Private ruling: The deductibility of income protection insurance
Date of advice: 17 February 2017
Published: July 2017
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for income protection premiums paid to an Australian insurance company? | A1: Yes.

Relevant facts and circumstances: You are a foreign resident of Australia for income tax purposes and derive foreign sourced income. You took out an income protection policy with an Australian entity. The policy provides that in the event of your total inability to work due to an injury or sickness, you will be provided with income benefits. The policy has no geographical limitations. The terms of the policy provide for a guarantee of renewability "regardless of the number of claims you make, or any changes in your health, occupation, pastimes or place of residence and as long as you continues to pay premiums within the grace period, the policy provides that owner can renew the policy without any more restrictive conditions being included." The policy requires you to pay annual premiums.

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 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 ( Smiths Case ). 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 income year. | Detailed Reasoning - Foreign resident taking out an income protection policy from an Australian provider: The question of whether a foreign resident for income tax purposes who took out an income protection policy from an Australian provider was entitled to a deduction for the premiums was considered in case T8 86 ATC 158. In case T8 86 ATC 158, the court held that: 'In relation to the premiums for the sickness and accident policy and the disability policy, it was submitted on behalf of the Commissioner that those premiums were incurred in gaining exempt income. It was said that any proceeds received under the policy as a result of claims made would replace income earned in the United Kingdom. It followed, so it was said, that these premiums were incurred in gaining exempt income. I do not accept this submission. So far as the personal disability policy is concerned this policy was issued in Brisbane by an Australian company and in my view any income derived therefrom pursuant to claims made under the policy would have an Australian source. The fact that such income may have replaced, or may replace, income earned in the United Kingdom does not alter the fact that any proceeds received would be assessable income in Australia. Accordingly I would allow a deduction for the premium of $417 paid in respect of the disability policy, see F.C. of T. v. D.P. Smith 81 ATC 4114.' | Detailed Reasoning - Your circumstances: You are a foreign resident for income tax purposes who has taken out an income protection policy with an Australian income protection insurance provider. In doing so, you have incurred annual premium expenses. Consistent with the principles established in Smiths Case and T8 86 ATC 158, those expenses are a deductible expense. Accordingly you are entitled to a deduction for the premiums that you have paid under section 8-1 of the ITAA 1997.