Why income protection is the forgotten EOFY tax break

As the end of the financial year approaches, everyone starts looking for any tax break they can find. While this can, at times, lead to some questionable attempts to reduce their taxable income, an area that advisers can help their clients find a deduction is through income protection insurance.

According to Marshall Ross, partner education manager at Acenda, while income protection is a valuable area for many advice clients, particularly higher earners, explaining the benefits through the hook of tax benefits can help get them over the line.

“People have demonstrated, behaviour wise, that they’re really driven from a tax perspective around how they purchase health insurance, because there’s obviously quite a tax incentive there,” Ross told ifa.

“But I don’t know if we’ve necessarily been able to capture that, from an adviser perspective, when positioning some of the benefits of things like income protection.

“We know it’s tax deductible, but thinking about it in the same kind of way for a high-income earner, there’s a pretty significant tax benefit for taking out income protection and taking more of a private interest in protecting your income versus defaulting on social security.”

For a client in the highest marginal tax rate, he explained, it can result in thousands of dollars of tax savings, in addition to the benefits of the safety net income protection insurance can provide.

“It’s another argument around often advisers are challenged, and they might come across clients who hold existing cover in their superannuation or group plans and things like that, where they might think they’ve got a level of coverage, but they might not be considering that element of owning the cover personally,” Ross said.

He added: “I think advice can really tap into this almost obsession that people have around tax deductions over the next … People will go and buy anything for a tax deduction.

“I think it’s something that, because we deal with it all the time, we maybe overlook the fact that people actually may not be aware of some of the parallels between things they’re quite used to purchasing, like health insurance, and things they may be less familiar with, like income protection.”

Another area that advisers should pay attention to as EOFY approaches, Ross said, is around strategic claims advice.

“We do a lot of life and TPD cover these days through superannuation, whether it’s tax benefits or whether it’s cash flow benefits and things like that,” he said.

“As well as creating some complexity because we’ve got a trustee in the picture at claim time, it can create opportunities when it comes to how we plan for that money to be released, in terms of opening up the opportunity for things like income streams or the ability to retain part of that benefit in a concessionally taxed environment to help fund our future lifestyle.

“I don’t know if we always explore that so well. We perhaps always default, often, to taking that lump sum as quickly as practicable because the client wants the money, and that’s kind of the way we go.

“I think there is, there’s a really great opportunity there to help people get good tax outcomes and get good life outcomes when it comes to sums of money that they receive through super.”