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  • Insurance payouts

    Insurance payouts for purely personal items don't have to be included in your tax return.

    However, insurance payouts for items you've used to produce income may have to be included in your tax return.

    Where you've used items for both personal and income-producing purposes, you need to calculate the percentage of each use.

    If you receive a lump sum insurance payment to cover a number of assets, you need to reasonably apportion the payment between the assets for tax purposes.

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    Your family home

    Any insurance payout you receive if your family home is destroyed or damaged is not taxable – it doesn't have to be included as income in your tax return.

    Homes used for business purposes

    If an insurance payout is made on a house used for income-producing purposes – for example, part of your home is used for a home business – it may need to be taken into account for capital gains tax purposes. You need to subtract the relevant cost base from your insurance payout to work out whether you made a capital gain or loss.

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    If you're a small business operator, you may be entitled to a range of small business concessions.

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    Personal property

    Insurance payouts received for destroyed or damaged items you used solely for your personal use – such as 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). In this case you need to subtract the cost base of the asset from your insurance payout to work out whether you had a capital gain.

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    Trading stock

    Where you've been claiming the cost of an insurance premium as a tax deduction, a payout received under the policy for a loss of trading stock is generally treated as assessable income.

    GST

    If you tell your insurer what proportion of the premium you can claim GST credits for before making a claim, you will not have to pay GST on your insurance payout. You can claim GST credits on the part of an insurance premium that relates to business purposes.

    Depreciating assets

    If you receive an insurance payout for the destruction of a depreciating asset used to produce income, such as a car or office equipment, you will need to calculate a balancing adjustment.

    The balancing adjustment is worked out by comparing the amount you received for the destruction of the asset – such as an insurance payout – with its adjustable value at the time it was destroyed. The adjustable value is the purchase price of the asset, less its decline in value since you first used it.

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    If you only used the asset to produce assessable income and the amount you receive is:

    • more than the adjustable value, the excess is included in your assessable income
    • less than the adjustable value, you can claim a deduction for the difference.

    Example

    Bridget purchased a cabinet that she used solely in her work. Six months later the cabinet was destroyed by fire and Bridget received an insurance payout, of which she attributed $1,300 to the cabinet. Its adjustable value at that time was $1,200.

    As the amount received of $1,300 is more than the adjustable value of the cabinet at the time it was destroyed, the excess of $100 is included in Bridget's assessable income. Alternatively, she could choose to offset it against the cost of any replacement assets.

    End of example

    If you used the asset partly to produce assessable income, and partly for personal use, calculate the proportions of each.

    Example

    Andrew's computer is destroyed and he receives an insurance payout of $600. The computer cost him $1,000. Andrew uses the computer 40% of the time for private purposes and 60% in his job. At the time it was destroyed, the computer's adjustable value was $700.

    Andrew can claim a deduction for the balancing adjustment amount of $60 – that is, 60% (the proportion of use in Andrew's job) of $100, which is the difference between the insurance payout he received ($600) and the adjustable value of the computer at the time it was destroyed ($700).

    In addition, Andrew makes a capital loss of $160 – that is, 40% (the proportion of use for private purposes) of $400, which is the difference between the amount of insurance Andrew received ($1000) and the computer's cost ($600).

    End of example

    Cars

    If you used your car at some time to produce assessable income you may have to make a balancing adjustment.

    If you claimed your car expenses using the 'one-third of actual expenses' or the 'log book' method, your balancing adjustment amount needs to be reduced by the percentage that you used the car for personal use.

    If you only used the 'cents per kilometre' method or the '12% of original value' method since you began using the car, no balancing adjustment arises, as these methods take the decline in value into account in the calculation.

    Example

    Louise buys a car and for the next two income years she uses the 'log book' method to work out her deductions for car expenses. The car is destroyed during the second income year and Louise receives an insurance pay-out of $24,500. At the time the car was destroyed, its adjustable value was $18,200.

    As Louise's log book showed that the level of her business use was 40%, the balancing adjustment amount is 40% of the difference between the insurance payout and the adjustable value of the car – that, is $2,520. Louise must include this amount in her assessable income.

    End of example

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    Offsets

    For assets that you use solely to produce assessable income, including cars, you can offset an assessable balancing adjustment amount against the cost of one or more replacements.

    You must acquire the replacement asset or incur the expenditure:

    • no earlier than one year before the original asset was destroyed
    • no later than one year after the end of the income year in which the original asset was destroyed.

    We can agree to extend the time limit – for example, if it is unlikely that insurance claims in relation to the disposal of the original asset will be settled within the required time even though you have taken all reasonable steps to have the claims settled.

    To offset the assessable balancing adjustment amount:

    • the replacement asset must be installed ready for use by the end of the income year in which you incurred the expenditure on the asset or you started to hold it
    • you must be able to deduct an amount for it.

    If you offset an amount against the cost of a replacement asset after the end of the income year in which the replacement asset was installed ready for use, you must also reduce the sum of its opening adjustable value plus any second elements of its cost for that later year.

    Low-value pool items

    If an asset that was destroyed was used solely to produce assessable income and was in a low-value pool, you reduce the closing pool balance by the amount of the insurance payout you receive.

    If an asset was used partly to produce assessable income and was in a low-value pool, you:

    • multiply the insurance payout you receive for it by the percentage that it was used to produce assessable income
    • subtract the result of this from the closing pool balance.

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    Last modified: 22 Sep 2016QC 50168