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Ruling

Subject: Insurance payment for a depreciating asset

Question 1

Is the insurance payment received for the destruction of your motor vehicle included in your assessable income as an assessable recoupment?

Answer: No.

Question 2

Is the insurance payment received for the destruction of your motor vehicle included in calculating the balancing adjustment for the motor vehicle?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You owned a motor vehicle which had a carrying capacity of 6 tonne.

The motor vehicle was used for private and business related purposes.

The motor vehicle was written off in an accident.

The motor vehicle had been fully depreciated.

You received a payment under your insurance policy as a result of the destruction of the motor vehicle.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Section 20-20

Income Tax Assessment Act 1997 Section 20-25

Income Tax Assessment Act 1997 Section 40-285

Income Tax Assessment Act 1997 Section 40-290

Reasons for decision

Summary

The insurance payment you received as a result of the destruction of your motor vehicle is not an assessable recoupment under section 20-20 of the Income Tax Assessment Act 1997 (ITAA 1997). This is because the amount is included in calculating the balancing adjustment amount for the disposal of the motor vehicle.

As the motor vehicle was full depreciated at the time of the accident the taxable component of the balancing adjustment amount will be assessable.

Detailed reasoning

Subsection 6-5 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.

Other characteristics of income that have evolved from case law include receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

In your case, you have not earned the insurance payment as it does not relate to services performed. The payment is a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the insurance policy and was only payable in certain circumstances. Thus, the insurance payment is not considered to be ordinary income and is, therefore, not assessable under subsection 6-5 of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income.

Section 10-5 of the ITAA 1997 lists those provisions. Included in this list are sections 20-20 and 40-285 which deal with assessable recoupments and assessable balancing adjustments, respectively.

Insurance payment as a recoupment

Subsection 20-20(2) of the ITAA 1997 provides an amount you have received as a recoupment of a loss or outgoing is an assessable recoupment if:

· you have received the amount by way of insurance or indemnity, and

· you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for it in an earlier income year, under any provision of this Act.

Subsection 20-25(5) of the ITAA 1997 specifically excludes an amount you receive as an assessable recoupment where the recoupment amount serves as the termination value of a depreciating asset.

In your case, you received an insurance payment as a result of the destruction of a motor vehicle (a depreciating asset). This payment is considered to be the termination value of the asset (see discussion below). It follows that the exclusion under section 20-25(5) of the ITAA 1997 applies.

Therefore, your insurance payment is not an assessable recoupment under subsection 20-20(2) of the ITAA 1997.

Balancing adjustment

Subdivision 40-D of the ITAA 1997 states that you may have to make an adjustment to your taxable income if you stop holding or using a depreciating asset. This adjustment is known as a balancing adjustment. The adjustment is generally based on the difference between the actual value of the asset when you stop holding it and its adjustable value.

A balancing adjustment event occurs for a depreciating asset when it is lost or destroyed.

Section 40-285 of the ITAA 1997 states that the balancing adjustment amount will be included in your assessable income where the asset's termination value exceeds the asset's adjustable value.

The termination value of a depreciating asset that is lost or destroyed is the amount received under an insurance policy for the loss or destruction of the asset.

The adjustable value of a depreciating asset at a particular time is the opening adjustable value for that year plus any second element costs for the year, less its decline in value for the year up to that time.

The opening adjustable value of an asset for an income year is its adjustable value to you at the end of the previous income year.

Section 40-290 of the ITAA 1997 states where a depreciating asset is used for both a taxable and non-taxable purpose, the balancing adjustment amount must be reduced by the amount that is attributable to the use for a non-taxable purpose.

You have advised that the destroyed motor vehicle had been fully depreciated in the company books, therefore, its adjustable value at the time of the accident was nil.

As the insurance proceeds received for the destruction of the motor vehicle (the termination value) exceeded its adjustable value, an assessable balancing adjustment amount has occurred.

The balancing adjustment amount should be apportioned between the taxable and non-taxable use of the motor vehicle. The taxable use portion of the balancing adjustment will form part of your assessable income for the year ended 30 June 2011.