ATO Interpretative Decision

ATO ID 2010/178 (Withdrawn)

Income Tax

• This ATO ID is withdrawn. Guidance on the issue contained in this ATO ID can be found at Income protection insurance (QC31905).
  This document has changed over time. View its history.

Issue

Is a taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for premiums paid on an income protection policy?

Decision

Yes. The taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for premiums paid on an income protection policy that protects them from loss of income.

Facts

The taxpayer is an employee.

They pay an annual premium for an income protection policy.

The policy provides them with periodic benefits to protect them against loss of income.

Reasons for Decision

Section 8-1 of the ITAA 1997 allows a deduction for losses and outgoings to the extent they are incurred in gaining or producing assessable income and are not of a capital, private or domestic nature.

In applying this provision the courts have held that to be deductible the loss or outgoing must be incidental and relevant to the earning of assessable income (Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236, Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578; 81 ATC 4114; (1981) 11 ATR 538 (Smith's Case)).

In Smith's Case the High Court considered the deductibility of premiums paid for a personal disability insurance policy. The policy provided the taxpayer with a monthly indemnity against any income loss arising from an inability to earn.

The Court held that the premium was deductible because it was incidental and relevant to the operations and activities carried on to produce assessable income. This decision was not made by reference to the certainty or likelihood of the premium generating income but by reference to its nature and character and its general connection with the taxpayer's activities which directly produced assessable income.

The majority also concluded at ATC 4117; ATR 542, that the premiums were not of a capital, private or domestic nature:

Likewise the periodic nature of the payment and other provisions in the policy which contemplate its renewal from year to year militate against its characterisation as an outgoing of a capital nature. Nor is there any reason whereby it could assume a domestic or private nature.

The facts of the present case are similar to those in Smith's Case. It is accepted that the premiums paid are relevant and incidental to and, therefore, have a sufficient connection to the assessable income of the taxpayer, and that they are not of a capital, private or domestic nature.

For these reasons, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for premiums paid under an income protection policy that provides for periodic benefits to protect them against loss of income, even if it does not actually produce such income.

Year of income:  Year ending 30 June 2010

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Federal Commissioner of Taxation v Smith
   (1981) 147 CLR 578
   81 ATC 4114
   (1981) 11 ATR 538

Related ATO Interpretative Decisions
ATO ID 2004/661

Keywords
Work related expenses
Income protection insurance

Business Line:  Small Business/Individual Taxpayers

Date of publication:  8 October 2010

ISSN: 1445-2782