Private ruling: Rental property income
Published: June 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is your share of the insurance proceeds paid to cover the cost of repairs to your rental property included in your assessable income in the financial year that the related repair expenditure is claimed as a deduction? | A1: Yes. | Q2: Is your share of the insurance proceeds paid to cover the cost of depreciating assets assessable income? | A2: Yes. | Q3: Is your share of the insurance proceeds paid to cover the cost of reconstructing the capital works that were destroyed included in your assessable income? | A3: No.


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 20-20 | Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 subsection 40-300(2) | Income Tax Assessment Act 1997 section 43-10 | Income Tax Assessment Act 1997 section 43-40

Reasons for decision: Detailed Reasoning - Insurance proceeds and repairs: An amount received by way of insurance is an assessable recoupment if it is paid to cover the cost of a deductible expense and the deduction can be claimed in the current year or in an earlier financial year (subsection 20-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997)). [Current year means the financial year for which you are working out your assessable income and deductions]. The cost of repairs to premises used for income producing purposes is deductible providing the expenditure is not of a capital nature (section 25-10 of the ITAA 1997). You are considered to have incurred deductible repair expenditure when the repair work was carried out, and as such, you are entitled to a deduction for your share of the cost of repairs to your rental property. As you are entitled to a deduction for your share of the repair expenditure in the 2012-13 financial year, and you received an amount of insurance to cover the cost of this expenditure, the insurance amount received to cover this expenditure is an assessable recoupment in the 2012-13 financial year. | Detailed Reasoning - Insurance proceeds and depreciating assets: The insurance proceeds you received to compensate you for the cost of replacing destroyed depreciating assets, is not income from rendering personal services, income from property or income from carrying on a business. The payment was also a once and for all payment and therefore does not have an element of recurrence or regularity. Accordingly, the insurance proceeds received as compensation for the destruction of depreciating assets is not assessable income under section 6-5 of the ITAA 1997. Your assessable income also includes statutory income amounts which are not ordinary income but are included in assessable income by provisions about assessable income (section 6-10 of the ITAA 1997). As noted above, 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 (subdivision 20-A of the ITAA 1997). However, if a balancing adjustment is required for property on which you incurred a loss or outgoing, no part of the termination value of the property is an amount you receive as recoupment of the loss or outgoing (subsection 20-25(5) of the ITAA 1997). The termination value of a depreciating asset that is lost or destroyed is the amount or value received or receivable under an insurance policy or otherwise for the loss or destruction (item 8 in the table in subsection 40-300(2) of the ITAA 1997). As no balancing adjustment was required because the written down value of the depreciating assets was nil, the insurance proceeds you received for the destruction of your depreciating assets are an assessable recoupment. | Detailed Reasoning - Insurance proceeds and destroyed capital works: The insurance proceeds you received to compensate you for the loss of capital works is not income from rendering personal services, income from property or income from carrying on a business. The payment is also a once and for all payment and therefore does not have an element of recurrence or regularity. Additionally, the insurance proceeds were received for the loss of capital works and, therefore, take on the character of those capital works. As such, the payment is capital in nature. Accordingly, the insurance proceeds you received to compensate you for the loss of capital works is not assessable income under section 6-5 of the ITAA 1997. As noted above, your assessable income also includes statutory income amounts which are not ordinary income but are included in assessable income by provisions about assessable income (section 6-10 of the ITAA 1997). Under paragraph 20-20(2)(b) of the ITAA 1997, recoupment of a loss or outgoing is only an assessable recoupment if the taxpayer can deduct an amount for the loss or outgoing for the current year, or has deducted or is able to deduct an amount for it for an earlier financial year, under any provision of the ITAA 1997. The phrase 'for the loss or outgoing' in paragraph 20-20(2)(b) of the ITAA 1997 requires a connection between the deduction and the loss or outgoing for which the taxpayer had recouped (paragraph 11 of Taxation Determination TD 2006/31). In your case, the relevant loss or outgoing which has been recouped is the destruction of the capital works. The 'loss or outgoing' referred to in paragraph 20-20(2)(b) of the ITAA 1997 is not limited to an amount expended or paid by you. As in the present case, it extends to a loss incurred as a result of the destruction of an asset. Whilst you may have been able to deduct an amount in relation to the original construction of the capital works under section 43-40 of the ITAA 1997, or in relation to the construction of replacement capital works under section 43-10 of the ITAA 1997, these are not deductions for the loss referred to in paragraph 20-20(2)(b) of the ITAA 1997. No deduction is available for the loss of the capital works. Accordingly, as you cannot deduct an amount for the loss or outgoing for which the insurance proceeds are received as recoupment, the insurance proceeds received for the destruction of the capital works are not an assessable recoupment under section 20-20 of the ITAA 1997. As the insurance proceeds paid to cover the cost of reconstructing the capital works that were destroyed in the natural disaster are not ordinary or statutory income they are not included in your assessable income under any provision of the ITAA 1997.

Relevant facts: Your rental property was damaged by a natural disaster. | In the aftermath of the disaster, there were lengthy delays in repair work. | Your insurance company offered you a payout equivalent to the amount of one of the insurance quotes in lieu of waiting to have the repairs completed by builders. | You accepted the insurance payout. | The work needed to restore the property was a new kitchen, bathroom, laundry, oven, carpet, blinds and a lawn locker. | The effective life of the existing depreciable assets had been extinguished prior to the disaster. | The total cost of repairing the property was substantially less that the payout you received. | The reduced costs to you were largely because there was no labour, transport or other associated costs as you were assisted by friends and family.