An income protection insurance policy covers for the loss of salary or wages due to illness or accidents. The amount of the payments you receive is a percentage of your earnings based on your employment income prior to a claim.
Policies may be personal accident insurance, sickness insurance or a combination of both, usually named income protection insurance.
You must declare all payments you receive for lost salary or wages under one of these policies (this includes any payment you receive as part of a workers compensation scheme). Where you declare payments made to you under an income protection, sickness or accident insurance policy in your tax return will depend on if tax has been withheld.
You may receive a compensation payment, if you've made a personal injury claim and either:
- you agree to a settlement
- a court order is made in your favour.
You may receive these payments in the form of a lump sum payment, structural (periodic) payments or both. If you meet certain conditions, the payments may be tax-free, see Personal injury compensation structured settlements.
The premiums you pay to protect against the loss of your employment income are deductible, see Income protection insurance.
As the policyholder, you must check whether tax has been withheld from payments you receive under an income protection, sickness or accident insurance policy.
Tax is not withheld from payments the insurer pays directly to the owner of a relevant policy.
If tax is withheld
If tax is withheld, declare these payments at Salary, wages, allowances, tips, bonuses etc in myTax. If completing a paper tax return and tax has been withheld, declare these payments at question 1 Salary or wages.
These amounts will show on your income statement or PAYG payment summary – individual non-business.
If tax not withheld
If tax has not been withheld, and the payment is shown on your income statement or PAYG payment summary – individual non-business, declare these payments at Salary, wages, allowances, tips, bonuses etc in myTax.
If completing a paper tax return, declare these payments at question 2 Allowances, earnings, tips, director fees etc.
If tax has not been withheld, you declare these payments at other income in your tax return if:
- the premiums were deductible
- the payments replace your employment income
- they are not shown on your income statement or PAYG payment summary – individual non-business.