Is income protection tax deductible?

• Generally, costs you incur that are directly related to your ability to earn an income may be tax-deductible.
• Because income protection is designed to replace your income if you can't work due to illness or injury, premiums for this type of cover are generally tax-deductible, with some exceptions.
• Tax-deductible premiums may result in significant savings for you.

Can I claim a tax deduction for my income protection premium?

You may be able to claim your income protection premium as a tax deduction, but it depends on the type of cover you have and whether your policy is outside or inside super.

According to the Australian Taxation Office (ATO), you can't claim a tax deduction if the policy:

• you take out is through your superannuation fund and the premiums are deducted from your super contributions, and
• pays you a lump sum to compensate you for injury (e.g. if there is life insurance, total and permanent disability insurance or trauma insurance bundled into your policy)

What can I claim if my income protection policy is 'bundled' with other covers?

If your policy is bundled, a tax deduction may only be available for the portion that pays for income protection.

So, if you're paying an annual premium of $4,000, half of which is for income protection insurance and half of which is for trauma insurance, you can only claim for half (i.e. $2,000) of the premium.

How much could I save on my tax?

The size of your tax deduction depends on your premium, your taxable income and the rate of tax you pay.

For example, paying an annual premium of $2,000 for stand-alone income protection outside of super that's fully tax-deductible, in the 2022/23 financial year could save up to:^disclaimer

• $650 if you earn $75,000 per year before tax (based on a marginal tax rate of 32.5% including Medicare levy)
• $740 if you earn $150,000 per year before tax (based on a marginal tax rate of 37% including Medicare levy)
• $900 if you earn $200,000 per year before tax (based on a marginal tax rate of 45% including Medicare levy)

Note: Your savings may vary and will depend on your personal and family circumstances. Seek independent taxation advice to confirm your eligibility for tax deductions.

Do I have to pay tax if I'm receiving income protection benefits?

While premiums for income protection may be tax-deductible, you should also be aware that any claimed benefits you are paid under your policy may be treated as taxable income.

Your insurer generally won't deduct tax from the amount they pay you, so you may be required to pay tax on these amounts when you lodge your tax return.

Should I consider income protection?

If you're of working age you may have a range of expenses – mortgage or rent payments, grocery and utility bills, school or university fees and/or car costs – that will continue even if you lose your source of income.

Unless you have sufficient savings to cover your debts and general household expenses for months, or potentially years, it makes sense to insure your income, just as you would your house, car or mobile phone.

How many hours per week do you need to work to qualify for income protection?

Income protection insurance is primarily designed for those with a regular income or who work at least 20 hours a week. Contractors and the self-employed are usually eligible, but special conditions may apply to them.

The following occupations/workers are not generally covered under income protection policies:

• Unpaid carers
• Part-time employees working fewer than 20 hours a week
• Casual workers

Also, check if your policy has any special requirements or conditions around paid or unpaid parental leave as this may affect your eligibility for cover or the payments you may receive if you claim.

We recommend getting tax advice

Taxation law is complex and the ability to claim tax deductions for premiums may depend on the type of policy and benefit covers you have. We recommend you seek tax advice specific to your personal circumstances from a tax adviser or registered tax agent.