The tax treatment of insurance premiums is an area that doesn’t get much attention but it is important.  There are tax consequence to be aware of when paying for insurance premiums and receiving proceeds from a payout.

From an income assessability point of view the proceeds from insurance payouts usually take on the nature of the payment it is supplementing in the policy holders hands.

Generally speaking, the main considerations for determining the deductibility of insurance premiums would include:

• The purpose of the policy – as with all expenses, to be eligible for a deduction, the payment must be incurred in gaining or producing assessable income and not be capital or private in nature.
• The tax treatment of proceeds should there be a pay out.  There is a common misnomer that the proceeds of insurance payouts are only assessable when you claim a tax deduction on the premium; when in fact the treatment of proceeds is a determinant of whether you are entitled to claim the premium as a tax deduction.

Below is a brief discussion on a couple of common types of insurance coverage.

Key person insurance – The deductibility of key person insurance will fall to the specific event you insure against.  Where the insurance proceeds are designed to supplement the loss of income or cost to engage a short term replacement due to disability or death of a nominated employee the premiums are likely to be deductible as the proceeds would take on the character of the business income; however where insurance is taken by one business partner for the purpose of providing funds to buy out another business partner’s interest in the event of a death the premiums would be considered capital in nature and not deductible.  There is also bit of a trap to beware of with the Tax Office being of the view that you cannot have a key person in a one person business and the premiums would likely be capital in nature regardless of the policy details.

Income protection insurance – As this usually provides for a lump sum or series of payments to cover a percentage of normal earnings, the premiums would be deductible in most situations.

Travel insurance – Usually not deductible (even if travelling for work) on the basis that it covers private expenses if paid out ie medical costs or loss of personal items.

Rental vs home property insurance – The Tax Office accepts that the cost to insure a rental property (despite being a capital asset) is a cost incurred in producing assessable income¹ and therefore deductible.  Conversely costs to insure your own home is not deductible on the basis it is private in nature and doesn’t produce any income.

If the premiums are not deductible to the taxpayer, there may still be scope to recover some of the expense under separate provisions, most notably as third element of cost base when selling a CGT asset² (even the family home if main residency exemption doesn’t apply for entire ownership period)

As there are many factors that impact the treatment of insurance premiums and proceeds, please contact us should you wish to clarify your specific tax consequences.

¹ Australian National Hotels v FCT 88 ACT 4629

² For assets purchased after 20/08/1991

Submitted by Adam Burgess