Edited version of private advice

Authorisation Number: 1051943628438

Date of advice: 28 January 2022

Ruling

Subject: Assessable income - insurance proceeds

Question

Is the amount received assessable income?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased an investment property (the Property).

You purchased insurance for the Property.

At the time of purchase, a building inspection was completed, and some issues were identified. No issues were identified regarding unauthorised buildings, however.

Sometime later, you received information from the council that part of the original building was built illegally. This was not disclosed to you during the purchase of the Property.

Other repairs required were disclosed to you at the time of purchase of the Property.

You lodged a claim with your insurance company.

According to a letter received from your insurance company, a number of unauthorised works were undertaken on the Property.

In relation to the replacement of one of these unauthorised works, the insurance company was of the view that as you created the risk that formed the substance of the claim, you would not be indemnified for the replacement in accordance with the relevant section of the insurance policy.

In relation to the XXX, the insurance company was of the view that as you were aware the XXXX would need repairs based on pre inspection report, you agreed to take on that risk.

The insurance company accepted that some of the works fell within the meaning of a covered title risk. They therefore accepted indemnity in relation those works.

The insurance company assessed your claim and ultimately you agreed on a settlement of $XXX, XXX.

A clause in the insurance policy states that the maximum amount of liability the insurer will accept is $XXX,XXX.

The settlement amount was paid to you in XXXX.

You have spent at least $XXX, XXX on construction costs and originally placed a claim for the whole amount. However, you received only $XXX,XXX as that is the maximum amount payable as above. You will be claiming capital works deductions for the costs.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 Subdivision 20A

Reasons for decision

Assessable income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

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.

Amounts that are not ordinary income but are included in your assessable income by another provision are called statutory income. The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997.

Assessable recoupments

Subdivision 20-A of the ITAA 1997 provides that 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 received by way of insurance or indemnity is an assessable recoupment if it is paid for a deductible expense and the deduction can be claimed in the current year or in an earlier income year.

Application to your circumstances

The amount you received from your insurance company is not assessable income under section 6-5 of the ITAA 1997 or an assessable recoupment under Subdivision 20-A of the ITAA 1997.