Income Protection Insurance and Tax
When the Goods and Services Tax (GST) was introduced in Australian on 1 July 2000, it was a major adjustment for retailers, businesses and consumers. However, not only did the implementation of the GST require a range of new processes, years later the average Australian is often still confused by their obligations, especially when it comes to any tax that is payable on their income protection policy.
Fast Facts About Income Protection Insurance and G.S.T
|Is GST payable on income protection premiums?||No||There is no GST applied to income protection insurance, life insurance or private health insurance premiums as these products are viewed as financial services. GST is payable on premiums for general insurances such as home or car insurance.|
|Are benefits paid from an income protection insurance claim subject to income or other taxes?||No||Income insurance benefits are viewed as part of the policy-holders taxable income and cannot be claimed as a deduction, as it is not possible to claim money being paid to you as a tax deductible expense.|
Find out when income protection premiums are tax deductible
Income Protection Insurance Tax Guides
- Guide to Self-Employed Business Tax Deductibility on Life Insurance. If you are self employed you can generally structure your life insurance policy to allow you to claim your premiums as a deduction at tax time. This means that in most cases you won't have to put yourself or your business at risk because of under insurance, and you'll be able to enjoy the injection of a tax refund at the end of the financial year. Use this guide to understand how the tax treatment differs and how GST is applied to insurance when you're in business for yourself.
- Is Life Insurance Personally Tax Deductible? In most cases your personal life insurance policy doesn't entitle you to any tax benefits, which is why you need to read this guide to find out how to structure your life insurance and other financial products to take advantage of eligible tax deductions, and how you can apply these smart financial principles to your business too. If you have your own business, you're self employed, or you're savvy enough to be actively managing your superannuation, there are a myriad of ways you can manage the GST and tax treatment of your insurances.
GST is VAT - GST Explained
GST affects every Australian differently, and your obligations and interactions with this tax will depend on the way you run your business, the way you structure your financial products and the way you use goods and services. To help you understand GST in Australia, the main things you should know are:
- GST is a value added tax. Many other countries actually call this tax a VAT (value added tax), and as such VAT and GST are the same thing. GST allows for a tax to be collected on the value which is added to a product at each stage of production. For example, the producer applies GST to their product before selling it to a wholesaler, the wholesaler then applies their GST to the product before selling it to you. In Australia GST is charged at 10% of the cost of a product or service.
- Businesses can claim back GST they’ve paid on purchases. In the example above, the wholesaler who bought the item from the producer and was charged GST, can claim back the GST they paid, when completing their quarterly Business Activity Statement (BAS). Unfortunately as the consumer at the end of the line, you can’t claim back the GST you’re charged on products and services.
- Goods and services which attract GST. Most types of personal and real property will attract a GST charge, as well as all types of services, unless they are GST free or input taxed.
- Goods and services which are GST free. Businesses which aren’t registered for GST won’t charge GST for their goods and services. In Australia a business can be registered for GST at any time, but must be registered for GST once their turnover exceeds $75,000 per year. Other GST free items include most basic foods, some education costs, and selected medical, health and care products and services.
GST becomes relevant for insurance because GST is collected on the value added to the product by the insurer. In the case of most general insurances, the value added by the insurer is the difference between the value of the premiums plus any interest earned on investing those premiums, and the value of claims paid out.
Is Income Protection Insurance Tax Deductible?
Income protection insurance is a unique case when it comes to Australian tax laws because it is one of the few types of personal insurance where you are generally eligible to claim your premiums as a tax deduction. This is because any benefit you receive from a claim on your income protection policy will be replacing your normal income, and is therefore assessable for tax purposes. Therefore, the premiums you pay to qualify for that income protection benefit can generally be a tax deduction.
For your income protection to be tax deductible:
- Your income protection benefit must be paid as an ongoing income, not as a lump sum benefit.
- Any income protection benefit you receive from your policy must be recorded in your tax return.
- In combined insurance policies, only the portion of your premiums which pays for your income protection cover will be deductible.
- Insurance for other events such as death, trauma, injury or critical care is not tax deductible.
- Premiums paid before 30 June can be claimed on your current year’s tax return.
Tax Treatment of Income Protection Insurance
When it comes to tax time, the things you need to know about your income protection insurance are:
- Your premiums are generally tax deductible.
