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Edited version of your private ruling
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Ruling
Subject: Assessability of compensation payment and deductibility of expenses
Question and answers:
Is the insurance payout you received to cover the repairs to your rental property included in your assessable income in the income year it was received, when no related repair expenditure was incurred?
No.
Is the insurance payout you received to cover the cost of repairs to your rental property included in your assessable income in the income year that the related repair expenditure is incurred?
Yes.
This ruling applies for the following period:
Year ended 30 June 2011
The scheme commenced on:
1 July 2010
Relevant facts
You and your spouse own an overseas property.
Your rental property was damaged as a result of a natural event.
Your rental property sustained further damage after a period of time.
After the initial event an assessor viewed your property and estimated what the cost of repairs would be.
You received a payment from an insurance organisation to cover the costs to repair your rental property from damage incurred in the initial event.
Due to the further damage that the rental property sustained you are yet to begin repairs to the property.
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 20-20.
Income Tax Assessment Act 1997 Subsection 20-20(2).
Income Tax Assessment Act 1997 Section 20-35.
Income Tax Assessment Act 1997 Subsection 20-35(1).
Income Tax Assessment Act 1997 Subsection 20-35(2).
Income Tax Assessment Act 1997 Subsection 20-35(3).
Income Tax Assessment Act 1997 Section 25-10.
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the year. Assessable income that is not ordinary income but is assessable under a specific provision of the ITAA 1997 is called statutory income and is assessable under section 6-10 of the ITAA 1997. An insurance recoupment is considered statutory income.
Under subsection 20-20(2) of the ITAA 1997, an amount received as a recoupment of a loss or outgoing is an assessable recoupment if:
· it is received by way of insurance or indemnity; and
· you can deduct an amount for the loss or out going for the current year, or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this act.
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Section 25-10 of the ITAA 1997 provides that expenditure incurred on repairs to a rental property are deductible.
Therefore, an amount received by way of insurance is an assessable recoupment if it is paid to cover the cost of repairs to a rental property and the deduction can be claimed in the current year or in an earlier income year under subsection 20-20(2) of the ITAA 1997. Current year means the income year for which you are working out your assessable income and deductions.
Accordingly, the insurance payout you have received is treated as if it was received in the income year that you will incur the expense to repair your rental property and therefore should be included in your assessable income for that year (the same income year that you claim the related repair deduction).