Edited version of private advice

Authorisation Number: 1052035714726

Date of advice: 28 September 2022

Ruling

Subject: CGT - rental property

Question 1

Does the portion of the Landlord Insurance amount received to compensate for loss of rent for your property need to be included in assessable income?

Answer

Yes. The insurance payout to compensate you for loss of rent needs to be included as income. Further information about rental-related income can be found by searching 'QC 67554' on ato.gov.au.

Question2

Will the portion of the Landlord Insurance amount received to compensate for damage to your property be considered a recoupment of part of the acquisition costs of the property and be applied to the cost base of the property for capital gains tax purposes?

Answer

Yes. You meet the relevant factors contained in Taxation Ruling TR 95/35 regarding compensation payments received in relation to permanent damage to or a permanent reduction in the value of an underlying asset.

As there was no disposal of the Property at the time of receipt, we consider that the amount represents a recoupment of all or part of the total acquisition cost of the Property.

Accordingly, you reduce the cost base of the Property by the amount of the compensation received.

Question 3

Will the cost of repairs and improvements to your property incurred when the property was used for private purposes form part of the cost base of the property for capital gains tax purposes?

Answer

Yes. The expenses incurred in relation to the property after the Landlord Insurance was paid can be included in the cost base of the property. However expenditure does not form part of the cost base, to the extent that any amount you have received as recoupment of it, is included in assessable income.

This private ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You (Taxpayer 1 and Taxpayer 2) purchased the Property for $XXX,XXX as Joint Tenants. Settlement date was XX/XX/XXXX.

You then leased the Property on XX/XX/20XX.

You claimed immediate deductions for rental expenses in the income year you incurred them. You have not claimed deductions for decline in value of depreciating assets.

You sold your principal place of residence located interstate with the intention of relocating to the Property.

The tenant vacated the Property XX/XX/20XX.

State border closures prevented you from inspecting the Property prior to the tenant vacating.

You subsequently moved into the Property which became your principal place of residence.

After you moved in, damage to the Property was found which was caused by the tenant's activities.

You lodged a claim through your Landlord Residential Building Insurance (Landlord Insurance).

You were paid an amount for Loss of Rent in XX/XX/20XX.

Ongoing damage was subsequently found and another claim was made to Landlord Insurance.

You provided a Claim Confirmation from the Insurer.

You were unable to make any repairs during the income year ended 30 June 20XX.

You have subsequently spent an amount of the Landlord Insurance proceeds to repair damages to the Property.

There are still a number of works yet to be done at the Property. The Landlord Insurance proceeds will not be sufficient to cover the works as the cost of materials and labour has significantly increased in the time.

You continue to wait to get trades in to complete the works.

You intend to make improvements to the Property.

You do not intend to rent out the Property in the foreseeable future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Subsection 20-25(1)

Income Tax Assessment Act 1997 Subsection 20-25(2)

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Subsection 110-45(3)