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Is Income Protection Tax Deductible?

If you are paying for income protection, is it tax deductible? Is income protection insurance taxable? Here’s a guide on income insurance in Australia.

Have you ever taken a sick day at work? You might have been lucky enough to have an annual amount of sick leave you’ve been able to use when you took this sick day, so you didn’t actually lose any income. If you didn’t, maybe you were lucky enough to recover quickly and get back to work without noticing any major financial hardship.

But, what if you weren’t so lucky?

What if you had to take an extended amount of time off because of a sickness or injury, and you didn’t have any sick leave to support you.

This is why Australian income protection insurance is important.

But what exactly is income protection insurance, and can you claim income protection as a tax deduction? In this article, we’re going to walk you through all the ins and outs to do with tax deductions on income insurance.

What is income protection insurance and why should you have it?

Income protection insurance acts like a safety net, ensuring you still get paid in the event you are left sick or injured and can no longer work. By paying a fee, you can have the peace of mind that in the event of an accident you will still be able to pay your bills.

Ever heard of Murphy’s Law? It’s the age old saying that “anything that can go wrong, will go wrong”. As with any insurance, you don’t need it until you need it.

To put this in a more digestible manner, you don’t need income protection insurance until something actually goes wrong and you can’t work for an extended period of time.

As per Murphy’s Law, if you don’t have income protection insurance, something more than likely will go wrong, and if you do have income protection insurance, everything will more than likely be fine.

What is your taxable income?

Your taxable income is money generated from your employer or your work. Your taxable income also includes:

  • PAYG summaries
  • Pensions and government allowances
  • Interest earned (banks etc)
  • Dividends
  • Rental property income
  • Business income
  • Other income earned (capital gains etc)

Is income protection insurance income taxable?

The short answer, yes. Income protection is a benefit that provides you with a replacement income and so the ATO needs to be paid based on your income tax bracket. 

Usually, your insurer will withhold your tax and pay the ATO for you, which means you don’t need to do a thing. However, they won’t always, so it’s your responsibility to check whether your insurer is paying your tax or not. 

Does income protection insurance include GST?

Income protection is exempt from GST because it is classified as a financial service. According to the ATO, income protection insurance is classified as “financial supplies”, and financial supplies are input-taxed sales so they do not have to pay GST in their price.

What qualifies your tax deduction?

There are only three main requirements that qualify as an expense for tax deductions, which is calculated against your income:

  • You must have spent the money and not have been reimbursed
  • It must be related to your job
  • You must have a record to prove it

What constitutes an expense as “related” to your job you might ask?

Are your income insurance premiums tax deductible?

In general, yes you are allowed to claim your income insurance premiums as a tax deduction. However, it is not universal and whether you are allowed to claim it or not depends on the type of cover you have.

According to the ATO, you are not allowed to claim deductible insurance premiums if:

  • You take your income protection insurance through your superannuation fund and the premiums are deducted from your super contributions
  • You are paid a lump sum to compensate your injury or sickness such as life insurance, total and permanent disability insurance, or trauma insurance bundled in the policy

Who can help you claim insurance tax deductions?

The more you deduct, the less tax you pay and the more money you can spend on yourself. The sure-fire way to do that is with a tax agent or accountant. You can also claim your tax agent/tax return fee back on tax, so why wouldn’t you use one to minimise your tax and maximise your money?

For all things tax to insurance, check out our Life Admin Hub for more informative blogs