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Salary Packaging Q&A ‘ Income protection and life insurance policy costs

If an organisation is planning to allow salary sacrificing for employees in regards to their income protection insurance and life insurance policy costs – will this result in a fringe benefit tax liability or is there a specific exemption that applies?

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Question

Our organisation is planning to allow salary sacrifice for our employees in regards to their income protection insurance and life insurance policy costs. We will reimburse these policy costs and reduce their pre-tax salary accordingly. Can you please let me know if it will result in a fringe benefit tax liability or is there a specific exemption that applies?

Answer

Income protection insurance taken out by an individual is an item of expenditure that the individual can claim as an income tax deduction on the basis the premium is being paid in order to derive an amount that will be assessable income if paid to the insured individual.

As the individual can claim an income tax deduction, where an employer pays or reimburses the employee’s premium, although the payment/reimbursement is an expense payment fringe benefit, the otherwise deductible rule will apply to reduce the taxable value of the benefit to zero. As such, no FBT will be payable.

Life insurance premiums on the other hand are not deductible on the basis that a life insurance payout is not assessable income of the recipient. In this case the otherwise deductible rule is not available and FBT will apply. There is no specific exemption available that we are aware of.

Disclaimer: Information provided in this article, while correct at time of publishing, is subject to change.