When it comes to the tax deductibility of insurance, it can become quite confusing and overwhelming to know what you can record as a deduction and what you may need to pay tax on when a claim is paid.
Depending on the ownership structure and purpose of keyman insurance, you may find that the premiums are tax deductible or that tax is payable on the benefit paid at time of claim.
As the law currently stands, Section 51 of the Income Tax Assessment Act dictates that you can:
- Treat the premiums as non-deductible and the proceeds as non-assessable if a life policy is involved; or
- Treat the premiums as deductible and the proceeds as assessable income if an accident/sickness or term/whole of life policy is involved.
When it comes to paying tax on the benefits received by the beneficiary, the following usually applies:
- The claim payment is not taxable if received by the original beneficial owner if a life insurance policy is involved; and
- The claim payment may be subject to capital gains tax (CGT) if the benefits are received by a company or trust for an accident/sickness/life policy; and
- The claim payment is usually not taxable if received by the life insured, spouse or relative for any policy involved.
The purpose of insurance is relevant
The Australian Tax Office may vary its approach depending on whether the insurance was taken out for revenue or capital purposes. If a policy is taken for capital purposes, then the premium is not tax deductible and the benefit (if received by the original beneficiary) is not tax deductible. Certain exceptions to this rule apply.
If a policy is taken for revenue purposes, then the premium may be tax deductible and the benefit also subject to tax.
If a company receives a sickness/disability benefit by way of the insurance policy, then CGT will apply. When considering the sums insured it is wise to factor in the possibility of CGT being taken from the benefit and increasing the sums insured accordingly.