Tax breaks can ease insurance pain

The premiums might make you wince, but remember – insurance related to the business probably qualifies for a tax deduction. By TERRY HAYES of Thomson Legal & Regulatory

By Terry Hayes of Thomson Legal & Regulatory

Insurance is great to have when something goes wrong, but those premiums can be a pain. That pain can be relieved, however. Taking account of the tax deductions that may be available can reduce the effective cost of those premiums to the business.

In general terms, insurance premiums are tax-deductible if they have the necessary connection with earning assessable income or are necessarily incurred in carrying on a business for the purpose of earning assessable income.

That’s simple enough, but it is important to be aware of what that really means. Insurance premiums can be paid for all sorts of cover, and the tax law allows some tax deductions that might surprise SMEs.

Premiums paid by a business for workers compensation insurance are deductible. No surprise there.

So too are insurance premiums for fire, theft, public liability, loss of profits and motor vehicle insurance, even though the insurance may cover capital assets or losses. If a business obtains an offshore loan and that money is used in the business, a tax deduction can be allowed for premiums to insure against foreign exchange losses that may arise in relation to the loan.

The simple message is that if the insurance has some connection with the business, a tax deduction may be possible. It’s always a good idea if considering insurance to talk to your accountant before paying the premium; a tax break can lessen the financial impact.

Premiums payable on savings investment, endowment and life insurance policies are generally on the capital account and therefore not tax-deductible. However, premiums paid by a self-employed person for disability insurance against loss of income are tax-deductible.

If the policy also provides benefits of a capital nature (such as for death or loss of a limb), the premiums will have to be apportioned between the income and capital components. It’s important to note, however, that if the premiums cannot be apportioned, the tax office will generally treat the whole premium as non-deductible. Again, talk to your accountant before taking out the policy.

The tax office considers that trauma insurance premiums are not deductible if the policy provides capital benefits, but may be deductible if paid by an employer if the policy advances the employer’s business and the employer is both the policy holder and the beneficiary under the policy. So it is important to look carefully at what benefits such a policy provides.

So-called “key man” insurance has become popular, especially for SMEs, where the loss of a key employee can be financially damaging to a business, even if only briefly. Premiums for key man insurance will be deductible if the policy is taken out to protect such revenue items as the loss of revenue by the business because a key person died.

However, if the policy is taken out to protect against a capital loss (to pay a sum to the key employee’s estate on her or his death), the premiums will not be deductible. Where an insurance policy provides both types of cover, an apportionment of the premiums may be required to work out what the tax-deductible component is.

As a general rule, where a “key employee” insurance arrangement is unrelated to the business interests of the employer, the premium will not be deductible.

Insurance is a necessary part of any successful business, and understanding the tax consequences of various policies is essential. Another reason for having good advice at hand.

Terry Hayes is the senior tax writer at Thomson Legal & Regulatory, a leading Australian provider of tax, accounting and legal information solutions; www.thomson.com.au

To read more stories on tax by Terry Hayes click here.