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Edited version of your private ruling
Authorisation Number: 1012342869056
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Ruling
Subject: Income protection insurance
Question
Are you entitled to a deduction for the payments made to an insurance plan?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
· the application for private ruling, and
· the documents provided in response to a request for further information.
You have an insurance plan.
You made two payments for this insurance plan.
The only benefit listed under the insurance plan is a death cover benefit.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and 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.
The High Court considered the deductibility of a personal disability insurance premium in FC of T v. Smith 81 ATC 4114; (1981) 11 ATR 538. In this case a medical practitioner employed by a hospital was 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 the premium under the policy was deductible even though the purpose of the expenditure was not the gaining of the income in that year. There was sufficient connection between the purchase of the cover against the loss of ability to earn and the consequent earning of assessable income and the outgoing was not of a capital, private or domestic nature. The deduction in this case was allowed under subsection 51(1) of the Income Tax Assessment Act 1936 (now replaced by section 8-1 of the ITAA 1997).
A deduction is allowable under section 8-1 of the ITAA 1997 for premiums paid under an income protection policy that provides for an indemnity against loss arising from an inability to earn income. However, if the policy provides for benefits of an income and capital nature, only that part of the premium attributable to the income benefit is deductible.
In your situation, you are paying a premium for an insurance plan. You or your dependants shall receive the benefits of the policy upon your death or diagnosis of a terminal illness. The benefits provided under the policy are of a capital nature rather than of an income nature. Therefore, the premiums are not deductible under section 8-1 of the ITAA 1997 as they are of a capital nature.
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