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Edited version of your written advice
Authorisation Number: 1012767869216
Ruling
Subject: Insurance proceeds from a rental property
Question 1
Are the insurance proceeds paid to cover the cost of reconstructing the capital works that were damaged in the hail storm included in your assessable income?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 2014
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 investment property was damaged in a large hail storm during the relevant financial year.
The insurance company is offering, a lump sum cash settlement.
The lump sum is to cover damage to the structure.
You believe that the damage to the structure is purely cosmetic however professionals argue it will reduce the lifespan and resale value of the structure.
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 Section 25-10.
Income Tax Assessment Act 1997 Subsection 40-300(2).
Income Tax Assessment Act 1997 Section 43-10.
Income Tax Assessment Act 1997 Section 43-40.
Reasons for decision
The insurance proceeds you will receive to compensate you for the damage to your investment property structure is not income from rendering personal services, income from property or income from carrying on a business. The payment will be a once and for all payment and therefore does not have an element of recurrence or regularity.
Additionally, the insurance proceeds will be received for damage to the structure and, therefore, take on the character of capital works. As such, the payment will be capital in nature.
Accordingly, the insurance proceeds you will receive to compensate you for the structural damage is not assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).
Your assessable income also includes statutory income amounts which are not ordinary income but are included in assessable income by provisions about assessable income (section 6-10 of the ITAA 1997).
Under paragraph 20-20(2)(b) of the ITAA 1997, recoupment of a loss or outgoing is only an assessable recoupment if the taxpayer can deduct an amount for the loss or outgoing for the current year, or has deducted or is able to deduct an amount for it for an earlier financial year, under any provision of the ITAA 1997.
The phrase 'for the loss or outgoing' in paragraph 20-20(2)(b) of the ITAA 1997 requires a connection between the deduction and the loss or outgoing for which the taxpayer had recouped (paragraph 11 of Taxation Determination TD 2006/31).
In your case, the relevant loss or outgoing which will be recouped is the damage to the structure. The 'loss or outgoing' referred to in paragraph 20-20(2)(b) of the ITAA 1997 is not limited to an amount expended or paid by you. As in the present case, it extends to a loss incurred as a result of the destruction of an asset.
Whilst you may have been able to deduct an amount in relation to the original construction of the capital works under section 43-40 of the ITAA 1997, or in relation to the construction of replacement capital works under section 43-10 of the ITAA 1997, these are not deductions for the loss referred to in paragraph 20-20(2)(b) of the ITAA 1997. No deduction is available for the loss of the capital works.
Accordingly, as you cannot deduct an amount for the loss or outgoing for which the insurance proceeds are received as recoupment, the insurance proceeds received for the destruction of the capital works are not an assessable recoupment under section 20-20 of the ITAA 1997.
As the insurance proceeds paid to cover the cost of reconstructing the capital works that were destroyed in the hail storm are not ordinary or statutory income they are not included in your assessable income under any provision of the ITAA 1997.