Record-keeping Rules for Insurance in Australia
By Paolo, 28.05.2024
Dealing with insurance is not an easy endeavour. There are often a number of questions and concerns raised when taking new insurance policies, including:
- Do I need insurance for this particular area of my life/business?
- Did I choose the right insurance policy for this particular area of my life/business?
- Do I have to pay an excess when I make a claim, and in which case, how much?
- How difficult is the claim process?
- Will I be out of pocket before the claim is paid, or will insurance cover the costs directly?
Although, as Bookkeepers/BAS Agents working closely with our clients, we are often the recipients of such questions, we are neither qualified nor have the expertise to provide professional advice on insurance.
Qualified professionals who can answer these concerns include insurance brokers and financial advisors.
Once the decision to take a particular policy is made, the next hurdle is establishing whether such policy should be taken and paid for by the business or the individual and identifying whether the cost of the policy is tax-deductible.
As Accountants have full visibility of an individual’s tax position, including their personal tax, investments, Superannuation, and any business ownership, they are the most suitable professionals to advise when and how an insurance policy is tax deductible.
Bookkeepers/BAS Agents are then responsible for correctly coding these transactions based on the Accountant’s advice.
This blog article provides general guidelines on the most common types of insurance and whether or not these can be claimed as deductible business expenses.
Record-Keeping Rules for Insurance Transactions
Income Tax Deductions
“Insurance premiums are deductible under section 8-1 of the Income Tax Assessment Act 1997 in accordance with general principles, namely that 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.”
In simpler terms, when the insurance beneficiary and/or policyholder is the business, the insurance is tax-deductible for the business. When the insurance beneficiary and/or policyholder is the individual, the insurance is generally non-deductible for the business but may still be deductible (depending on the insurance type) in the Individual Tax Return.
GST Implications
Generally, when the purchase of insurance is tax-deductible, it is also GST-deductible (providing that GST applies to the insurance purchased).
However, not every insurance component is subject to GST; therefore, when recording insurance transactions, it is important to separate the components that are subject to GST from the exempt ones.
Insurance Components and GST Applications
These most common insurance components and their GST implications are:
- Premium > Subject to GST
Note: some insurance types are fully GST-exempt; - FSL (Fire Service Levy) > Subject to GST;
- ESL (Emergency Service Levy) > Subject GST;
- Underwriter and Broker Fees > Subject to GST;
- Stamp Duty > GST Exempt.
Record-Keeping for Insurance
The correct record-keeping for insurance depends on a number of factors.
Tax-deductible Insurance Transactions
Any tax-deductible insurance transaction can be coded as expenses and shown in the business Profit and Loss.
Generally, Profit and Loss reports created by Accountants, especially when part of the Annual Financial Statements, show the total cost of insurance summarised under either one or two expense accounts, ‘Insurance Expenses’ and ‘Workers’ Compensation Insurance’.
Bookkeepers/BAS Agents generally structure a more detailed chart of accounts to create Profit and Loss reports for management purposes, allocating the insurance costs across various accounts. For example:
- Facilities Insurance;
includes: asset protection, property damage, content, etc. - Business Insurance;
includes: public liability, indemnity, audit fees, cyber security, etc. - Motor Vehicle Insurance;
includes both CTP and comprehensive - Workers’ Compensation Insurance
When insurance premiums are of substantial value and invoiced as an annual lump sum, a way to effectively manage the insurance cost is by posting the annual insurance cost as a ‘Prepaid Insurance’ Asset and then distributing 1/12 of the annual value each month by creating a recurring journal.
Non-Deductible Insurance Transactions
The correct record-keeping applicable to non-deductible insurance transactions varies depending on the following scenarios:
1. Non-deductible insurance types (both company and individual), paid by the company for its business owner
These transactions should be coded to the balance sheet account, where all other personal non-deductible costs are coded. The account name/type varies depending on the business entity:
- Sole Trader/Partnerships > Drawings;
- Companies > Director’s/Shareholder’s Loan;
- Trust/SMSF > Beneficiary/Member’s Loan;
2. Non-deductible business insurance types, however deductible in the Personal Tax Return, paid by the company for its business owner
These transactions should also be coded to a balance sheet account. However, as these insurance types can be deductible on the Individual Tax Return, they should be coded separately from the other non-deductible transactions.
