Negative Gearing (Insurance)

Negative gearing in the insurance context describes claiming income protection premiums as a deduction against your overall taxable income. The term is borrowed from property investing; here it just means using a deductible expense to reduce your tax bill.

The higher your marginal tax rate, the larger the effective premium subsidy. The deduction is available under section 8-1 of the Income Tax Assessment Act 1997.

Effective premium cost by marginal tax rate

| Gross premium | 32.5% marginal rate | 37% marginal rate | 45% marginal rate (top rate excl. Medicare) | |---|---|---|---| | $2,000 | $1,350 | $1,260 | $1,100 | | $4,000 | $2,700 | $2,520 | $2,200 | | $6,500 | $4,388 | $4,095 | $3,575 |

Net cost = premium × (1 - marginal rate). Medicare Levy adds 2 percentage points to most middle and higher rates.

Why multiple income sources amplify the benefit

The deduction reduces total assessable income, not income from a specific source. If you have salary, rental income, and business income, the income protection premium offsets the combined total. This is particularly valuable when:

• You are a business owner with variable income across years
• You have rental properties producing additional assessable income
• You sell investments in a high-income year creating a capital gain

Timing the deduction

1. Pre-pay the annual premium in June to bring forward the deduction into the current financial year
2. Match high-income years by pre-paying when you expect a one-off income spike
3. Apply Taxation Ruling TR 97/7 on prepaid expenses which allows immediate deduction for periods up to 13 months

Genuine purpose test

The ATO requires the premium to be genuinely incurred in producing assessable income. For income protection cover this is generally satisfied because the policy replaces income that would have been taxable. The cover must genuinely protect your income-earning capacity; you cannot deduct premiums for purposes unrelated to your work. Authority: section 8-1, Income Tax Assessment Act 1997 and Taxation Ruling TR 2003/7.