Income protection insurance is insurance to protect you in case you are unable to work – the insurance pays and replaces your salary and wages that you would have ordinarily received. In other words, it provides regular payments if you’re unable to work due to illness or injury. In this blog, we’ll discuss: Is income protection tax deductible?
The Short Answer: Yes — in Most Cases
In Australia, income protection insurance premiums are generally tax deductible in your tax return Melbourne if the policy is held outside of superannuation and the benefit is intended to replace your income.
According to the Australian Taxation Office (ATO), premiums paid for a policy that protects your assessable income are deductible under section 8-1 of the Income Tax Assessment Act 1997. This is because the expense is incurred in gaining or producing assessable income.
What Is Deductible?
- Premiums for income protection, sickness, or accident insurance (held outside super)
- Policies that pay a regular income stream while you’re unable to work
Example:
If you pay $1,200 per year for a personal income protection policy, you can typically claim the full $1,200 as a deduction in your tax return. If in doubt, ask your tax accountant Melbourne for clarification.
What Is Not Deductible?
- Income protection premiums paid through your super fund (because the fund claims the deduction)
- Policies bundled with life, total and permanent disability (TPD), or trauma cover, unless the premiums are clearly split
- Premiums that relate to non-income benefits, like lump-sum payments
How Do You Claim It?
You claim your income protection premiums as a deduction in your tax return Melbourne or individual tax return under the “Other deductions” section. Keep a record of:
- Your premium payments
- A copy of the policy
- Any correspondence from your insurer that outlines the cover and cost
Important Tip: Partial Deductibility
If your policy combines income protection with other types of insurance (e.g. life or TPD), only the portion relating to income protection is deductible. You may need a breakdown from your insurer to work out the deductible amount. You can also contact your tax accountant Melbourne who can advise the deductible nature of your premium.
Income Received Is Taxable
Remember: if you receive a payout from your income protection policy, the payments must be included in your assessable income in your tax return Melbourne. You’ll pay tax on them at your marginal tax rate.
In Summary:
Income protection (standalone) | Yes, tax deductible |
Bundled with life/TPD (no breakdown) | Not deductible |
Through super (paid from fund) | Not deductible |
Income protection payout received | Taxable income |
Need Advice?
If you’re unsure about how your income protection policy is treated for tax, or whether you’re claiming the correct amount in your tax return, speak with a qualified tax accountant melbourne or financial adviser. They can help ensure you’re maximising your tax refunds in your tax return while staying compliant with ATO rules.