In this example, we will use a company paying Private Health Insurance for the business owner:
- Sole Trader/Partnerships > Drawings – Private Health Insurance;
- Companies > Director’s/Shareholder’s Loan – Private Health Insurance;
- Trust/SMSF > Beneficiary/Member’s Loan – Private Health Insurance;
3. Non-deductible insurance, paid by the company for its employees
When a business chooses to pay non-deductible insurance for its employees (such as Private Health Insurance), the insurance expense becomes tax-deductible for the business. However, these payments must be captured under the Fringe Benefits Tax regime.
Types of Insurance and Their Tax Implications
Public Liability Insurance
Public Liability Insurance is designed to protect a business against claims arising from bodily injury or property damage to third parties (such as customers, clients, or members of the public) that occur as a result of the business activities, as well as accidental damage to property owned or controlled by someone else.
Although this type of insurance is only compulsory for some business types, every business should invest in this insurance.
Public Liability is both tax and GST-deductible.
Professional Indemnity Insurance
Professional indemnity insurance protects businesses and professionals who provide advice or services to clients against claims of negligence, errors, or omissions that result in financial loss or damage to the client.
Professional indemnity is both tax and GST-deductible, and it is generally sold together with public liability insurance.
Workers’ Compensation Insurance
Workers’ Compensation insurance provides coverage for employees who suffer work-related injuries or illnesses. It covers the cost of medical expenses, rehabilitation, and wages whilst the injured employee is unable to work.
Workers’ Compensation Insurance is compulsory for all businesses that hire employees. The insurance covers only the employee residing in the same state or territory where the insurance is taken. Therefore, employers who hire employees in multiple states and territories must take Workers’ Compensation Insurance in every state or territory where their employees reside.
Workers’ Compensation Insurance is both tax and GST-deductible.
Motor Vehicle Insurance
There are two types of Motor Vehicle Insurance:
- CTP (Compulsory Third-Party)
This is a requirement for all vehicles and provides coverage for injuries and fatalities caused by the vehicle’s driver. In some states and territories, CTP Insurance is paid as part of the vehicle registration. - Comprehensive Insurance
This type of policy provides extensive coverage against various vehicle accidents, such as unintentional harm, fire damage, theft and destruction caused by storms.
Motor Vehicle insurance can only be claimed as a business deduction when the vehicle is owned by the business. However, when a vehicle owned by a business is driven for non-business activities, the percentage of private usage must be captured under the Fringe Benefits Tax regime.
When a vehicle is owned by an individual (i.e. the Company Director or an employee) and used for business purposes, the business cannot claim the cost of the vehicle insurance. However, it can pay the vehicle’s owner a vehicle allowance for business usage.
Cyber Security Insurance
Cyber Security insurance protects businesses from any financial loss and liabilities associated with data breaches, hacking, ransomware attacks, or other cybercrimes. It can also cover costs related to data recovery, notification of affected parties, legal expenses, and potential liability claims.
Cyber Liability Insurance is both tax and GST-deductible.
Tax Audit Insurance
Tax Audit insurance provides businesses with coverage for costs associated with ATO audits, including additional Accounting fees, other professional fees (including legal, consulting and advisory costs) and other audit expenses.
Tax Audit Insurance is both tax and GST-deductible.
Income Protection Insurance
There are several types of Income Protection Insurance. Each type provides a safeguard to a person’s income during life’s unexpected events. For these insurance types, the insurance beneficiary determines whether the insurance is tax-deductible for the business or for the individual or non-tax deductible at all.
The main types of Income Protection Insurance are:
- Income Protection
Typically, the beneficiary of Income Protection Insurance is the individual insured. This insurance regularly pays a percentage of the beneficiary’s income while unable to work due to injury or illness (caused outside of the workplace).
Income Protection insurance is non-deductible for the business, but deductible in the Individual Tax Return. - Total and Permanent Disability Insurance
The beneficiary receives a lump sum when unable to work due to a specified permanent disability.
This insurance type is non-deductible for both the business and the individual. However, it may be deductible when taken under a Self-Managed Super Fund (SMSF). Business owners who also have an SMSF should seek financial advice before taking up this insurance. - Trauma Insurance
This type of insurance provides coverage to an individual who has suffered a critical illness or serious injury (as listed in the policy taken). Trauma insurance may cover out-of-pocket medical costs (including therapy and nursing care) and a percentage of their regular income whilst unable to work.
The policy is non-deductible if the policy beneficiary is the individual suffering the illness/injury. However, it is tax-deductible when both the policyholder and beneficiary are the business. - Keyman Insurance
Keyman Insurance (or Key Person Insurance) is an organisation’s policy that provides coverage for key staff members from critical illness, injury, permanent disability or death. The policy pays the organisation a lump sum benefit when any of the above instances occur.
