Deductibility of life insurance premiums payable on income protection policies

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Question

The question of deductibility of life insurance premiums payable on income protection policies

Answer

Life insurance premiums for income protection policies are not automatically deductible for income tax purposes. In order to claim a tax deduction for an income protection premium, the entity paying the premium must be able to show that the premium was incurred in the production of its assessable income, and not be capital in nature. 

Some income protection contracts contain benefits which are inherently capital in nature, such as critical illness benefits. Where a portion of the insurance premium is paid to secure ancillary benefits which are capital in nature, the portion of the premium paid to secure those benefits would not be deductible for tax purposes. Any claim proceeds received when these benefits are claimed would be capital in nature, and may also be exempt from taxation.

In recent months, the Australian Taxation Office (“ATO”) has been focusing on taxpayers who do not segment their income protection insurance premiums into deductible and non-deductible components. Many taxpayers have in the past simply claimed the full premium as a tax deduction. The ATO is now demanding that premiums be segmented into their deductible and non-deductible components and a deduction be claimed only for the deductible portion.

In order to assist taxpayers in dealing with these ATO queries, many life companies have segmented the income protection premiums paid into components. Taxpayers in receipt of these segmented percentages can now decide which segments are deductible, and which segments are non-deductible. The aim of the life insurers is to supply the relevant factual information so that clients in conjunction with their tax advisers can form a view on the appropriate tax treatment of each segment supplied in the notice.

The appropriate tax treatment of individual segments will depend upon the nature of the income protection contract in question. For example, if there is a benefit which is paid for illness, and that benefit is offered in addition to the core income protection benefit, the illness benefit would probably in our view be capital in nature. Any portion of the premium paid to secure this benefit would not be tax deductible.

TAL provides general guidance on the tax treatment of ancillary benefits, but cannot provide specific advice in relation to the tax treatment of these benefits. This is a matter for the Client and their taxation advisers. This approach by TAL is consistent with the approach taken in relation to the tax treatment of other life insurance products, and is therefore not unique to income protection insurance.

 

The information contained in this email s general information only and is not intended to be legal, taxation or financial advice. TAL Australia, it subsidiaries and its representatives have not taken into consideration any individual’s personal circumstances, financial needs or objectives. If any person is intending to act on the information contained in this email, consideration should be given to the appropriateness of this general information in the light of that person’s own objectives, financial situation or needs before acting on the information. 

Persons acting on any matter covered in this email should seek independent professional advice on the application of that matter to their individual circumstances. In relation to any financial product referred to in this email, a copy of the Product Disclosure Statement should be obtained and read prior to making any decision regarding the acquisition that financial product.

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