How does the Income Protection Tax Deduction work?
When is an Income Protection Premium not tax deductible?
You cannot claim a personal tax deduction if you have income protection through a superannuation fund, including a SMSF. In this case it is the fund who owns the policy and pays the premium, not you. The fund will claim the premium as an expense and this will reduce the tax payable by the fund.
You can also not claim a tax deduction for any part of your income protection premium which relates to lump sum or capital payments, such as the Lump Sum TPD option, Trauma/Critical Illness benefit or Specified Injury benefit, or other benefits deemed not to be replacing income.
How to claim a tax deduction for income protection premiums
If you have an income protection policy your insurance company will send you a tax statement each year. This will show the premiums you have paid and how much you can claim as a tax deduction. These statements are usually sent out within one to two months of the end of the financial year. If you do not receive a statement you should request one from your insurance company.
When completing your tax return enter the claimable amount of the income protection premium as a work tax deduction in the “Other deductions” category.
How much tax you will save will depend on your marginal tax rate
Let’s look at an example:
If your taxable income is over $180,000 pa in 2021/2022 the applicable marginal tax rate is 45% (excluding the Medicare Levy).
In this example if your income protection premium of $1,000 is fully tax deductible you would…
|Pay the insurer||$ 1,000|
|Receive a tax refund of||$ 450|
|Receive 10% back from Insurance Watch at end of first year||$ 100|
|NET COST of Income Protection in first year ( a saving of 55%)||$ 450|
For incomes between $120,000 and $180,000 the current marginal tax rate is 37% and the net cost would be $530 – a saving of 47%.
For incomes between $45,000 and $120,000 the current marginal tax rate is 32.5% and the net cost would be $575 – a saving of 42.5%
These tax savings, along with Insurance Watch’s 10% cashback, can make income protection very affordable. Run your own quotes now.
Please Note: the above information is of a general nature only and does not constitute personal advice. You should not act on this information without considering your personal needs, financial situation and objectives. We recommend you seek advice from a tax professional regarding your own situation.