As the insurance beneficiary is the business, not the individual, this insurance type is tax and GST-deductible.
Life Insurance
There are three main types of Life Insurance:
- Life Insurance
Life Insurance pays a lump sum benefit to one or more beneficiaries when the beneficiary/policyholder passes away.
Life insurance is non-deductible for both the business and the individual. - Terminal Illness Insurance
Like Life Insurance, Terminal Illness insurance pays the beneficiary/policyholder a lump sum when diagnosed with a terminal illness with less than 12 or 24 months of life expectancy. The definition of ‘Terminal Illness’ varies from one policy to another.
Terminal Illness Insurance is non-deductible for both the business and the individual. - Group Life Insurance
This insurance type is structured through a Self-Managed Super Fund and may cover several SMSF members.
When structured correctly, a percentage of Group Life Insurance is deductible in the SMSF. However, the downside of this insurance is that any payouts or benefits received from the group life insurance policy may be taxed, particularly if those members have not yet reached their retirement age under Superannuation law.
Private Health Insurance
The main purpose of Private Health Insurance is to cover the main cost of private hospital treatments. Most Private Health Insurance policies also include partial reimbursements for other medical and therapeutical treatments (i.e. dental, optical, acupuncture, etc). These reimbursements are defined as ‘extras’ in the policy.
Private Health Insurance is also taken by individuals earning over a set annual income to avoid paying Medicare surcharges.
Private Health Insurance is a non-deductible business expense but is deductible in the Individual Tax Return.
Property Insurance
These insurance types are designed to safeguard the policyholder’s property and/or its content.
The main types of Property insurance are:
- Property Insurance
Generally taken by the person or entity owning the property, this insurance provides coverage for any damage to a property, including weather, fire and burglary. Generally, with commercial properties, the insurance also covers the assets located inside, including equipment and/or stock.
Property insurance for commercial properties is both tax and GST-deductible. - Asset Protection Insurance
Asset Protection insurance is similar to Property Insurance. However, the coverage is restricted to the damage of assets (equipment or inventory) inside the commercial building (i.e. a Factory, Retail Shop, Hospitality venue, etc.). Generally, this type of insurance is taken by a business renting a property.
Asset Protection Insurance is both tax and GST-deductible. - Content Insurance
Content Insurance covers the cost of damage and theft of content inside a residential property.
A percentage of content insurance may be tax-deductible for businesses working from home offices (the percentage would equal the square meters of the residential property occupied by the home office). When this insurance is paid in full by the business, the private portion of the insurance must be captured under the Fringe Benefits Tax regime.
Note: claiming Content Insurance as a tax deduction for those who own their residential property may impact Capital Gain Tax. - Business Interruption Insurance
Generally, taken together with Property or Asset Protection insurance, Business Interruption insurance extends these insurance types to cover the cost of any business interruptions caused by the property and/or asset damage.
Business Interruption Insurance is both tax and GST-deductible.
Travel Insurance
Travel Insurance may cover a range of unexpected costs incurred whilst travelling, including stolen items, out-of-pocket medical expenses due to illness or injury and travel delays.
Travel insurance is tax deductible when taken for business trips or for the business component of business/recreational trips.
Conclusions
Navigating through the “insurance maze” can be daunting. Investing in the wrong policy cover may not only turn into a waste of money but also not provide financial assistance when needed.
The first core task is to ensure that money is invested towards the right policies. It is important to understand that no size fits all. Insurance should be tailored around the individual needs, tax position and family dynamics.
Understanding the claim and excess payment should also be regarded as a high priority.
This is why it is essential to get financial advice before investing in any insurance, particularly long-term policies like Life and Total or Permanent Disability, rather than being misled by clever salespeople.
Once the correct insurance options have been chosen, another core task is to ensure they are accurately set up to get the maximum tax deduction. Always consult with your Accountant to ensure the insurance Policyholder is set up correctly.
Finally, when you have a business, make sure you invest in a qualified and knowledgeable bookkeeper who can code all insurance transactions correctly and provide your Accountant with clear accounts at the end of the year to guarantee the correct deductions are recorded.
Contact Evolution Cloud Accounting if you need support with your business accounts.
References
https://www.zurich.com.au/latest-news/magazine/types-of-life-insurance.html
https://business.gov.au/risk-management/insurance/business-insurance
https://www.seniors.com.au/life-insurance/types
Disclaimer
This blog and attached resources are of general nature designed for informational and educational purposes only. They should not be construed as professional financial advice for your individual business. Should you need such advice, consult a licensed financial or tax advisor.
