In recent months, parts of Australia have been battered by a combination of fire and floods. As people try to piece their lives together in the aftermath, insurance payouts can go a long way in helping rebuild homes and replace lost items. However, if you receive an insurance payout in relation to your business, home business or rental property you need to be aware there may be associated tax consequences.
For example, if you rent out your home or a portion of your home on a short stay website, you may be subject to capital gains tax (CGT) if you receive an insurance payout in relation to that home. Businesses that receive an insurance payment may be subject to varying tax consequences depending on what the payment is designed to replace.
Insurance payouts relating to personal property (including household items, furniture, electrical goods, private boats and cars) and your main residence are not taxed. If you keep a home office or run a business from home and you receive an insurance payout in relation to the property being damaged or destroyed, there may be CGT consequences.
Similarly, if you have a rental property or renting out a room of your main residence which later becomes damaged or destroyed and is subject to an insurance payout, you will need to include the insurance payout amount when you work out whether you have a capital gain or loss. This applies even if you were casually renting out a room, your home or (part of) your farm as short-stay accommodation.
For those operating a business, the tax consequences of an insurance payout are even more complicated depending on what the money received is for. For example, destroyed business premises come with CGT consequences, while any insurance amount you receive for the repair of damage will need to be included in your assessable income.
If an amount is received in relation to damaged or destroyed trading stock, it must be included as assessable income. For any depreciating assets used in generating assessable income (eg office equipment), you will need to calculate the difference between the amount received from insurance and the asset book value of the asset at the time it was destroyed. Any excess needs to be included as assessable income, while a deduction can be claimed for any losses.
For depreciating assets in the low-value pool, you will need to reduce the closing pool balance by the amount of insurance payment you receive. In addition, the tax treatment will need to be modified if an asset was partly used to produce assessable income and in a low-value pool.
The tax treatment of insurance payments for work cars is similar to that of depreciating assets, except if you used the logbook method for claiming car expenses. If you used the logbook method, the balancing adjustment amount needs to be reduced by the percentage that you used the car for personal use.
Businesses that correctly informed their insurer of their GST status when they took out the insurance don’t have to pay GST on insurance payout amounts and may be entitled to GST credits for purchases made with those amounts. Small businesses may also be entitled to CGT concessions.