If you become sick or injured and are unable to work for a specified period of time, income protection insurance can provide you with up to 70% of your regular (pre-tax) monthly income, excluding superannuation. This financial support allows you to focus on your recovery without stressing about a loss of income. In many cases, income protection premiums may be tax-deductible as benefits paid under this policy are treated as assessable income.
Learn how tax deductions for Australian income protection insurance premiums work in this guide.
Is income protection insurance tax-deductible in Australia?
If your income protection insurance is arranged through your superannuation fund, your super fund may be eligible to claim a tax deduction for the premiums paid on your behalf. You won’t, however, be able to claim a tax deduction for these premiums in your own tax return. This is because income protection premiums are generally tax deductible to the policy owner and insurance through super is technically owned by your super fund. Premiums for iIncome protection insurance owned through super, are typically paid - either as a contribution or from your existing super balance via a rollover. You should be aware that whilst this ownership structure may reduce your out-of-pocket expenses, paying for your income protection policy with your superannuation balance, may impact your retirement balance. Lifebroker can assist you to compare income protection insurance owned both personally and through super. Lifebroker is unable to advise you on a suitable structure based on your personal circumstances, objectives, financial situation and needs. If you’re unsure how to structure your insurance, you should consult a financial adviser who can provide you with personal advice or consider consulting a registered tax agent for tax advice.
Are income protection insurance benefit payments taxable?
If you become too ill or injured to work and make a successful claim on your income protection insurance, the benefit payments you receive are generally considered part of your taxable income. This is because these benefits are calculated based on your gross (pre-tax) income. If you purchased your income protection insurance directly through your insurer, generally, your insurer won’t deduct tax from your income protection insurance benefit payments and you’ll need to declare the payments as income when you complete your tax return, in the year the benefits are received. This means that you may have to pay tax on the benefits received to the Australian Taxation Office (ATO) at tax time.
If your income protection insurance policy is set up through your superannuation fund, the insurer or the superannuation fund is required to withhold tax from benefit payments paid to you.
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Frequently asked questions
Income protection is insurance that pays up to 70% of your regular monthly income if you’re too sick or injured to work. How would you pay for your living expenses if you were suddenly too unwell to work? Without a regular income, would you be able to pay for groceries, bills, rent or mortgage repayments? This is why people take out income protection — it’s a safety net that allows you to keep up your living expenses while focusing on recovering.
You can use our comparison tool to check out which income protection policy might suit your needs.
Income protection is designed to support you financially if you become too sick or injured to work. You might consider getting income protection if you’re not sure how you’d pay for things like bills and groceries without your regular income. You can seek professional advice if you’re unsure whether income protection is the right choice for you.
Income protection premiums you have paid during the applicable tax year may be tax deductible where the benefits paid replace lost income and you purchased your policy directly through your insurer (that is, your policy isn’t held through a super fund).
A registered tax agent can help you crunch the numbers on how much you can claim.
You won’t be able to claim a tax deduction on income protection premiums if your policy is held within your super account.
If your income protection is bundled with other types of cover — like life, total and permanent disability, or critical illness — you may only be able to claim a deduction on the portion of your premium that pays for the income protection.
You may claim a tax deduction for income protection premiums you have paid during the applicable tax year where the benefits paid replace lost income when you complete your tax return.
Yes — if you make a claim on your income protection and start receiving payments, you will need to declare them to the ATO on your tax return. Payouts are generally taxed at your marginal tax rate.
If you purchased your policy directly through your insurer, generally your insurer won’t deduct tax from your benefit payments. You’ll need to declare the payments as income when you complete your tax return.
If your income protection policy is set up through your superannuation fund, the insurer or superannuation fund is required to withhold tax from benefit payments paid to the claimant who is not the policyholder. The tax will be forwarded to the ATO, and the payer will provide a payment summary which includes the benefit payments and tax withheld information to complete your tax return.
Income protection premiums you have paid during the applicable tax year may be tax deductible where the benefits paid replace lost income and you purchased your policy directly through your insurer.
The benefit payments you receive are generally considered part of your taxable income and taxed at your marginal rate.
When the income protection policy is held within a self-managed super fund (SMSF), the income protection premiums paid by the SMSF may be tax deductible for the SMSF.
You won’t pay GST on income protection premiums because income protection is classified as a ‘financial supply’.
Health insurance and income protection are not the same
• Health insurance helps cover the cost of medical care. Depending on your policy, health insurance can include cover for surgical expenses and emergency healthcare, as well as extras like dental and optical.
• Income protection covers up to 70% of your income so you can continue to meet your everyday living expenses when you’re too ill or injured to work.
The key difference here is that you can spend your income protection benefit payments in any way you like. For example, you could use your payments to cover the bills and groceries, school fees or even takeaway food — it’s your money to spend as you please. On the other hand, health insurance is directly linked to the cost of your medical treatment and services. It’s not uncommon for people to have both types of insurance so they have backup for medical costs and for general living expenses. If you’re not sure whether you need insurance or what type of insurance may suit you best, consider obtaining professional advice.