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Edited version of your private ruling
Authorisation Number: 1012456430312
Ruling
Subject: Insurance payout
Question
Is the business interruption portion of the insurance pay-out assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
A fire destroyed your rented business premises. You will not reopen the business.
You received an insurance pay-out covering contents, equipment and some business interruption payment. The business interruption payment was calculated on expected turnover from the date of the fire to the termination of the policy.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Reasons for decision
Section 6-5 of the ITAA 1997 states that your assessable income includes income according to ordinary concepts, this is called ordinary income. The legislation, however, does not define the expression income according to ordinary concepts.
Ordinary income generally includes 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.
Business income is ordinary income and is therefore included in assessable income.
Ordinarily, an amount paid to compensate for loss acquires the character of that for which it is substituted (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82).
Paragraph 74 of TR 95/35 states;
In Case Z21 92 ATC 218; Case 7870 (1992) 23 ATR 1162, the Administrative Appeals Tribunal (P W Johnston, Deputy President) accepted that $165,000, received on the termination of a management agreement, was compensation for loss of future earnings, and therefore assessable income. The amount was received as compensation for the repudiation of the agreement, and was paid to avoid paying damages arising as a result of the termination of the agreement. The Tribunal found that the receipt stood in the place of damages to compensate for the loss of future profits, and not for the loss or destruction of the facility or business asset which the company would have exploited to earn those management fees.
As such, the insurance proceeds you will receive as compensation for lost income is included in your assessable income under section 6-5 of the ITAA 1997 in the income year that the compensation is received.