Income-Protection Insurance Premiums

7.89. Section 82H of the Act allows a deduction of amounts paid by a taxpayer as premiums for insurance against sickness of, or against personal injury or accident to, the taxpayer or his spouse or child. The amount of the deduction under the section is limited in that the total sum deductible for premiums and payments of the various kinds referred to in the section may not exceed $1,200. These premiums and payments include life insurance premiums and payments made to a superannuation scheme.

7.90. The question has been raised, in cases before Boards of Review, whether a premium for insurance against sickness or accident of the kind referred to in the section may not be deductible as an expense in deriving income. If it is so deductible, there will of course be no limit on the amount that may be deducted. The principles applicable in determining whether an insurance premium is deductible as an expense in deriving income are by no means clear. In some circumstances an expense directed to protecting a capital asset is deductible, though Australian judicial authorities in this respect are less helpful to the taxpayer than United Kingdom authorities. The question to be resolved is whether the expense, even though it relates to a capital asset, is a

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‘working expense’. An insurance premium of the kind now considered could be regarded as a working expense of protecting human capital, in this context the capacity to earn income. There seems, however, to be no basis for an assumption that the deductibility of the premium depends under the present law on whether the form of compensation is a lump sum, which will probably not be income, or periodical receipts, which certainly will be.

7.91. Two consequences flow from these views of the operation of the law as to expenses in deriving income. First, it may be easier for a self-employed person to obtain the deduction of the premium. Secondly, there is a prospect of asymmetry in that while a deduction is allowable for the premium a receipt of compensation in a lump sum under the present law may not be income.

7.92. The first consequence involves what might be considered an unfair discrimination between the self-employed and the employee. The second may be thought to involve an unacceptable cost to Revenue.

7.93. The Committee's proposals in relation to deduction under section 82H are dealt with in Chapter 21. Apart from any concession that may be available under provisions replacing section 82H, the Committee considers that there should be a further specific provision allowing a deduction in circumstances outside the concession. The specific provision should in its terms exclude the operation of the general deduction for expenses in deriving income in relation to premiums on income-protection insurance policies. The premium on such a policy should be made deductible, without limit on its amount, only if the policy provides that the compensation will be paid in periodical amounts during sickness or disability. A sum received in commutation of periodical payments under the policy should be expressly made assessable income.

7.94. To the extent that the new section goes further in allowing a deduction than the general deduction now provides, it will involve a concession that calls for justification. In Chapter 21 the Committee offers, as justification for the deduction of contributions to a superannuation fund, that it is reasonable to allow the postponement of tax on income when expenditure of that income has been demonstrably deferred, provided there is some assurance that it will be brought to tax at a later time. The same justification may be offered for the deductibility of premiums under the Committee's present proposal.

7.95. It will be seen in Chapter 21 that the Committee proposes limits on the deductibility of contributions to a superannuation fund. There might seem, then, to be justification for restricting the amount of the deduction under the provision now proposed by the Committee. However, the availability of insurance will act as a brake. Underwriting practices already set limits on the total cover that an insured person may have: in many cases he will, for example, already be covered to a degree by a superannuation scheme of which he is a member. In the circumstances the Committee does not propose any limit on the deductibility of the premium. Were some limit imposed, there would be a case for allowing a deduction of excess premiums against receipts of compensation under the policy. This would introduce awkward administrative problems.

7.96. Consideration must also be given to payments to sickness and accident funds and to friendly societies that provide benefits by way of periodical payments on the incapacity of a member through sickness or accident. Where the benefits are provided exclusively on a periodical basis, payments and benefits should be given similar treatment to that proposed for income-protection insurance policies.