Business Insurance Records

Insurance is one of those costs that gets paid, filed and forgotten. The renewal notice arrives, the premium goes out, and at tax time the whole amount lands in a single insurance expense account. The trouble is that different policies are treated quite differently for tax, and the paperwork that proves which is which tends to be exactly the paperwork nobody kept.

Not all premiums are treated the same

• Everyday business cover — public liability, professional indemnity, business contents, commercial vehicle and similar policies protecting the operations of the business are generally deductible as ordinary running costs.
• Income protection — the treatment usually depends on who holds the policy. A policy held personally by the owner is generally claimed in the owner's individual return, not in the business. Cover held through a super fund is generally not deductible to the individual at all. A policy owned by a company over a director sits in more complicated territory and is worth specific advice before anything is claimed.
• Key person insurance — the purpose of the cover generally drives the treatment. Cover taken out for a revenue purpose, such as replacing profits lost while a key person is out of action, is generally on deductible ground, and a payout on that policy is generally assessable. Cover taken out for a capital purpose, such as clearing debt or funding a buy-out of a shareholding, is generally not deductible, and the payout is treated differently again. The purpose should be documented when the policy starts, not reconstructed after a claim.
• Life and total-and-permanent-disability cover for owners — generally private or capital in nature and generally not deductible to the business.

The records worth keeping

• The policy schedule and renewal notice for every policy, showing who the insured is, who owns the policy and what is covered.
• The premium tax invoice, not just the bank line. Premiums usually bundle stamp duty and other charges that do not carry GST, so the GST credit is generally smaller than a quick calculation on the total would suggest — the invoice shows the real figure.
• A file note or minute recording the purpose of key person cover, made at the time the policy is taken out.
• Everything connected to a claim — correspondence, assessments, the payout advice and how the proceeds were banked and treated. Insurance records generally need to be kept for 5 years, and records connected to a claim or a capital matter are worth keeping longer.

What we commonly see go wrong

• A bundled premium covering liability, life and income protection coded entirely to one deductible expense account.
• GST credits claimed on the full premium, including the stamp duty component that carries no GST.
• Key person policies with no documented purpose, leaving the tax treatment to be argued from memory after a claim.
• The policy owned by one entity while another entity pays the premium, so nobody is clearly entitled to the deduction.
• A payout banked and assumed to be tax-free without anyone checking how the related premiums were treated.

A worked example

As an illustration: a company pays a single annual premium that bundles public liability cover, key person life cover over the director, and the director's income protection. The bookkeeper codes the whole payment to insurance expense and claims GST on the full amount. In a review, the life and income protection components are questioned, the GST claim is found to be overstated because of the stamp duty component, and there is no record of why the key person cover was taken out. None of this reflects bad intent — it reflects one bank line hiding three different tax treatments. Separate invoices, or at least a documented split, would have answered every question.

When to get help

If your premiums bundle several types of cover, if there is key person or owner insurance anywhere in the structure, or if a claim has been paid and nobody is sure how the proceeds should be treated, it is worth having the policies mapped against the entities once. It is a short exercise, and far cheaper before a claim or a review than after one.

Is income protection insurance deductible through my business?

It depends on who holds the policy. Cover held personally is generally claimed in your individual return rather than the business, cover held through super is generally not deductible to you personally, and company-owned policies over a director need specific advice before anything is claimed.

Are key person insurance premiums deductible?

Generally it turns on the purpose of the cover. Policies taken out to protect revenue are treated differently from policies taken out for capital purposes such as clearing debt or funding a buy-out — and the payout treatment follows the same logic. Document the purpose when the policy starts and confirm the position with your adviser.

How long should I keep insurance policies and claim records?

Generally 5 years, in line with other business records. Documents connected to a claim, a dispute or a capital matter are worth keeping for longer, and the policy schedule for any current policy should always be on file.