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29 August 2019

Do you, as a business owner, pay income protection insurance on behalf of your employees? You have probably wondered what tax implications this has for your company in terms of income tax, FBT and GST. Is this a fringe benefit? Should it be treated as an extension of the employee’s salary or wage and subject to PAYE? Or, is it a company cost?

For tax purposes, the full payment or a contribution to your employee’s premium for income protection insurance is viewed as a company cost and as such is deductible from income tax. As a result of this, the GST portion is also claimable in your GST return.

They should not be considered as part of your employee’s salary or wage package, and, therefore, not subject to PAYE.

The income protection insurance premium payments (which is for the benefit of an employee) are also not treated as a fringe benefit, if the payment of the insurance pay out to the employee would be considered as part of the employee’s assessable income. If the payment is not considered as part of the employer’s assessable income, the payments would be subject to FBT.

For example, the business pays an income protection insurance policy premium of $1,150 incl. GST annually for Roger. Under this policy, if Roger is unable to work, the insurance company will pay out an agreed amount to cover Roger’s income. This pay out would be included in Roger’s assessable income. In this scenario, your company would be able to claim $1000 as a company cost, which is deductible for income tax. They would also be able to claim $150 as a GST payment on their GST return. And finally, they would not be subject to paying any FBT.

The above is also all applicable to payments on insurance protection premiums for shareholders, if the policy is in the company’s name. If, however, the insurance policy has been taken out in the shareholders name, the premium payments should be treated as drawings and deductions are claimed in the shareholders personal return.

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