When recovering from disaster events, check if you need to report and pay tax on insurance payouts:
- damaged or destroyed personal items or assets are not taxed
- businesses or income-producing assets may be taxed.
The following examples show when insurance payments are taxable and need to be included in your tax return.
Any insurance payout you receive for your family home (main residence) is not taxable. You don't include these payments as income in your tax return.
Example 1: damaged main residence
Sarah’s main residence is damaged by flooding. She receives an insurance payout to pay for repairs. Her insurance payout is not taxable as it relates exclusively to a private asset.End of example
Example 2: destroyed main residence and home business
Adrian’s home is destroyed in a cyclone and he receives an insurance payout. He had been operating a small catering business from his home.
As part of his home was used to produce income and he had claimed deductions relating to that use, Adrian's insurance payout amount will be used in working out any capital gain or loss on the property. He includes the net capital gain in his tax return.End of example
Insurance payouts for personal assets are not taxable. For example, insurance payouts for damaged or destroyed household items, furniture, electrical goods, boats, and private cars are not taxed.
There are special rules for:
- personal assets that cost you more than $10,000
- collectables that cost more than $500 such as paintings, jewellery, antiques, or coins.
These rules will only apply if the insurance payout exceeds the original cost of the asset.
Example 1: personal vehicle destroyed by fire
Nick’s car is destroyed by fire. He receives an insurance payout of $6,500 for the destroyed vehicle. His car was a personal asset and was not used for work purposes. He does not have to include the payout amount in his tax return.
Cars are exempt from CGT so there are no capital gains tax consequences.End of example
Example 2: TV damaged in hail storm
Hilary’s television is damaged in a hail storm. The insurance payout she receives does not need to be included in her tax return. The TV was a personal asset that is not taxable.End of example
Example 3: leisure boat destroyed in bushfire
Dean’s $3,000 boat is destroyed in a bushfire. Dean did not use his boat for any income producing purpose. He does not need to include his insurance payout on his tax returnEnd of example
Example 4: collectable artwork destroyed in bushfire
Julian has a Sidney Nolan painting worth $750 which is destroyed in a bushfire. The painting is a collectable.
Julian will include his insurance payout amount when he works out his capital gain or loss at the end of the income year.End of example
Example 5: bicycle worth over $10,000 destroyed in cyclone
Tim’s bicycle is destroyed in a cyclone. He receives an insurance payout of $15,000.
As his bicycle was worth more than $10,000, the payout will have tax consequences. He needs to subtract the cost base of the bicycle from his insurance payout and include any net capital gain or loss in his tax return.End of example
An insurance payout for a property used to produce income will have tax consequences. For example, if you used part of your home to run a home business or you rented out a room.
The insurance payout amount will be relevant when you work out if you have a capital gain or capital loss to include in your tax return. If you are a small business operator, you may be entitled to small business capital gains tax (CGT) concessions.
If your asset is destroyed you can roll over the CGT liability. See involuntary disposal of a CGT asset.
You must include the amount you receive from an insurance payout for damaged or destroyed trading stock in your tax return. Refer to the general trading stock rules.
Example: trading stock
Farm Supplies Co loses several tractors in a natural disaster. The business has insurance and has deducted the premiums as a business expense each year.
They include the insurance payout they receive in the business's assessable income. If the trading stock balance at the end of year is lower than it was at the start of the year, the business has an allowable deduction for that difference.End of example
Provided that you correctly informed your insurer of your GST status when you took out your insurance, you do not have to pay GST on your insurance payout. You may be entitled to claim GST credits for any purchase that you make with the insurance payout.
An insurance payout for damaged or destroyed business premises will have tax consequences.
You will need to work out if you have a capital gain or capital loss to include in your tax return. If you are a small business operator, you may be entitled to small business capital gains tax (CGT) concessions.
If you receive an insurance payout for damage or destruction of a depreciating asset that you used to produce income, such as a car or office equipment, it will have tax consequences.
You need to compare the amount of the insurance payout with its book value at the time it was destroyed (its ‘adjustable value’). If the payout is more than the book value, the excess is included in your assessable income. If the payout is less than the book value, you can claim a deduction for the difference.
For more information see Disposing of a depreciating asset.
Apportioning assets for personal use and producing income
If you used the asset for personal use and for producing income, the amounts need to be apportioned.
Example: cabinet used solely to produce assessable income
Bridget's work filing cabinet is destroyed by fire. She receives an insurance payout of $1,300 for the destroyed cabinet. Its adjustable value at this time is $1,200.
As Bridget receives $100 more than the book value of the cabinet, she includes that $100 in her assessable income.End of example
If you used your car for income producing purposes, you will need to compare the insurance payout amount with the book value of the car at the time it was destroyed (a balancing adjustment).
If you claimed your car expenses using the logbook 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 since you began using the car, no balancing adjustment arises, as this method takes the decline in value into account in the calculation.
Example: work car
Louise buys a car and for the next 2 income years she uses the logbook method to work out her deductions for car expenses. The car is destroyed during the second income year and Louise receives an insurance payout of $24,000. At the time the car is destroyed, its adjustable value is $18,000.
As Louise receives $6,000 more than the book value of the car, she must include an amount in her assessable income. Her logbook shows that she uses the car 40% of the time for work, so she must include 40% of the difference between the insurance payout and the adjustable value of the car.
Louise includes $2,400 in her assessable income.End of example
Concessions for businesses
In some circumstances you can buy a replacement asset and offset the balancing adjustment amount against it. See involuntary disposal of a depreciating asset or involuntary disposal of a CGT asset for more information.
Low-value pool items
If a destroyed asset that was used solely to produce assessable income 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.