Edited version of private advice

Authorisation Number: 1052376862303

Date of advice: 25 March 2025

Ruling

Subject: Lump sum compensation payments

Question 1

Did a flood event that impacted a house that was generating rent trigger a CGT event C1 under section 104-20 of the Income Tax Assessment Act 1997 (ITAA 1997) in the year ending 30 June 20XX?

Answer 1

Yes, the flood event affecting the house will trigger CGT event C1 under section 104-20 of the ITAA 1997. The insurance payout is considered your capital proceeds. Section 100-45 of ITAA 1997 provides the calculation needed to work out your capital gain or capital loss. You will need to determine the cost base to carry out this calculation.

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You own a rural property located at a specified address. You acquired the property after 20 September 1985. A house was existing on the property at the time the property was purchased.

You formed a partnership to carry on farming activities on the property.

You have rented the house situated on the property for more than a decade. You never lived in the house or treated this house as your main residence. The property has been consistently used to generate rental income since the purchase of the farming property and reported in the tax return.

The property was affected by a flood event that occurred on a specified date.

The property is insured with Insurer A and you lodged an insurance claim on a specified date. You have a building insurance only policy with Insurer A for the property. You provided a certificate of insurance indicating a sum insured value for the buildings of a specified amount, with a basic excess of a specified amount per claim. Key policy features include replacement cover for the buildings, as well as coverage for floods, rainwater run-off, and storm surges.

A representative of Insurer A inspected the property to assess the insurance claim. The property is located on a floodplain. The damage the flood caused the house resulted in the decision it was not viable to carry out any repairs to make the house liveable.

On a specified date, you received a settlement totalling of a specified amount from Insurer A for flood damage of the house on the property. You have provided a cash settlement fact sheet and a payment settlement statement as evidence for the claim.

You do not have any intention of using money for repair and restoration of the property.

Since the flood event, you have not rented out the house to generate any rental income.

You continue to carry on activity on the property. You intend to demolish the house.

Contention

You contend that the money receipt from insurance should be regarded as capital gain.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 100-45

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 section 104-20(1)

Income Tax Assessment Act 1997 section 104-20(2)

Income Tax Assessment Act 1997 section 104-20(3)

Income Tax Assessment Act 1997 section 152-40(1)

Income Tax Assessment Act 1997 section 152-40(4)(e)

Reasons for decision

Loss or destruction of CGT assets

CGT event C1 in subsection 104-20(1) happens if a CGT asset you own is lost or destroyed. The time of the CGT event as determined by subsection 104-20(2) will be when you first become aware of the loss or destruction; or if you receive compensation, when you receive the compensation.

The words 'lost' and 'destroyed' in subsection 104-20(1) are not defined in the Act and they take their ordinary meaning.

Taxation Determination TD 1999/79: Income Tax: capital gains: does the expression 'lost or destroyed' for the purposes of CGT event C1 in subsection 104-20(1) of the Income Tax Assessment Act 1997 apply to: (a) a voluntary 'loss' or 'destruction'? (b) intangible assets? relevantly states:

4. The word 'destroyed' in its context in subsection 104-20(1) contemplates both voluntary and involuntary actions. The Macquarie Dictionary, 3rd ed, defines 'destroyed' as '1. to reduce to pieces or to a useless form; ruin; spoil; demolish. 2. to put an end to; extinguish'. The word in its context in CGT event C1 applies if a CGT asset is destroyed in an involuntary occurrence, such as a natural disaster, or if it happens by the actions of others over which the taxpayer has no control. It also applies if a CGT asset is destroyed in a voluntary occurrence - if, for example, it happens due to a deliberate act of the taxpayer (e.g., a taxpayer might demolish a building in the course of redeveloping a property).

5...

6.Neither of the words 'lost' or 'destroyed', in the context of CGT event C1, contemplates damage to an asset that does not amount to the asset being lost or destroyed. A CGT asset must be wholly lost - not just damaged - or wholly destroyed - not just damaged - for the circumstances to be covered by CGT event C1. This is not to say, however, that CGT event C1 cannot happen to a discrete and identifiable part of a CGT asset - being a CGT asset in its own right - if the part is wholly lost or wholly destroyed and not just damaged.

Application to your circumstances

For CGT event C1 to occur, a CGT asset must be entirely destroyed, not just damaged. This also applies to a distinct and identifiable part of a CGT asset, which is treated as a CGT asset in its own right, if it is wholly destroyed or lost rather than merely damaged.

In your case, the house located on your land has been destroyed, making it unusable and no longer available for rent. Due to its location on a floodplain, the property was deemed unsuitable for repair, and you decided to demolish it.

When you acquired the property, the house was existing on the property. As a result of the flood, the house is no longer considered liveable. The house is a distinct and identifiable part of the CGT asset. For the purposes of applying CGT event C1, the house is treated as a CGT asset in its own right.

The property was covered by buildings insurance for flood damage, and you lodged an insurance claim a specified date. Following an inspection of the property, you received a specified amount in insurance proceeds on a specified date. The insurance payout relates to a property that became entirely unusable due to the flood, and is therefore considered to have been wholly destroyed. As a result, on a specified date when you received the insurance payment from your buildings insurer, this triggered CGT event C1 under section 104-20 of the ITAA 1997.

You will need to work out if you have made a capital gain or capital loss. Section 100-45 of ITAA 1997 provides the calculation needed to work out your capital gain or capital loss. The insurance payment represents your capital proceeds. You will need to determine what is your cost base to carry out the calculation.

Section 102-5 of ITAA 1997 provides you with the method to calculating your net capital gain, if any. Any net capital gain maybe reduced by any capital losses made as a result of other CGT events triggered for other CGT assets in the same year. Then you apply any previous unapplied net capital losses from prior income years. Any remaining net capital gain maybe further reduced by the discount percentage. Then if your capital gains qualify for any of the small business concessions, the capital gain is reduced. You would then sum together any other net capital gains you have calculated to this point for any other CGT assets in that same income year. The total summed amount is your net capital gain for the income year. This net capital gain amount is reportable in your income tax return for the relevant year as assessable income Be aware, there may be an exception(s) and/or modification(s) to rules when carrying out your calculation for a net capital gain on a CGT gain under section 102-5 of ITAA 1997.

Note: one of the basic conditions to entitle you to apply one or more of the small business concessions is the CGT asset is required to be an active asset. Subsection 152-40(1) of ITAA 1997 states a CGT asset is an active asset at the time if the asset is used, or held ready for use, in the course of carrying on a business that is carried on by you. However, paragraph 152-40(4)(e) of ITAA 1997 states the CGT asset is not an active asset if the asset's main use is to derive rent and other mentioned types of passive income sources.