When most people think about financial planning they tend to focus on the wealth creation side of things, but often forget about the wealth protection. Building a financial plan without adequate insurance is like building a house on flimsy foundations. 

Comprehensive insurance cover can be a significant expense; however these costs can be made more affordable by taking advantage of the tax deductions that apply to specific types of insurance, and to some methods of implementing insurance. 

Income protection

Due to the high frequency of claims, premiums for income protection insurance can be quite high. However, they are tax-deductible, so the cost is discounted at the same rate as the policy holder’s marginal tax rate. For example, someone on a marginal tax rate of 39% (including 2% Medicare levy), paying a premium of $1,000 would have an out of pocket cost of just $610, after the tax deduction is claimed. 

It needs to be remembered, however, that any benefits paid under an income protection policy are treated as assessable income, and therefore subject to tax. 

Life insurance

While the premiums for life insurance are not normally tax-deductible to individuals, there is a simple way to gain a tax benefit. Superannuation funds can claim a tax deduction for the life insurance premiums they pay. So by taking out life insurance via a superannuation fund, the end result is the same as if the premium was deductible to the person taking the insurance. 

Using superannuation to provide life insurance has another potential benefit. As premiums are paid by the fund, it reduces the pressure on household cash flow. This may reduce the ultimate superannuation payout, but if the savings made outside of superannuation are used wisely, the overall financial position should be improved. 

The proceeds of life insurance are not generally taxable. However, a death benefit paid from a super fund to a non-dependant may be subject to some tax. 

Total and permanent disability insurance (TPD)

TPD insurance is usually attached to life insurance. From a tax perspective it’s treated in a similar way, so implementing it via superannuation is usually the most tax-effective way to do it. 

Trauma insurance

Trauma insurance pays a lump sum if the policy holder suffers a defined medical condition or injury. It cannot be implemented through superannuation. Premiums are not tax-deductible, and benefit payments are not subject to tax. 

As with investing, the main focus on insurance shouldn’t just be on saving tax. It is a protection tool. Always talk to a qualified adviser to ensure you get the appropriate level of cover, and the most tax effective way to implement it. 

Our risk management and accounting teams are ready to help. 
Call (02) 4926 2300 or email us. 

If you have any questions in relation to the tax advantages of insurance please contact our team at Leenane Templeton today!

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1. Personal Expenses
Be careful and ensure that any claims or interest on borrowing for investment are separated from interest on borrowing of a personal nature.

2. Substantiate Your Claim
Keep all receipts to prove any deductions and be able to show why the expense was incurred to derive assessable income.

3. SMSFs And Property
Consider moving Business Real Property into a SMSF. This is a good way to free up some cash coming into tax time.

4. Renovations By Previous Property Owner
If the renovations are identifiable and itemized in a depreciation schedule, then it is possible to be eligible for a deduction for depreciation on the cost of improvements by a previous property owner.

5. Capital Gains Tax
Ensure any capital gains on the sale of property are properly recorded. The ATO are keeping an eye out for any undisclosed capital gains from disposing of assets to invest in superannuation.

6. Fixtures And Fittings
If fixtures and fitting cost less than $300, it may be possible to claim a tax deduction.

7. Self-Education Expenses
Keep all receipts and documentation relating to self-education, such as seminars and investment related books and magazines, in order to qualify for tax deduction.

8. Use A Quantity Surveyor
There are benefits to having a depreciation schedule prepared by a qualified quantity surveyor. They could help gain a significant tax deduction for depreciation. The cost of employing such a surveyor is tax deductible and will help back up a capital allowance claim.

9. Pre-Pay Interest
Depending on the lender, it is possible to pre-pay interest to defer the payment of tax. This is dependant on possible future income, interest rates and cash flow impact.

10. Repairs To Property
Be aware that although the cost of initial repairs at the time of purchase is not deductible, expenses for repairs further down the track are. They must relate, however, to wear and tear or other damage incurred as a result of earning rental income.

11. Short Term Holdings
If a property has been renovated with the aim of selling it at a profit in the short term, the ATO may tax it as if it were a ‘profit making scheme’. If this occurs, it is not possible to take advantage of CGT concessions.

For more information about year end strategies please contact our Newcastle Financial Advisors on 02 4926 2300

This information is of a general nature only. It is not intended as personal advice or as investment recommendation, and does not take into account the particular investment objectives, financial situation and needs of a particular investor. Before making an investment decision you should read the product disclosure statement of any financial product referred to in this newsletter and speak with your financial planner to assess whether the advice is appropriate to your particular investment objectives. financial situation and needs. See our disclaimer for full details.

For other resources visit:

Newcastle Accountants Leenane Templeton

Self Managed Super Fund Advisors

Newcastle Accountants

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