The Goods and Services Tax was introduced in the year 2000 in Australia. With it came significant changes in the way consumers and businesses conducted their activities. If you are not sure about the tax you need to pay on your income protection policy, you are not alone. There is a lot of information available to offer guidelines on what you should pay for GST on income protection insurance. The ATO is the final authority on this issue and they also offer clear guidance on this topic.
GST On Income Protection
If you have an income protection cover, then no GST will be payable on this policy. This is because income protection insurance is considered a financial service. The premiums you pay for your income protection insurance are tax deductible, which means you are allowed to claim the cost of your premiums as a tax deduction. This only applies if your income protection policy is held within a superannuation fund. If your income protection is held outside the superannuation fund, your premiums will not be tax deductible.
If you successfully make a claim and get a regular payment as your income protection benefit, the benefit will be subject to tax since it is viewed as an income for you. There are other reasons that relieve you from paying GST on income protection insurance. ATO views your income protection policy as a savings plan and therefore exempted from GST.
Tax Deductibility Conditions
To ensure your income protection insurance is tax deductible, there are some conditions that need to be fulfilled. First and foremost, your benefit has to be paid in arrears and not as a lump sum for tax deductibility to be considered. Once you receive your benefit, it has to be included in your tax returns and you can also claim tax deductibility for premiums you paid before 30th June in the current year's tax return.
If your income protection insurance is added to other insurance policies, only the portion of the premiums that pays for the income protection will be tax deductible.
Marginal Tax Rate
When making your tax returns, the amount you are allowed to claim from your income protection cover is dependent on your marginal tax rate. There are several income brackets provided, and each income bracket has a rate at which it is taxed. The higher your income, the higher your marginal tax rate will be. This is the rate you will use to calculate the amount you can claim on the premiums paid for your income protection insurance.
Income Protection Tax Claims
In order to claim a tax deduction on your income protection premiums during the time you are filing your tax returns, you need to attach a paper to your tax returns form and indicate the amount you are claiming. This amount is normally indicated on your premium statement that is sent to you every year by your insurance provider in the month of July. If for any reason you do not have your premium statement, you will need to contact your insurance provider to give you the correct figures to avoid problems with the ATO.
Kerrie Peacock is a keen analyst of the Australian personal insurance industry and offers useful and practical insights. For more information and advice, log on to www.mecovered.com.au/gst-income-protection-insurance-ato.