Edited version of private advice

Authorisation Number: 1052126565424

Date of advice: 8 June 2023

Ruling

Subject: Deductions - income protection insurance

Question 1

Are you entitled to a deduction for income protection premiums paid to an Australian insurance provider which provides you with income benefits in the event of your total inability to work due to an injury or sickness?

Answer

Yes.

You are entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for premiums paid under an income protection policy that provides for periodic benefits to protect you against loss of income. Further information can be found on the ATO website by searching for QC 72188.

Question 2

Are you entitled to a deduction for income protection premiums paid to an Australian insurance provider which provides you with a one-off lump sum payment in the event of your total inability to work due to permanent disability?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX.

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an employee.

You purchased income protection insurance with an Australian entity.

The policy provides that in the event of your total inability to work due to an injury or sickness, you will be provided with income benefits.

The policy provides that in the event of your total inability to work due to permanent disability, you will be provided with a one-off lump sum.

The income protection insurance policy is solely in your name.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Income protection policies provide for periodic payments in the event of loss of income caused by the insured not being able to work due to sickness or injury.

An amount paid to compensate for a loss generally acquires the same nature of what it is substituting.

Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

These payments are assessable as income, as they are paid to take the place of lost earnings.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

ATO Interpretative Decision (ATO ID) 2010/178 (withdrawn but still illustrative) state that income protection premiums paid is relevant and incidental to the operations and activities carried out to produce assessable income. Therefore, the premiums paid have a sufficient connection to the assessable income of the taxpayer, and that they are not of a capital, private or domestic nature.

If the policy provides for benefits of an income and capital nature, only that part of the premium attributable to the income benefit is deductible.

The insurance premium that refers to 'Sickness and Injury Cover" in the policy statement will be treated as deductable for income tax purposes as the benefit it refers to would be treated as assessable under subsection 6-5(2) of the ITAA 1997.

The policy premium that is referred to as 'Optional Extras' will not be deductible because the benefit is deemed as capital in nature and not income.

For these reasons, you are entitled to a deduction under section 8-1 of the ITAA 1997 for premiums paid under an income protection policy that provides for periodic benefits to protect you against loss of income.

However, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for premiums paid under an income protection policy as the benefit would likely be deemed as capital in nature and not income.

Please note the deduction for income protection premiums are claimed at item D15 on your income tax return.

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