Are key person insurance premiums tax deductible for my business?

Deductibility depends on cover purpose, not cover type. Revenue-purpose key person premiums are deductible; capital-purpose key person premiums are not. The Commissioner of Taxation's view in ATO Taxation Ruling TR 2009/2 sets the framework.

The legal form of the cover (Life, TPD, Trauma, Income Protection, Business Expenses) does NOT determine deductibility. The PURPOSE the proceeds will fund is what matters.

Revenue purpose vs capital purpose: the tax difference

| Element | Revenue purpose | Capital purpose | |---|---|---| | Premium deductibility | Deductible under ITAA 1997 s8-1 | Not deductible | | Proceeds tax treatment | Assessable as ordinary income | Generally exempt under ITAA 1997 s118-37(1)(a) (CGT exemption for life policy proceeds to original beneficial owner) | | Typical use | Replace lost business income, cover ongoing operating costs | Fund recruitment, repay debt, buy out shareholder equity | | Example covers | Business Expenses, IP-style key person cover | Life cover for buy/sell, debt protection, capital replacement |

What 'revenue purpose' looks like

The Commissioner treats cover as held for revenue purposes where the proceeds replace amounts that would otherwise be assessable income. Common examples:

• Business Expenses Cover reimbursing rent, utilities, employee salaries while the key person is disabled.
• IP-style key person cover paying a monthly benefit to replace lost revenue while the business recruits.
• Short-term revenue replacement structures using Life or TPD where the documented intent is to replace 1 to 3 years of lost profit.

Premiums are deductible under ITAA 1997 s8-1 (general deductions). Proceeds are assessable income to the business and taxed at the corporate rate.

What 'capital purpose' looks like

Cover is held for capital purposes where the proceeds fund a capital outcome rather than income replacement. Common examples:

• Buy/sell funding under a shareholder agreement (proceeds buy out the deceased owner's equity).
• Debt protection paying off business loans on death or disability of a guarantor.
• Recruitment funding paying executive search and training of a replacement.
• Equity protection preserving the value of the business by removing dependency on the key person.

Premiums are NOT deductible. Proceeds to the original beneficial owner are generally exempt from CGT under ITAA 1997 s118-37(1)(a). That section provides a CGT exemption for life insurance policy proceeds where the recipient is the original beneficial owner.

ATO source documents to cite at audit

• ATO TR 2009/2 Income tax: deductibility of premiums paid for an insurance policy against the loss of profits, key persons and trauma insurance (the canonical capital-vs-revenue framework).
• ATO TR 95/35 Income tax: deductibility of income protection insurance premiums (relevant where key person cover is structured as IP).
• ATO TD 94/35 Income tax: are premiums of an insurance policy for funding a buy-sell agreement deductible (the position on buy/sell premiums).
• ATO TR 85/36 Income tax: receipts of insurance proceeds (general framework for the assessability of insurance proceeds).
• ATO TR 2003/9 Income tax: insurance industry (life insurance policies) (industry-level framework for life policies).

The ATO website page Insurance premiums - key person and revenue protection insurance summarises the position for businesses.

Single policy with split purpose

If one policy covers both purposes (e.g. a $2M Life policy where $1.5M is for buy/sell funding and $500,000 is for revenue replacement), the deductible component is the portion attributable to revenue purpose. Maintaining detailed records of the split is essential at audit. In practice, many businesses hold separate policies for each purpose to simplify the tax administration.

What the PDSs say about tax

No panel insurer PDS makes tax representations on the deductibility of key person premiums. The standard wording defers to professional tax advice. TAL Accelerated Protection PDS (12 December 2024): Tax may apply if the policy or insurance is taken out for business purposes and you should seek professional taxation advice. Acenda Insurance PDS (27 September 2025) refers to Business Expenses assessable as income and that part of the premium that relates to the benefit that replaces income is likely deductible.

How to evidence intent at application

Best practice is to prepare an accountant's letter at the time of application documenting:

• The intended purpose of the cover (revenue, capital, or both).
• The calculation method used to derive the sum insured.
• Where the proceeds will be applied if a claim occurs.

This evidence reduces ATO re-characterisation risk if the proceeds are later applied to a different purpose.

Regulatory anchors

• ITAA 1997 s8-1 (general deductions test).
• ITAA 1997 s118-37(1)(a) (CGT exemption for life insurance policy proceeds).
• ATO TR 2009/2, ATO TR 95/35, ATO TR 85/36, ATO TR 2003/9, ATO TD 94/35.

This is general advice only. Tax treatment is complex and depends on business structure (sole trader, partnership, company, trust), cover purpose, and policy ownership. Discuss with a registered tax agent and a licensed insurance adviser before taking out cover.