When it comes to tax time, there are a number of items that wouldn’t readily spring to mind as tax deductions.
Given the maze that is our tax system, it is little wonder many Australians find themselves bamboozled and often even tax advisors forget about a couple of easy ways to reduce tax while increasing benefits.
One of the most effective ways is through income protection insurance.
This is a type of insurance that delivers you an income if, for whatever reason, you find yourself out of work.
It also has the added attraction of being fully tax deductible. The system works like this.
If, for instance, you pay $1,000 a year for income protection, then than $1,000 bill is deducted from your taxable income.
If you earn between $80,000 and $180,000 a year, your marginal tax rate would be 37 per cent. Effectively, you would receive a $370 return.
Anyone earning between $37,001 and $80,000 a year has a marginal tax rate of 32.5 per cent and so would receive a $325 rebate.
Income protection is one of the only insurance policies that is fully tax deductible.
But you should bear in mind that if you receive income under that policy – in the event that you lose your job or through some other misfortune such as illness – that the tax office will expect you to pay income tax on that payout.
That’s because you would still be earning an income. Given you get the tax deduction on the premium, when you pay the money in, the tax man expects you to pay income tax on the other side, when you receive an income from the insurance policy.
An income protection policy is guaranteed renewable so the insurer cannot cancel the policy because your circumstances have changed.
The tax situation with other insurance policies is not quite so clear.
Life insurance and what’s known as TPD or disability insurance generally are not considered as tax deductible items primarily because they pay out a lump sum rather than income.
But you can combine an income protection policy with one of these extra policies and receive a part deduction.
On the flip side, life insurance and TPD insurance lump sum payouts are not taxed. So you don’t get the tax deduction on the way in but the money isn’t taxed on the way out.
For the self-employed running their own super fund, there are provisions for disability insurance premiums to be tax deductible, but the rules governing this are complex and require individual expert advice.