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Is the taxpayer, an employee, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenditure incurred on an income protection policy?

Yes. The taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for expenditure incurred on an income protection policy that provides for an indemnity against loss arising from the inability to earn income.

The taxpayer, a salaried professional, contributes to an income protection policy. The policy provides the taxpayer with an indemnity against loss arising from an inability to earn income.

Section 8-1 of the 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.

The High Court considered the deductibility of a personal disability insurance premium in FC of T v. Smith 81 ATC 4114; 11 ATR 538. In that case a medical practitioner employed by a hospital was 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 the premium under the policy was deductible even though the purpose of the expenditure was not the gaining of the income in that year. There was sufficient connection between the purchase of the cover against the loss of ability to earn and the consequent earning of assessable income and the outgoing was not of a capital, private or domestic nature. The deduction in that case was allowed under subsection 51(1) of the Income Tax Assessment Act 1936 (now replaced by section 8-1 of the ITAA 1997).

The taxpayer is therefore entitled to a deduction under section 8-1 of the ITAA 1997 for premiums paid under an income protection policy that provides for an indemnity against loss arising from an inability to earn income. However, if the policy provides for benefits of an income and capital nature, only that part of the premium attributable to the income benefit is deductible.