Private ruling: CGT - disposal of asset - insurance payout
Published: June 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 01 July 2011

Ruling: Q1: Did a Capital Gains Tax (CGT) event C1 occur when your received the insurance payout for your rental property? | A1: Yes | Q2: Will a roll-over be available under Subdivision 124-B of the Income Tax Assessment Act 1997 in respect of any capital gain you make on the disposal of your rental property? | A2: Yes | Q3: If you fail to incur expenditure to acquire another CGT asset within the specified roll-over period, do you have to include the capital gain in your assessable income for the financial year that the CGT event occurred? | A3: Yes

Relevant facts and circumstances: You have owned a rental property for a number of years. Although not always tenanted, the property was available to be rented for the entire period of ownership. The property was damaged beyond repair. You received an insurance payout. You have incurred costs for demolition work carried out on your rental property. You still own the land. You have continued to incur rates expenses since the property became uninhabitable. You have not decided whether you will rebuild on the land, buy a rental property in a new location or simply payoff your loan with the insurance payout.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1, | Income Tax Assessment Act 1997 section 104-5, | Income Tax Assessment Act 1997 section 104-20, | Income Tax Assessment Act 1997 Subdivision 124-B, | Income Tax Assessment Act 1997 subsection 124-70(2) and | Income Tax Assessment Act 1997 section 124-75.

Reasons for decision: Summary: A capital gain or loss is the difference between what it cost you to get a CGT asset and what you received when you disposed of it. However you can only make a capital gain or loss if a CGT event happens, a summary of these is listed in section 104-5. A CGT event C1 happens if a CGT asset, or part of a CGT asset, you own is lost or destroyed. This event will take place when you first receive compensation for the loss or destruction; or if you receive no compensation - when the loss is discovered or the destruction occurred (section 104-20). In your case, you received an insurance payout for your rental property which was destroyed beyond repair. Accordingly a CGT event C1 occurred at this time as you are considered to have disposed of your rental property when you first received your insurance payout. Cost base When there is only a partial disposal (or in this case, destruction) of a CGT asset, then the cost base needs to be apportioned between the part that has been destroyed and the part that remains (section 112-30). In order to calculate that portion of the cost base that relates to the part of the asset that was destroyed, the following calculation is used: Cost base of the whole asset multiplied by Capital proceeds for the CGT event happening to the part divided by Those capital proceeds plus the market value of the remainder of the asset This is the part of your original cost base that relates to the dwelling that was destroyed. You would use this amount to calculate the capital gain you have made from the proceeds received from the insurance claim. The remainder of the cost base is the amount attributable to that part of the asset that was not affected by the event, in your case the land. | Detailed Reasoning - Question 2 & 3: When you make a capital gain on the disposal of a CGT asset you are required to pay tax on that amount. Whilst this tax is generally referred to as capital gains tax it is not a separate tax, just part of your income tax. In respect of a capital gain as a result of a CGT asset being destroyed, you may be able to choose for that capital gain to be rolled-over until the occurrence of a future event. Subsection 124-70(2) specifies that you may qualify for that roll-over if you receive money or another CGT asset under an insurance policy. To qualify for the roll-over you must incur expenditure in acquiring another CGT asset and at least some of the expenditure must be incurred: · no earlier than one year, or within such further time as the Commissioner allows in special circumstances, before the event happens; or · no later than one year, or within such further time as the Commissioner allows in special circumstances, after the end of the income year in which the event happens. Therefore if you incur expenditure to acquire another CGT asset within the periods specified above then any capital gains made from the disposal of your rental property can be rolled-over to the new CGT asset. However if expenditure on a replacement asset is not incurred within the specified period, then a capital gain or loss must be declared in the income year in which the insurance payment was received.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Reasons for decision: Note that all subsequent legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.