If your property is damaged or destroyed, you may receive an insurance payment. How this is treated for tax purposes depends on:
- the type of property - home, other buildings, cars, personal property or work-related items
- whether or not the property is income-producing - for example, a rental property or business premises.
Repairs to income-producing property are generally tax deductible in the year you incur them. If the work goes beyond restoring the original form or function, the expense may not be deductible as a repair. Different rules apply where property is improved or completely replaced. Where the cost of repairs includes goods and services tax (GST), you may be entitled to input tax credits if you are registered for GST and incur the cost in carrying on your enterprise.
If the house was used only as your principal residence, disregard capital gains tax (CGT) as you cannot make a capital gain or loss.
Any insurance payout you receive for your destroyed or damaged home is not taxable. It does not have to be included as income in your tax return.
Moving back into your rebuilt home
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The government has announced changes to the law which extend the capital gains tax main residence exemption. The changes apply to taxpayers whose main residence is accidentally destroyed regardless of whether or not the destruction results from a natural disaster. These were announced together with changes relating to destruction as a result of a natural disaster.
For more information on both changes see No capital gains tax for properties in natural disaster land swap programs.
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If you have to live elsewhere while rebuilding or repairing your home, you will keep your main residence exemption if you do both of the following:
- move back into the repaired or rebuilt property as soon as practicable after the work has been completed
- live there for at least three months.
Example: moving back in as soon as practicable
Louis and Yasmine's home was destroyed by Cyclone Yasi. Over the next few weeks the family decides to use the insurance proceeds to rebuild their home. Their initial advice is that it may take up to 12 months for their home to be rebuilt.
They decide to relocate temporarily 20 kilometres away and take out a six- month lease with a six month option on another home. Their only child, Marley, is enrolled in a school local to their leased home.
After six months, the rebuilding has progressed but is not complete, so the family take up the lease option.
After nine months the home is rebuilt. As Marley is halfway through the final school term and there would be a financial penalty for breaking the lease, the family decide to stay until the end of the school term.
In this circumstance, Louis and Yasmine have moved back into the home as soon as practicable after the work has been completed.
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Selling your land without rebuilding
If your home was destroyed and you then dispose of the vacant land on which it was built, you can choose to apply the main residence exemption and disregard CGT.
For more information, refer to the Guide to capital gains tax.
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If you used your home for business purposes
If you acquired the house after 20 September 1985 and you used it for income-producing purposes (for example, using part of your home for a home business) the payout may need to be taken into account for CGT purposes. You will need to subtract the relevant cost base from your insurance payout to work out whether you made a capital gain or loss.
If CGT applies, it is likely that you will be able to elect for rollover relief from capital gains tax or to preserve the pre-CGT status of your property.
Repairing property
You can claim a deduction for the cost of repairs to a rental property or business premises if they do not involve substantial reconstruction or substantial repair, or the replacement of an entire structure such as a fence.
If you receive money from a relief fund and use it to make repairs, this does not affect your entitlement to the deduction.
If you receive an insurance payout in respect of these repairs, the amount you receive should be included in your assessable income.
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For more information about when you can claim a deduction for repairs, refer to:
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Rebuilding property
If your rental property or business premises were destroyed by a disaster, any costs to rebuild are capital and not immediately deductible.
However, you may be able to claim a deduction for the construction costs of your property over a 25-year or 40-year period - this is called a capital works deduction.
As a general rule, where the cost of an insurance premium has been claimed as a deduction, payments received pursuant to a claim under the policy will be treated as assessable income.
If you hold an insurance policy, you can choose to tell your insurer what proportion of the premium you can claim GST credits for. You can claim GST credits on the part of the premium that relates to business purposes. If you do not tell your insurer before making the claim, you may have to pay GST when your claim is settled.
Insurance payouts received for destroyed or damaged cars and motorcycles used for personal use are not taxable. These payouts do not have to be included as income in your tax return.
If the car or motorcycle was destroyed and was used for business or income-producing purposes, you may need to include an amount in your assessable income or claim an amount as a deduction. Any insurance payout you receive is used to work out the amount to be included in your income or allowed as a deduction.
Insurance payouts received for destroyed or damaged work-related items - for example, computers and tools - are not taxable. These payouts do not have to be included as income in your tax return.
If the item was destroyed and was used for income purposes, you may need to include an amount in your assessable income or claim an amount as a deduction, having regard to the extent to which you used it for income purposes. Any insurance payout you receive is used to work out the amount to be included in your income.
If you used the asset for work, but you also used it for private purposes, any gain or loss that relates to your private use will be treated as a capital gain or capital loss. However, a capital gain is disregarded if you acquired a personal-use asset for $10,000 or less. A capital loss is also disregarded from the disposal of any personal-use asset.
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You can find out more in the:
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Insurance payouts received for destroyed or damaged items you used solely for your personal use - for example, household goods - are not taxable.
However, the payout may need to be taken into account for capital gains tax purposes.
If a personal-use asset that was destroyed cost you more than $10,000 (or $500 if the property was a collectable, such as a painting or jewellery) you will need to subtract the cost base from your insurance payout to work out whether you had a capital gain.
Capital losses on personal-use assets are disregarded, but you can make a capital loss on a collectable acquired for more than $500. These losses can only be used to reduce capital gains from collectables.
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If you think you will make a capital gain or loss following the destruction of personal property, you can find out more in the Guide to capital gains tax.
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If you have any questions or require assistance, call us on 1800 806 218 during business hours.
The following guides may be useful:
Last Modified: Wednesday, 23 January 2013