If you’re paying premiums for income protection insurance, there’s a good chance you can claim them back at tax time. It’s one of the few types of personal insurance the ATO treats as an income protection insurance tax deduction, though the answer depends on how your policy is set up.
The short answer
In most cases, yes.
If you hold a standalone income protection policy outside superannuation and pay the premiums yourself, they’re generally tax deductible. Because the cover exists to replace income you’d otherwise be earning and paying tax on, the ATO treats the premium as a cost connected to earning your assessable income, in the same way it treats other work-related expenses.
Can you claim income protection on tax?
For most people with a standalone policy, yes, you can claim income protection on tax as a deduction in the financial year you paid the premium. A worked example makes this easier to picture. Say you pay $260 a month for a bundled policy that includes both income protection and trauma cover. Of that, $190 goes toward the income protection component and $70 toward trauma.
At tax time, you can claim a deduction on the $190, because that portion is designed to replace your income. The $70 for trauma cover isn’t deductible, since it pays a lump sum unrelated to lost income rather than replacing earnings. That distinction matters for any bundled policy.
That distinction matters for any bundled policy. If your income protection is combined with life, TPD or trauma cover in one premium, only the income protection portion counts, so it’s worth asking your provider or accountant to confirm the breakdown rather than assuming the whole premium is deductible.
Inside super vs outside super
Where your income protection policy sits changes who gets the deduction:
- Outside super: you pay the premium yourself and claim the deduction directly in your own tax return.
- Inside super: your fund pays the premium from your super balance, and the fund, not you personally, generally claims the tax benefit. You can’t claim it a second time on your own return.
Neither structure is automatically better, it comes down to cash flow, how much cover you actually need, and whether your fund’s default policy suits your circumstances. But if you’re specifically after an income protection policy tax deductible outcome in your own name, holding cover outside super is what gets you there.
Does income protection insurance have GST?
One detail that catches people out: income protection premiums are GST free. Because the cover is issued by a life insurer and classified as a financial supply, GST doesn’t apply the way it would to general insurance products like car or home cover.
Insurance Advisers Top Tip:
If you pay your premium annually rather than monthly, you can claim the full year’s deduction in the financial year you pay it. Paying an annual premium just before 30 June is a simple, legitimate way to bring the deduction into the current year, worth a quick chat with your accountant if your income was higher than usual.
Timing your claim
You can only claim what you actually paid within the financial year. If your policy starts partway through the year and you pay monthly, you can only claim the months you’ve paid, not a full year’s premium. Some people prepay 12 months upfront before 30 June specifically to bring the full year’s deduction forward, though whether that suits you depends on your cash flow and overall tax position.
What about self-employed people and sole traders?
Being self-employed doesn’t disqualify you from this income protection insurance deduction. As long as the policy is designed to replace your personal income and you meet the usual criteria, sole traders and contractors can generally claim it the same way employees do, you’ll just need to substantiate your income through tax returns or business financials rather than a payslip.
Do you pay tax on the payments you receive?
This is the flip side worth knowing before you claim anything. If you make a successful claim and start receiving income protection payments, those payments are generally treated as taxable income, since they’re replacing the salary or wages you’d otherwise be earning. You’ll need to declare them on your return, and because tax usually isn’t withheld automatically, it’s worth setting money aside so you’re not caught short at tax time.
Getting it right
Tax treatment is only one part of the picture. It matters more that the cover itself, the waiting period, benefit period and definitions actually suit your income and occupation, since a policy that saves you a little at tax time but doesn’t pay out properly when you need it isn’t doing its job. If you’re not sure whether your current policy is structured in the most tax-effective way, or you don’t have income protection in place yet, get in touch with our team at The Insurance Quoter.
We can review your situation and help you set up cover that works for both your budget and your tax position. For anything specific to your own return, an accountant or registered tax agent is the right person to confirm the details.
FAQs
Does it matter which insurer I use for the deduction to apply?
Yes. The deduction generally only applies to policies issued by an insurer licensed to operate in Australia. Cover from an unlicensed or overseas provider typically won’t qualify.
What if my policy pays a lump sum instead of a regular income benefit?
The deduction is tied to cover that pays a regular benefit to replace lost income. A policy structured to pay a lump sum instead is treated as more like capital in nature, so the premium generally isn’t deductible.
Do I need to keep records to support my claim?
Yes. The ATO can ask for evidence of what you’ve paid, so hold onto your premium statements, renewal notices, or the annual tax statement most insurers send showing the deductible amount.
Can I still claim if my employer pays my income protection premium?
Generally no. The deduction applies to premiums you pay yourself. If your employer pays on your behalf, it’s treated differently, so check with your employer or accountant how it’s reported.
