ATO Interpretative Decision
ATO ID 2010/178
Income TaxDeductibility of income protection premiums
FOI status: may be released
This document has changed over time. View its history.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 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?
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.
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.Date of decision: 18 August 2010
Year of income: Year ending 30 June 2010
Income Tax Assessment Act 1997
Federal Commissioner of Taxation v Smith
(1981) 147 CLR 578
81 ATC 4114
(1981) 11 ATR 538
(1949) 78 CLR 47
(1949) 8 ATD 431
(1949) 4 AITR 236 Related ATO Interpretative Decisions
ATO ID 2004/661
Work related expenses
Income protection insurance