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Edited version of your written advice
Authorisation Number: 1012929765980
Date of advice: 22 December 2015
Ruling
Subject: Income protection insurance
Question
Are you entitled to a deduction for the premiums paid for income protection insurance from a foreign company?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You are investigating taking out income protection insurance.
You will take out the policy with a foreign company as it is cheaper.
You will incur expenses for premiums under the policy.
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, or relate to the earning of exempt income.
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 that case a medical practitioner employed by a hospital was allowed a deduction for premiums paid to secure a month 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 income in that year.
It was considered that 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 that case was allowed under subsection 51(1) of the Income Tax Assessment Act 1936 that has since been replaced with section 8-1 of the ITAA 1997.
In your case you will be entitled to a deduction under section 8-1 of the ITAA 1997 for premiums you pay to a foreign insurance company for income protection insurance where the policy provides for an indemnity against loss of income should you be unable to work due to sickness of injury.
Further information
If your policy also provides for benefits of a capital nature only that part of the premium attributable to the income benefit would be deductible and the premium would need to be apportioned to exclude the non-deductible amount.
If you receive income protection insurance payments under the policy, these will be assessable as ordinary income.