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Edited version of your private ruling
Authorisation Number: 1012336611997
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Ruling
Subject: Assessability of insurance claim payments
Question:
Are the payments you received from an insurance claim assessable income for income tax purposes?
Answer:
No.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You own a residential house property.
The house was damaged by a natural disaster.
At the time the damage occurred the house was not used for commercial or income producing purposes.
The cost to rectify the damage was $X and your insurance claim was accepted and paid in full by your insurance company.
The insurance claim was paid to you in instalments based on invoices furnished by the contractor who carried out the rectification work.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5(2), and
Income Tax Assessment Act 1997 section 15-30.
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.
It is settled law that an amount paid as compensation generally acquires the character of that for which it is substituted. Therefore, compensation or insurance payments which are a substitute for income will be assessable as ordinary income, even if received as a lump sum.
In your case, a residential dwelling belonging to you suffered significant damage as a result of a natural disaster, and you received several insurance payments totalling $X from your insurance company in settlement of your claim.
The payments you received were not from, or a substitute for, rendering personal services or income from carrying on a business. Neither were they income from property, or a substitute for income from property, as the dwelling was not used for commercial or income producing purposes.
Therefore, the insurance payments you received are not assessable as ordinary income under section 6-5 of the ITAA 1997.
Section 15-30 of the ITAA 1997
Section 15-30 of the ITAA 1997 operates to include in a taxpayer's assessable income any amount received by way of insurance or indemnity for the loss of income or earnings, if the lost amount would have been included in the taxpayer's assessable income but was not assessable under section 6-5 of the ITAA 1997.
The payments you received do not meet this description as they were not paid for a loss of earnings, but in satisfaction of your claim relating to the damage of a non income producing residential dwelling.
Therefore, the insurance payments you received are not assessable under section 15-30 of the ITAA 1997.
Capital gains tax (CGT)
The capital gains treatment of compensation received under a policy of insurance is discussed in Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts (TR 95/35).
Paragraphs 6 and 7 of TR 95/35 specify that where compensation is received for the permanent damage or reduction in value of a post-CGT asset (acquired after 20 September 1985) there will be no capital gain or loss made until the asset is eventually disposed of. The compensation amount received is treated as a recoupment of all or part of the original acquisition cost of the asset.
Paragraph 3 of TR 95/35 clarifies that "permanent damage or reduction in value does not mean everlasting damage or reduced value, but refers to damage or a reduction in value which will have permanent effect unless some action is taken by the taxpayer to put it right".
In your case, no capital gain occurred from the insurance payments you received as they are treated as a recoupment of all or part of the original acquisition cost of the dwelling.
Therefore, the insurance payments you received are not assessable as a capital gain.
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