An insurance premium that can be claimed as a tax deduction, reducing your taxable income. In Australia, income protection insurance premiums are generally tax deductible, while life, TPD, and trauma insurance premiums typically are not.
Income protection premiums are generally tax deductible because the policy replaces income that would otherwise be taxable. Life, TPD, and trauma premiums held personally are usually not deductible.
The deduction is claimed in the financial year you pay the premium, not the year the cover applies.
| Cover type | Personally held | Held inside super | |---|---|---| | Income protection | Deductible to you | Fund claims the deduction | | Life | Not deductible | Fund claims the deduction | | TPD (any-occupation portion) | Not deductible | Fund may claim the deduction | | Trauma | Not deductible | Generally cannot be held in super |
Income protection deductibility flows from section 8-1 of the Income Tax Assessment Act 1997: the expense is incurred in gaining or producing assessable income, so it qualifies.
Life, TPD, and trauma premiums fund lump sum benefits rather than income replacement. The benefits are capital in nature, so the premium is not a deductible income-producing expense.
For superannuation-held cover, premiums are paid from concessional contributions taxed at 15% in the fund, so you don't claim the deduction personally. The fund may claim it instead.
Sarah earns $85,000 per year and pays $1,200 annually for income protection insurance. She can claim the full $1,200 as a tax deduction, potentially saving $420 in tax (at 35% marginal rate including Medicare levy).
James pays $2,500 per year for life insurance outside super. He cannot claim this as a tax deduction because life insurance provides a lump sum benefit, not income replacement.
Maria's employer pays $1,800 per year for her income protection insurance as part of her salary package. This amount is considered a fringe benefit and is tax deductible to the employer, while Maria may have FBT implications.
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