Private ruling: Rental property expenses
Published: July 2011
Ruling period: Year ended 30 June 2010 Year ending 30 June 2011 Year ending 30 June 2012 Year ending 30 June 2013 Year ending 30 June 2014 Year ending 30 June 2015
Date scheme commenced: 1 July 2004

Ruling: Q1: Are you entitled to a deduction for your premium amounts for your mortgage protection insurance for the disability and involuntary unemployment cover? | A1: Yes. | Q2: Are you entitled to a deduction for your premium amounts for your mortgage protection insurance for the trauma cover? | A2: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (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). In your case, you have taken out a mortgage protection insurance policy which consists of disability cover, involuntary unemployment cover and trauma cover. The policy provides for the disability and involuntary unemployment benefits to be paid direct to your financial institution in the event of you being unable to perform your usual occupation in certain defined circumstances. If you suffer a trauma as specified in your policy you will receive payments to the sum insured selected by you as shown in your policy. Tax Determination TD 95/41 states that the premium payable under a trauma insurance policy is not an allowable deduction to an employee of a self employed person. The purpose of trauma insurance is to provide a capital amount to the insured person if they suffer a specified medical condition. The policy does not replace any loss of income. In your situation your policy provides for benefits of an income nature (disability and involuntary unemployment cover) and capital nature (trauma cover), so only that part of the premium attributable to the income benefit is deductible. That is, only the portion of the premium paid for the disability and involuntary unemployment cover has the necessary connection with the earning of investment income and is an allowable deduction under section 8-1 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You are the sole owner of an investment property. | The property was available for rent from late 2004 and is currently tenanted. | You have provided a copy of your current mortgage protection insurance policy schedule. | The product disclosure statement for the Mortgage Protection Insurance provides that where the applicable conditions have been met payments will be made for any claim for disability or involuntary unemployment directly to the financial institution and for trauma any amount will be paid directly to you.