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Edited version of private ruling
Authorisation Number: 1011609086907
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Ruling
Subject: Repairs to Rental Property and Insurance recoupment
Question 1
Is the insurance payout assessable under section 20-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer: Yes.
Question 2
Can the insurance payout be apportioned over more than one year under section 20-40 of the ITAA 1997?
Answer: Yes.
This ruling applies for the following period:
01 July 2009 to 30 June 2010
The scheme commences on:
01 July 2009
Relevant facts and circumstances
You and your partner part own a rental property that was damaged by a cyclone during the relevant year. Your share of the rental property (and still is) leased to the occupier of the rental property.
As a result of the cyclone damage you and your partner received an insurance payout toward the damage of which your combined share is 75%.
As part of the process of repairs you and your partner decided to perform some improvements. You and your partner have separated the improvements from the repairs and are not asking us to rule on this aspect.
The cost of the repairs has been determined to be 44% while the improvements have been costed at 66%.
The expenditure on repairs and improvements totalled 6% in 2008, 10 % in 2009 and 84% in 2010
None of the repairs or maintenance included in the total have been deducted as an expense or taken up as depreciable assets or capital works.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 20-20.
Income Tax Assessment Act 1997 Subsection 20-20(2).
Income Tax Assessment Act 1997 Subsection 20-40(1).
Income Tax Assessment Act 1997 Subsection 20-40(2).
Income Tax Assessment Act 1997 Section 25-10.
Reasons for decision
Question 1
Summary
Is the insurance payout assessable under section 20-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer: Yes.
Question 2
Can the insurance payout be apportioned over more than one year under section 20-40 of the ITAA 1997?
Answer: Yes.
Detailed reasoning
Repairs to House
You have stated that you have repaired the house back to the condition it was in immediately prior to the damage. You have apportioned those amounts used to improve the property in a way beyond its condition immediately before the damage.
Section 25-10 of the ITAA 1997 states that expenditure incurred in repairing a premises is an allowable deduction providing that the premises is held for an income producing purpose.
Taxation Ruling (TR) 97/23 states that the word 'repair' has its ordinary meaning. Repair includes the making good of deterioration to property. The ruling goes on to say that a repair involves the restoration of the efficiency or function of the property to its former appearance, form, state or appearance. A repair is distinct from an improvement that enhances the asset's condition beyond what it was previously.
As you have apportioned the expenditure to bring the rental property back to its former condition, any expenditure incurred in doing these repairs, will be an allowable deduction under section 25-10 of the ITAA 1997.
Insurance receipt
Section 20-20 of the ITAA 1997 concerns assessable recoupments. Subsection 20-20(2) of the ITAA 1997 provides that an amount you have received as recoupment of a loss or outgoing is an assessable recoupment if you received the amount by way of insurance or indemnity and the amount can be deducted as a loss or outgoing in the current or previous years under any provision of the ITAA 1997.
In your case you received your share of an insurance payout. As already noted above the amounts expended in repairing the house are allowable deductions, therefore the insurance payout is considered to be an assessable recoupment under subsection 20-20(2) of the ITAA 1997.
Subsection 20-40(1) of the ITAA 1997 applies when you receive an assessable recoupment where the amounts can be deducted over two or more years.
Subsection 20-40(2) of the ITAA 1997 provides that your assessable recoupments are included in the calculation of your assessable income:
· only so far as they have not already been included for an earlier income year; and
· only to the extent of your total deductions to date for the loss or outgoing.
In your situation, your share of the insurance payout is considered an assessable recoupment. Since the damage you have incurred your share of expenditure on repairs. You will therefore declare your share of the insurance payout as an assessable recoupment up to the extent of the repairs that you have deducted.