountants and The Finance Brokers are here to help you navigate your cash flow requirements in your business. We offer complimentary cash flow reviews and assist you in understanding your finance needs.