- In the case of a combined policy you can only claim the amount of your insurance premiums which go towards income protection cover.
- Premiums on a policy which pays a lump sum benefit in the case of an injury may not be tax deductible.
- You can claim all premiums paid before 30 June on your next tax return.
- You must declare any benefits paid to you from your income protection policy on your tax return.
- The amount you can claim on your tax return from your income protection insurance depends on your marginal tax rate.
Your marginal tax rate is the rate at which your income is taxed according to the income bracket you fall into, typically the more you earn, the greater your marginal tax rate. For example, if you:
- Have an annual income of $100,000.
- Pay a $100 monthly premium for your income protection.
- Fall into the $80,001 - $180,000 p.a. income bracket and are taxed at the marginal tax rate of 37%.
- From your $100 monthly income protection premiums, you will be entitled to a $37 refund at tax time.
If you are coming into the end of the financial year you can increase the amount of your next tax refund by making a quarterly, half yearly or yearly premium payment instead of a monthly one. You will then be able to claim the premiums you paid for the coming months or the entire coming year in your next tax return, because you’ve made that payment in the previous financial year. For example:
|Annual Premium||Half Yearly Premium||Quarterly Premium||Monthly Premium|
|Frequency Discount (Typically 8%)||$96||N/A||N/A||N/A|
How Do I Claim Income Protection at Tax Time?
To record your income protection on your tax return and claim the deduction:
- Enter the type of expense you are claiming in the 'Description of claim' box on your tax return.
- On a separate sheet of paper write 'Schedule of Additional Information – Item D15' and on this sheet include your name, address, tax file number, the type of each expense and the amount. This sheet of paper needs to be attached to your tax return for submission.
- Your insurance company should send you a premium statement each July with details of the amount you can claim on your tax return. If you don't receive this statement, contact your insurer.
- Add up all the other expenses that you are claiming.
- Write that amount on your tax return form, excluding cents.
- Work with your tax agent or accountant to make sure you complete your income protection claim correctly.
Tax Treatment of Other Types of Insurance
If you have a comprehensive financial management plan, then you probably have more than just income protection insurance, and following are the details of how those other insurances are treated at tax time.
- Is input taxed and therefore premiums are free from GST.
- Is classified GST free in the same way as other types of financial services as it is likened to a savings plan.
- The premiums of a life insurance policy held within your superannuation fund are often tax deductible.
- The premiums for a life insurance policy independent of a super fund are not tax deductible.
- Tax dependents can receive a tax free benefit payout from a life insurance policy held through a super fund.
- Non dependents can be taxed up to 31.5% of their benefit amount from a life insurance policy held through a super fund.
- Beneficiaries of a life insurance policy independent of a super fund are not subject to capital gains tax on their benefit.
Private health insurance tax treatment:
- Is GST free as it is categorised with all other health services.
- Premiums are not tax deductible.
- Everyone who holds private health cover is eligible for a rebate from the Federal Government at tax time.
- You are eligible for a rebate of up to 30% on your private health insurance premiums.
- The government rebate equates to a greater refund in most cases than if the premiums were tax deductible, as it does not discriminate against those with a small taxable income, or those who don't pay tax.
General insurance tax treatment:
- Premiums for insurances such as home and contents, car insurance and fire insurance include GST of 10%.
- Australia divides general insurance into two components – the premium amount and the claim amount – in order to ensure that GST is only collected on the insurer's value added portion.
- If you own or run a business which is eligible to claim GST, you should inform your insurer, either before, or at the time of making a claim.
- If you don't tell your insurer you are eligible to claim GST, you must pay GST on any general insurance settlement amount.
- You must accurately calculate the percentage of GST you can claim when informing your insurer.
- If you understate the amount of GST you can claim on general insurance you need to calculate the difference between the amount you told your insurer you could claim, and the amount you can actually claim, and then pay the difference.
With so many different products and services in Australia, and the range of insurance companies and policies, it can make working out your individual place in the tax system confusing. Therefore, use this guide and the related guides to help you understand more about how insurance is taxed, claimed and structured, and this will help you lead with informed questions when you meet with your accountant or tax adviser to finalise your financial products.