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Are you able to claim tax deductions for insurance premiums?

Generally speaking, the Australian Taxation Office (ATO) allows deductions for insurance premiums when there is evidence that the insurance cover relates to earning assessable income.

One example of the kind of cover that may be tax deductible is income protection insurance. The ATO has allowed such claims in certain circumstances, even though the insurance policy does not itself “earn” income for the taxpayer.

Taking out insurance cover against loss of income could allow a tax deduction for the premiums associated with this type of policy. For those operating a small business, protecting the ability to earn income may result in tax deductions for insurance premiums that cover fire and theft, motor vehicles, public liability and loss of profit.

Income protection insurance is often offered with combined death or disability cover. Lump sum payouts for death or disablement are “capital” in nature. Therefore, it is important to note that it is only the income protection component of the premium that may be tax deductible. Your insurer should be able to provide you with a breakdown.

Generally, any claims you make under these types of policies will be assessable income and must be declared in the income tax return for the year in which you receive any payout.

For businesses, “key employee” or “key person” insurance coverage is popular, as even a temporary loss of key persons may be financially damaging for the business. For premiums to be deductible, the protection under the policy must be for “revenue” – for example, the policy should specify that cover is for loss of business revenue or profits due to death or injury of the key employee insured.

However, if the policy protects losses that are more of a “capital” nature (for example, a lump sum is paid to the key person’s estate) then the premiums may not be tax deductible. When a single policy provides both types of cover, some apportionment of premiums may be needed to work out the deductible amount.

We strongly recommend you seek advice specific to your situation to ensure your insurance cover is suitable for your needs.

Please contact Will Lyons (will.lyons@mckinleyplowman.com.au) of our Financial Planning team if you need assistance with personal insurance needs.

written by:

McKinley Plowman