Are key person insurance premiums tax deductible for my business?

The tax deductibility of key person insurance premiums in Australia depends entirely on whether the policy is held for revenue or capital purposes, as defined by the Australian Taxation Office (ATO). For policies held for revenue purposes - designed to replace lost income or profits during ongoing business operations after losing a key person - the premiums are fully tax deductible as a business expense. However, if a claim is made, the insurance proceeds will be assessed as assessable income and subject to tax. For policies held for capital purposes - such as repaying business loans, buying out the key person's share, or covering capital expenses - the premiums are not tax deductible. In return, insurance proceeds for capital purposes are generally not treated as assessable income, though Capital Gains Tax (CGT) may apply. According to ATO Tax Ruling IT 2434, businesses must clearly document which portion of premiums relates to which purpose. If you have one policy covering both revenue and capital needs, you must maintain detailed records showing the split for tax purposes, though it may be simpler to maintain separate policies for each purpose.