Income Protection Insurance Tax Deductibility ATO - Get The Facts

The Australian Taxation Office is the government agency tasked with revenue collection. When you have income protection insurance, tax deductibility ATO guidelines will help you know what qualifies as tax deductible and what does not qualify.

Tax Returns

When you receive a payout from your income protection insurance policy due to the loss of your job, you are required to include this payment in your tax returns. Normally, the premiums you pay are tax deductible, but only the part of the premium that relates to your income benefit. A deduction for a premium, can, however, not be claimed if you are being compensated for a physical injury in addition to loss of income. You can also not claim a tax deduction for your premiums if your income protection insurance premiums are paid from your contributions to the superannuation fund.

Merged Covers

If you have an income protection insurance that is combined with other covers, such as a policy that covers you for the loss of both income and capital, then the tax deductibility will only apply for the portion of the premium that goes towards paying for the income protection. If this portion of the premium cannot be worked out, then you as the policy holder will lose out since the ATO will lump the whole of the premium as non-deductible. It is therefore important to seek guidance from your insurance provider on what part of your premium is linked to your income protection.

Tax deductibility is not found in other insurance policies except income protection insurance. Tax deductibility by ATO is very specific, so it is advisable to keep your income protection insurance separate from your other insurance covers. If at all there are greater gains to be achieved by combining your income protection with other covers, you should ensure that the income protection portion of your premiums can be very clearly pointed out to avoid losing out on the tax deductions.

Employer Tax Deductibility

You may have an employer that has taken out an income protection policy on your behalf. This means the employer is the one that pays your premiums. In this case, the tax deductibility for the income protection premiums still applies, only that the reduction in tax will be applied to your employer's income and not yours. When you claim your benefits, however, the payout from an income protection policy held by your employer will be taxed before you can access the funds, because the ATO views the payout as an income.

Savings

You are able to make significant savings by claiming your income protection insurance tax deductibility. ATO is able to calculate the tax deductibility by taking the highest tax rate that you normally pay and multiplying this rate by the cost of your annual income protection insurance premiums. This is the amount of refund you can claim from ATO, which means that the cost of your income protection insurance is significantly reduced without infringing on the benefits of your policy.

You should note that if your benefits are to be claimed as a lump sum, then the tax deductibility on the premiums does not apply. The tax deductibility only applies if you will be paid in arrears as with your normal income.

Kerrie Peacock provides beneficial ideas on life insurance policy items that satisfy Australians' needs. To read more and guidance, visit www.mecovered.com.au/income-protection-insurance-tax-deductibility-ato.

This article was published on 06 Aug 2014 and has been viewed 429 times
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