ATO Interpretative Decision
ATO ID 2004/661 (Withdrawn)
Income TaxDeductions: premium incurred for the disability cover under a mortgage protection policy
FOI status: may be released
This ATO ID has been withdrawn as it is covered by existing web content Income protection insurance.This document has changed over time. View its history.
Status of this decision: Decision Withdrawn 13 January 2017.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of the premium they incurred for the disability cover under a mortgage protection policy?
Yes. The taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of the premium they incurred for the disability cover under a mortgage protection policy.
The taxpayer has a mortgage protection policy in relation to a housing loan.
Approval of the taxpayer's loan was not associated with or conditional upon the purchase of the mortgage protection policy.
The policy provides that the insurer will:
- meet the taxpayer's loan repayments in the event the taxpayer is unable to meet their repayment commitments as a result of involuntary unemployment or disability due to sickness, injury or disease (disability benefit), and/or
- pay the outstanding balance on the taxpayer's loan at the date of death
The policy also provides that the insurer will pay any disability benefits claimed on the policy directly to the financier to be applied against the loan.
The monthly disability benefits would be assessable to the taxpayer under section 6-5 of the ITAA 1997.
Reasons for Decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses or 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.
In Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431, the Court established that, for a loss or outgoing to be an allowable deduction, there must be a nexus between the outgoing and the assessable income so that the expenditure is incidental and relevant to the taxpayer's income-producing or business operations.
The Full High Court in Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578; (1981) 11 ATR 538; 81 ATC 4114, allowed a deduction for premiums paid to secure a monthly indemnity against the income loss arising from the inability to earn. It was held that there was sufficient connection between the purchase of the insurance cover against the loss of the ability to earn and the consequent earning of assessable income, and the outgoing was not of a capital, private or domestic nature. The deduction was allowed under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936) (the equivalent of section 8-1 of the ITAA 1997).
Disability benefits payable to the financier under a mortgage protection policy in the event the taxpayer is unable to perform their usual occupation due to sickness, injury or disease are assessable to the taxpayer under section 6-5 of the ITAA 1997.
The taxpayer incurred expenditure on the premium for the disability cover under a mortgage protection policy which provides for the payment of disability benefits in certain defined circumstances. There is a sufficient connection between the expenditure incurred and the production of assessable income in the form of the disability benefits such that the expense was incidental and relevant to the derivation of the taxpayer's assessable income.
Accordingly, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of the premium they incurred for the disability cover under a mortgage protection policy.
Note: The payment of the premium may be subject to the special prepayment rules contained in Subdivision H of Division 3 of Part III of the ITAA 1936.Date of decision: 3 June 2004
Year of income: 30 June 2003Income Tax Assessment Act 1936
Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation
(1949) 78 CLR 47
(1949) 4 AITR 236
(1949) 8 ATD 431
(1981) 147 CLR 578
(1981) 11 ATR 538
81 ATC 4114 Related ATO Interpretative Decisions
ATO ID 2001/405
ATO ID 2004/662
Accident & disability insurance expenses