Edited version of your written advice

Authorisation Number: 1012937869857

Date of advice: 18 January 2016

Ruling

Subject: Insurance recovery and assessable income

Question 1

Are you required to return as income the amount recovered under an insurance policy for damage to your rental property?

Answer

Yes

Question 2

Are you required to return as income the amount recovered under an insurance policy for loss of rental income?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2016

The scheme commenced on:

1 July 2015

Relevant facts and circumstances

You own an investment property from which you derive rental income.

The property sustained major damage in respect of which you made a claim on your landlord insurance. The claim was accepted by your insurer and you received a cash settlement during the year for the damage to the property and the loss of some rental income.

You began repairing the property upon settlement of your claim.

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 6-15

Income Tax Assessment Act 1997 - Section 8-1

Income Tax Assessment Act 1997 - Section 15-30

Income Tax Assessment Act 1997 - Section 20-20

Income Tax Assessment Act 1997 - Section 20-25

Income Tax Assessment Act 1997 - Section 25-10

Reasons for decision

Question 1

A taxpayer's assessable income consists of both ordinary income and statutory income.

Ordinary income is defined in section 6-5(1) of the ITAA 1997 as being '…income according to ordinary concepts.' This would include income such as salary and wages, rental income, dividends, business income and interest income.

However, a taxpayer's assessable income can also include 'statutory income' by virtue of subsection 6-15(2) of the ITAA 1997 which states that:

'Amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.'

It is considered that the insurance payment you have received is not 'ordinary income' but would fall within the realm of statutory income.

Section 15-30 of ITAA 1997 brings into a taxpayer's assessable income any amount that has been received by way of insurance or indemnity if the lost amount would have been included in your assessable income and the amount you receive is not assessable under section 6-5 of the ITAA 1997.

In your case you are entitled to claim a deduction for the cost of repairs to your rental property that were incurred as a result of damage sustained. However, as your insurer has met some or all of the cost incurred, you must reduce the amount claimed by the amount recovered from your insurer or alternately include the amount recovered as assessable income and claim the full cost of the repairs as deduction.

Question 2

Rental income is income according to ordinary concepts and as such is assessable under section 6-5(1) of the ITAA 1997. An amount of rental income recovered by way of an insurance claim merely replaces the income that would have been received if the event that gave rise to the insurance claim had not occurred.

In your case you have been compensated by your insurer for the lost rental income that would normally have been received by you during the period when the property was being repaired. The amount paid to you as compensation for the lost rental income therefore replaces the actual rental income that would have been due to you and accordingly is assessable income in terms of section 6-5 of the ITAA 1997 as it simply substitutes for the lost actual rental income.