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Ruling

Subject: payment following flood damage

Question

Is the indemnity payment you received included as assessable income where deductible repair work has been carried out?

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

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Your rental property was damaged by floods.

Your insurance policy did not cover you for the damages.

You were advised you would receive a 'good faith' payment instead.

You subsequently received a payment.

You carried out repair work on your rental property in the 2010-11 financial year.

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.

Reasons for decision

The assessable income of an Australian resident includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997)).  

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 (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 4 AITR 443) include receipts that:

· are earned,

· are expected,

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

Rental income is regarded as ordinary assessable income.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82) (Dixon's case). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

Insurance payments received to compensate a person for lost rent is regarded as ordinary assessable income. However, where the insurance payout is not to cover lost rent, it may be assessable under other provisions. Statutory income is not ordinary income but is included in assessable income by a specific provision in the tax legislation. 

Assessable recoupment

Under Subdivision 20-A of the ITAA 1997, certain amounts received by way of insurance, indemnity or other recoupment are assessable income if the amounts are not income under ordinary concepts or otherwise assessable.

An amount of insurance or indemnity received as recoupment of a loss or outgoing is generally an assessable recoupment where you can deduct an amount for the loss or outgoing (subsection 20-20(2) of the ITAA 1997). For example, an insurance payout to cover the costs incurred of repairing damage to a rental property is assessable if you can claim a deduction for the cost of the repairs.

Indemnity is not a defined term and therefore must be given its ordinary meaning. The Macquarie Dictionary, [Multimedia], version 5.0.0, 1/10/01, definition of indemnity includes compensation for damage or loss sustained.

In your case the payment you received is regarded as an amount received by way of indemnity following the floods. The associated repair work to your rental property is an allowable deduction. Therefore the payment is an assessable recoupment.