Do insurance payouts have tax consequences? Yes, if they relate to your business
Australia has been battered by a combination of fire and flooding in the past few months, so there’s little wonder that the topic of insurance payouts is on everyone’s lips.
But what’s perhaps most concerning is that not everyone knows that insurance payments may have 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 different tax consequences depending on what the insurance payout is for.
As people try to piece their lives together in the aftermath of the recent fires and floods, insurance payouts help to rebuild homes and replace damaged or destroyed items.
However, you should be aware that if you receive an insurance payout in relation to your business, home business or rental property, there may be tax consequences.
Duplicate the above container for more 2 column sections OR Duplicate the below container for 1 column text only sections. (DON’T FORGET TO DELETE THIS CONTAINER)
Insurance payouts on personal property and your home
The good news is that insurance payouts relating to personal property (including household items, furniture, electrical goods, private boats and cars) and your main residence are not taxed.
Insurance payouts on home office/home business
However, 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.
Insurance payouts on rental property
Similarly, if you have a rental property or have rented out a room in 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.
Insurance payouts on destroyed business premises
For example, an insurance payout to compensate for destroyed business premises would have CGT consequences. If you’re a small business, you may be entitled to CGT concessions. Any insurance amount you receive for the repair of damage to business premises will need to be included in your assessable income.
Insurance payouts on damaged or destroyed trading stock
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 (e.g. office equipment), you will need to calculate the difference between the amount received from insurance and the book value of the asset at the time it was destroyed. Any excess would need to be included as assessable income while a deduction can be claimed for any losses.
Insurance payouts on low value depreciating assets
For depreciating assets in the low-value pool, you will need to reduce the closing pool balance by the amount of an 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.
Insurance payouts on work cars
The tax treatment of insurance payments for work cars is like the treatment of depreciating assets described above, except if you used the logbook method for claiming car expenses. For those taxpayers who used the logbook method, the balancing adjustment amount needs to be reduced by the percentage that you used the car for personal use.
GST consequences of an insurance payout
Businesses that correctly informed their insurer of their GST status when they took out the insurance will not have to pay GST on the insurance payment and may be entitled to GST credits for purchases that are made with the payment.
Received an insurance payment and not sure what to do?
If you’ve received or are in the process of receiving an insurance payment and are not sure how to treat it for tax purposes, we can help. We can also help you take advantage of all available concessions to ensure that you’re not paying too much tax.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.