Private ruling: CGT - main residence
Published: September 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the insurance proceed you received for the loss of your house assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is the capital gain or loss that occurs as a result of the insurance proceeds you received disregarded under the main residence exemption? | A2: Yes.

Relevant facts and circumstances: You purchased a property in Month 20XX which you used as your primary place of residence. You lived in that property until Month 20XX. You relocated and the property was rented out from Month 20XX until the Month 20XX by various tenants. Whilst you were away you rented out a property and continued to treat your property as your main residence. Once the tenants vacated you decided you wanted to sell the property. On the Month 20XX the property was destroyed. You received compensation for damages from your insurance company. You received $X to pay off your mortgage. You received an additional $X paid directly to you. You have retained the land and unsure of what you will do with the land in the future.

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 10-5 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Section 104-20

Reasons for decision: Summary: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources 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. Other characteristics of income that have evolved from case law include receipts that: (a) are earned (b) are expected (c) are relied upon (d) have an element of periodicity, recurrence or regularity In this case, the payment received was not earned as it did not relate to services performed. The payment is also a one off payment and thus it does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the damage and destruction of a property, rather than from a relationship to personal services performed. Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income. Section 10-5 of the ITAA 1997 lists those provisions. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains. Capital gains tax (CGT) is the tax you pay on any capital gain you make and include on your annual income tax return. You make a capital gain or capital loss if and only if a CGT event happens (section 102-20 of the ITAA 1997). CGT event C1 happens if a CGT asset you own is lost or destroyed (section 104-20 of the ITAA 1997).The time of the event is when you first receive compensation for the loss or destruction. The insurance proceeds you receive are the sale proceeds for the asset. You make a capital gain if the compensation is more than the asset's cost base, or you make a capital loss if the compensation is less than the asset's reduced cost base. In your case, you have chosen to treat the property as your main residence and are therefore entitled to disregard any capital gain or capital loss under section 118-110 of the ITAA 1997 made as a result of the C1 event.