Premiums you pay for income protection insurance are generally tax-deductible in Australia, provided you pay them yourself from after-tax money and the policy replaces your salary or wages. The catch sits on the other side of the ledger: if you ever claim on the policy, the benefit payments are treated as assessable income and taxed at your marginal rate. Getting the deduction right depends on how the policy is owned, whether it sits inside superannuation, and whether it is bundled with other cover.
Why the ATO Allows the Deduction
Income protection exists to replace taxable wages if illness or injury stops you from working, so the ATO treats the premium as an expense incurred in producing assessable income rather than a personal or capital cost. That places it inside the general deduction rules of the Income Tax Assessment Act 1997.1Australian Taxation Office. General Deductions and Research and Development
Employees, contractors, and sole traders can all claim, as long as the premium comes out of their own pocket. Most policies replace up to 75% of your pre-tax income based on your earnings in the 12 months before your illness or injury.2Moneysmart. Income Protection Insurance The amount you claim is the actual dollar figure you paid in premiums during the financial year, taken from your insurer’s annual statement.
Premiums You Cannot Claim
The ATO draws a firm line between policies that replace income and policies that pay a capital sum for injury or death. Premiums for life insurance, trauma insurance, and critical care insurance are not deductible.3Australian Taxation Office. Income Protection Insurance Those pay for a physical event, not lost wages.
If your policy bundles income protection with life or total and permanent disability cover, only the income protection portion is deductible. Ask your insurer for a premium breakdown that separates the components. If the statement doesn’t split them, you cannot claim, and estimating the split yourself risks an adjustment on audit.
You also cannot personally deduct premiums for income protection held inside your superannuation fund, because the fund pays the premium from your super balance and claims its own deduction.3Australian Taxation Office. Income Protection Insurance Plenty of Australians hold this cover through super without realising it, so check your super fund’s annual statement before paying for a separate policy.
How to Claim It on Your Tax Return
Income protection premiums sit under “Other deductions” in myTax, not under work-related expenses. In the Deductions section, select Add/Edit at the Other deductions banner and choose “Income protection, sickness and accident insurance premiums.”4Australian Taxation Office. myTax 2025 Other Deductions On a paper return, the equivalent field is D15 “Other deductions not claimable elsewhere.”5Australian Taxation Office. D15 Other Deductions Not Claimable Elsewhere in Your Tax Return 2025
You’ll need the total premiums paid in the financial year and the insurer’s name. Most insurers issue an annual statement after 30 June showing the deductible amount. If it doesn’t arrive, download it from the insurer’s online portal. Enter only the income protection portion if your policy is bundled.
Prepaying Premiums
If you prepay premiums, you can claim the full amount upfront only when the prepayment covers a service period of 12 months or less that ends on or before the last day of the next income year. Prepay for longer than that and the deduction has to be apportioned across the relevant financial years, using a formula based on the days of service in each year.6Australian Taxation Office. Deductions for Prepaid Expenses 2025
For anyone paying monthly or annually, this never comes up. It matters mainly if you deliberately lock in several years of premiums in one payment.
The Other Side: Benefit Payments Are Taxed
Claiming the deduction is the easy half. The half people forget is that any payments you later receive from the policy are assessable income. You must declare all payments for lost salary or wages, whether they come as regular instalments or a lump sum.7Australian Taxation Office. Income Protection Insurance Payments The payments are added to your other income for the year and taxed at your marginal rate, plus the 2% Medicare levy.
This creates a cash-flow trap. A policy that replaces 75% of pre-tax income leaves you with less than 75% after tax. Some insurers withhold PAYG on payments before they reach you; others don’t, which means a bill at year-end. Ask your insurer at the start of any claim so you can arrange voluntary withholding or set money aside.
Because benefit payments are part of your taxable income, they can also push you above income-tested thresholds. A single person above $101,000 without private hospital cover may face the Medicare Levy Surcharge of 1% to 1.5% depending on income tier.8Australian Taxation Office. Medicare Levy Surcharge Income, Thresholds and Rates
One boundary worth flagging: personal injury compensation is a separate product with separate rules and can be tax-exempt under the structured settlement provisions for arrangements entered into on or after 26 September 2001.9Australian Taxation Office. Personal Injury Compensation Structured Settlements Income protection payouts don’t share that treatment, even when paid as a single lump sum, because they replace wages.
Records You Need to Keep
Keep records supporting the premium deduction and any benefit payments for five years from the date you lodge the return. If you lodge late, the five years runs from the actual lodgment date, not the original due date.10Australian Taxation Office. Records You Need to Keep
That means annual premium statements, any correspondence confirming the deductible portion of a bundled policy, and payment summaries or letters from the insurer showing benefit amounts and tax withheld. The ATO app’s myDeductions tool stores these digitally through the year, which is more reliable than searching your inbox the following July.