If you are considering purchasing income protection, it is likely that you will want to know whether the insurance premiums for income protection include GST. In addition, you should understand how your income protection insurance premiums may impact your tax contributions.

What if your income-protection premiums are tax-deductible?

A tax deduction is generally available for costs directly related to earning income. Depending on the type of benefits covered by the policy, some of the premiums could be related to income protection insurance. It is possible to claim a deduction for the cost of insurance against the loss of income from employment. You can deduct only the expenses of income protection. That’s called continuing salary protection.

According to ATO, tax deductions for insurance premiums are not available if the following conditions exist:

• the premiums are deducted from contributions made through your superannuation fund
• you receive compensation in the form of a capital sum for a serious injury.

For example, you can’t claim a deduction for insurance premiums associated with life, trauma or critical care.

You should also be aware that some of the premiums paid may be tax-deductible, but any claims you receive may be considered taxable income. There are many types of policies and benefits to choosing from, and whether you can claim tax deductions for premiums depends on what you have. You should, therefore, seek tax advice tailored to your unique circumstances from a registered tax agent or tax adviser.

Does income protection include GST?

As a financial service, income protection insurance is exempt from GST in Australia. According to the ATO, income protection insurance is considered an ‘input-taxed sale’ that does not contain GST.

Does the ATO tax income protection insurance?

The ATO advises that you are entitled to claim the cost of premiums you pay to income protection insurance in the event you lose your income. Income protection payments, however, also need to be included as income.

In other words, you may be entitled to tax benefits while you are paying income protection insurance premiums. You must legally report income to the ATO if you cannot work after suffering an accident or illness and successfully claim income protection insurance.

Are there tax deductions available for income protection insurance?

Tax deductions are generally available for income protection insurance premiums. However, your ability to claim a deduction may depend on:

• taxable income and tax rate
• your premiums

Tax deductions vary, but you may substantially reduce the original premium depending on your circumstances.

What are the qualification requirements for income protection tax deductions?

In Australia, you can generally qualify for an income protection tax deduction if you take out an insurance policy with an approved provider.

Shortly put, if you hold income protection insurance, you may be able to deduct it on your tax return. To get a sense of the deduction you may be eligible for with the ATO, your accountant can review your policy details.

Is the entire premium deductible when income protection is bundled with a life, trauma, or total and permanent disability policy?

The only part of the insurance premium eligible for a tax deduction is income protection insurance. Therefore, you cannot claim a deduction for other elements of the bundled policy, such as trauma or life insurance.

Suppose you pay an annual premium of $4000, and half of it is income protection coverage, the other half is health coverage, then you can only claim the half (i.e. $2000) of your premium.

My superannuation premiums cover income protection, so can I claim a tax deduction?

Even if you pay premiums for income protection insurance through your superannuation, those premiums will not qualify for tax savings. As the ATO describes, you are exempt from the contribution rules if you take out a policy through your superannuation. The same applies to both self-managed and commercial super funds.

Feel free to contact Aspect Underwriting if you are interested in income protection policies or just wish to know more about the topic. With a wide range of income protection insurance plans available, Aspect Underwriting strives to offer the best service to clients.