The ATO Rule on Income Protection Deductions
Under Section 8-1 of the Income Tax Assessment Act 1997, premiums paid for income protection insurance are generally tax deductible if the policy is designed to replace income you would have earned from your job. Because the benefit you receive from an IP policy is also treated as taxable income, the ATO allows the premiums to be deducted.
This applies to personally-held income protection policies — that is, policies you hold in your own name outside of superannuation.
What You Can Claim
- Premiums on a personally-held income protection policy that covers lost employment income
- Policies that cover salary, wages, and regular income from employment or self-employment
What You Cannot Claim
- Life insurance premiums (not deductible)
- TPD insurance premiums (not deductible outside super)
- Trauma/critical illness premiums (not deductible)
- The portion of any IP premium that relates to a lump sum rather than ongoing income payments
- IP premiums paid through superannuation (the super fund may get the deduction, not you personally)
A miner on $160,000/year pays $4,200 in annual IP premiums. At a 39% marginal tax rate, the tax saving is $1,638/year — reducing the effective cost to $2,562/year or $214/month. The after-tax cost of protecting $10,000/month of income is less than $215. That's exceptional value.
How to Claim the Deduction
Your IP premiums go in your annual tax return under "Other deductions" or "Insurance premiums." Your insurer or adviser will provide documentation of the premium paid. You don't need receipts for amounts under $300, but you should keep records for larger amounts.
If your accountant or tax agent prepares your return, simply tell them you hold an income protection policy — they'll know where to include it.
IP Inside Super and Tax
If your income protection is held inside your super fund, the premium is paid from your super balance. The super fund itself may claim a tax deduction for the premium, which reduces the effective cost — but you don't claim the deduction personally, and the benefit is also taxed differently when received.
This is one of the reasons the inside/outside super decision is worth discussing with a financial adviser — the tax outcome depends on your personal circumstances.
LAFHA and Allowances — Are They Counted as Income?
This is a common question for FIFO workers. Living Away From Home Allowances (LAFHA) and other site allowances are generally not included in the income base for IP purposes, as they're designed to cover costs rather than replace lost earnings. Your base salary plus regular overtime and production bonuses are the most commonly included components.
Getting this right at application stage is important — your adviser will help you document your income accurately so your benefit is maximised.
Disclaimer
This information is general in nature and does not constitute tax advice. Speak with a registered tax agent or accountant about your individual circumstances before claiming any deduction.