How Income Protection Is Taxed in Australia and What Self-Employed People Need to Know

If you run your own business, an illness or injury can stop your income overnight. Income protection insurance can replace part of your earnings, but the tax side often causes confusion. The short answer is that, for self-employed people in Australia, income protection premiums are generally tax-deductible, while any benefit payments you receive are taxed as income.

Your premiums are considered a business expense if the policy covers income loss from personal sickness or accident. The deduction sits at D15 on your tax return under ‘Other deductions’. You cannot claim premiums for policies held inside super, because the fund pays those, and you receive the deduction indirectly through a lower taxable contribution.

The trade-off is that if your premiums are deductible, the benefits you receive are taxable. The insurer does not withhold tax on your behalf, so you need to plan for the tax you will owe. How much tax you pay depends on your total income for the year and your marginal rate.

Different structures change who can claim the deduction. If you trade as a sole trader, you claim the deduction personally because the policy is in your name. If your business is a company or trust buying the policy for you, the entity can claim the deduction, provided it is genuinely liable for the premiums and the policy is part of your remuneration package. Benefits paid to the entity and passed on to you keep their character—they remain taxable in your hands.

Policy terms, waiting periods and benefit levels vary between insurers. Always check the product disclosure statement (PDS) for the exact conditions and any exclusions. What is outlined here is general in nature. Income Protection Help provides education about income protection, but we are not an insurer or underwriter. Final terms sit in each provider’s PDS.

Because your tax position can shift with your structure, income, and policy design, seeing a qualified tax professional is a good next step. General enquiries to Income Protection Help typically receive a response within one business day, but we do not give personal advice or predict any premium, cover or claim result.