The ability to claim an expense as a tax deduction, reducing taxable income. For insurance, deductibility depends on the type of insurance and its purpose - income replacement policies are generally deductible, while lump sum benefit policies are not.
Deductibility is the ability to claim a premium as a tax deduction under section 8-1 of the Income Tax Assessment Act 1997. The fundamental test is whether the expense is incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for that purpose.
The key principle is symmetry: deductible premiums produce taxable benefits, and non-deductible premiums produce tax-free benefits. Income protection follows the first pattern; life, TPD, and trauma follow the second.
| Cover | Held personally | Held by employer | Held in super | |---|---|---|---| | Income protection | Deductible to you | Deductible to employer | Fund claims; not personal | | Life | Not deductible | Deductible if FBT applies | Fund may claim | | TPD (any-occupation portion) | Not deductible | Deductible if FBT applies | Fund may claim | | TPD (own-occupation portion) | Not deductible | Limited | Generally not deductible by fund | | Trauma | Not deductible | Limited | Cannot generally be held in super | | Key person insurance (revenue purpose) | Deductible to the business | Deductible to the business | N/A | | Key person insurance (capital purpose) | Not deductible | Not deductible | N/A |
Self-employed people claim income protection premiums in the same way as employees, through their individual tax return. Personal super contributions used to fund insurance can be claimed as a deduction subject to the concessional contributions cap of $27,500 (2023-24).
Under Taxation Ruling TR 97/7, you can prepay premiums for a period of up to 13 months and claim the deduction in the current financial year. This is useful for:
To support a deduction, you must keep:
The records must be retained for 5 years from the date you lodge the relevant tax return. Authority: section 8-1, Income Tax Assessment Act 1997; Taxation Ruling TR 2003/7; Taxation Ruling TR 97/7.
James, a teacher earning $88,000, pays $1,350 for income protection insurance. He claims this as a deduction on his tax return, saving approximately $472 in tax at his 35% marginal rate (including Medicare levy), making the net cost $878.
Sophie pays $2,200 for life insurance and $1,800 for income protection. Only the $1,800 income protection premium is deductible, saving $630 in tax (35% rate). The $2,200 life insurance premium is not deductible as it provides a lump sum, not income replacement.
Michael, a self-employed consultant, has business insurance covering keyperson insurance ($3,500) and income protection ($2,800). Both are deductible business expenses, reducing his taxable business income by $6,300, saving approximately $2,961 in tax at the 47% rate.
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