The January 2026 third edition
This nine-page guide applies to companies, sole proprietorships and partnerships insuring against lost profits from a key person’s death or disability. A key person’s pivotal value can arise from qualifications, experience, contacts or business judgement, not just academic credentials. The person must have prime responsibility for bringing in profits.
Ordinary insurance and staff-benefit distinctions
Sections 14 and 15 require an income-producing expense and exclude capital expenditure. Insurance benefiting an employee or nominee normally forms staff costs; a business-beneficiary policy normally acquires a capital asset. Key-person insurance is a conditional exception. The footnote separately treats employer-beneficiary group staff insurance from YA2019 as deductible staff costs, even without a contractual payout-to-staff obligation, with employer recoveries taxable.
Condition one: protection of profits
The purpose must be protection against profits lost through death or disability of the key person. Cover can insure either event or both. Merely describing a policy as key-person insurance does not demonstrate that premiums are wholly and exclusively incurred for income production.
Condition two: the insured sum and attributable profits
The capital sum must directly relate to annual profits attributable to the person’s services, considering whether responsibility is prime, shared or contributory. The guide says premiums are not deductible where the assured sum exceeds annual business profits, because they are not wholly and exclusively income-producing. The insured sum is therefore a substantive condition, not just an insurer’s commercial limit.
Condition three: ownership and personal benefit
The policy remains business property and benefits must not be assigned to the insured or family. Facts showing personal benefit can defeat deduction, especially a sole proprietor or substantial company ownership alone or with relatives. The guide requires case-specific examination rather than automatically approving a policy because the business is its named beneficiary.
Condition four: no surrender or investment value
A policy with cash surrender or investment value fails the exception because a payout can occur even without insured death/disability. This applies regardless of the policy label, including life, endowment, crisis-cover or group-personal products. Separate this key-person rule from the footnote’s distinct group staff-benefit treatment.
Condition five: the whole profit-making structure survives
If death/disability destroys the entire profit-making structure so the business cannot continue, the premium protects capital and is not deductible. A sole proprietor’s policy on their own life fails for this reason because owner and business are not separate entities. Cover on an employee can qualify if all other conditions are satisfied.
Recoveries and the tax computation
Where premiums qualify for deduction, recoveries are taxable trading receipts. Claim in the return and clearly state why the insured qualifies as a key person in the computation. Supporting documents need not accompany the return but must be retained and supplied if requested. The 2023 edition added the group-insurance footnote; the 2026 guide preserves the substantive five-condition framework.
Official source
This article independently explains the substantive contents of the official PDF, including the relevant conditions, procedures and annexes. The linked document remains the authoritative source for its original wording, and later changes should be checked separately.
Read the official PDF ↗