For more than three months, much of Australia has been devastated by bushfires. Further, much of the country also continues to be devastated by ongoing drought. As a consequence, many individuals and businesses may receive assistance from the Government, insurance, or other sources.
Sam Comer, Senior Tax Consultant from Boyce Chartered Accountants has reviewed the potential tax consequences of this assistance. The effects will vary depending on why the payment was made, and whether there is any concessional tax treatment available.
Government disaster recovery payments
Australia Government Disaster Recovery Payment (DRP)
DRP payments are treated as exempt income. You therefore won’t need to pay tax on these amounts. However the payments will reduce any carried forward income tax losses you may have.
Disaster Recovery Allowance (DRA) and Natural Disaster Relief and Recovery Arrangements (NDRRA)
DRA and NDRRA payments are generally taxable, unless the Government declares payments in relation to a specific natural disaster as being exempt income. Where a payment is exempt, you won’t need to pay tax on the payment, but the payment will reduce any carried forward income tax losses you may have.
Other government recovery payments
The tax treatment of other various government recovery payments will depend on the nature of those payments, and whether the Government chooses to treat certain payments for certain disasters as being exempt from tax.
Receipts from private funds, charitable groups or crowdfunding platforms
The tax consequences of receipts from private funds, charitable groups or crowdfunding platforms will depend on what the payments are intended for. If the payments are intended to fund business expenses (e.g. fodder), the payments will be assessable income to you. However, if you spend those payments on additional business expenses, it is unlikely there will be any net effect on your tax position. For example, if you receive $10,000 to help cover fodder costs, and you immediately spend that $10,000 on additional fodder, the total net additional income will be nil.
If the receipts are for non-business purposes (e.g. food and essentials), the payments will not be taxable.
Gifts or assistance from your family and friends designed to assist you with the daily essentials are not taxable.
The tax treatment of insurance payments will depend on what the payout is in relation to, and whether there are any tax concessions available. Please note the below list is not comprehensive.
Any insurance payment received that relates to damage or destruction of your main residence is generally not taxable.
However, if you use your house for income-producing purposes (for example, part of your home is used for a home business), you may realise a capital gain on the receipt of insurance proceeds, similar to how you would for most other CGT assets.
Other CGT assets
Generally where you receive an insurance payment in relation to a CGT asset being destroyed, you will have a CGT event. Other CGT assets that you may be making a claim for include commercial premises or rental properties, to name a few.
If you make a capital gain, CGT rollover relief may be available. Generally, in order for relief to be available you need to spend the insurance proceeds received on either a replacement asset or on repairing or restoring the destroyed asset, within the specified timeframe. If you don’t fully spend the proceeds received, only partial rollover will be available.
The conditions and consequences for accessing the CGT rollover relief are complicated. We recommend that you seek specialist advice if you believe the rollover relief may be relevant to you.
Insurance payouts received for personal use assets are generally not taxable, where the asset cost less than $10,000 ($500 if the asset was a collectable).
Any insurance proceeds for trading stock will generally be treated as assessable income.
You may be entitled to spread any insurance proceeds received for the loss of livestock or trees held as assets of a primary production business over five years.
Where a depreciating asset is destroyed and you receive insurance proceeds for that asset, for tax purposes you are effectively treated as having sold that asset for tax purposes. Any insurance proceeds received for a depreciating asset will effectively be treated as the termination value (i.e. sale price) of that asset when it is destroyed. Depending on the written down value of the asset at the time it is destroyed and whether you are using small business pooling or not, you may have a profit or loss on the destruction of the asset that you will need to include in your taxable income.
Replacement rollover relief may be available where you use the proceeds to acquire a replacement asset and the various conditions for accessing the rollover relief are satisfied. If the rollover relief is available, you can apply any profit on the destruction of an asset against the cost base of the replacement asset. Again, we recommend that you seek further advice in relation to the rollover relief if you believe it is applicable to you.
If you have claimed tax deductions for your car at some point using the one-third actual expenses or log-book method in the past, you will need to consider the tax implications if you receive insurance proceeds in relation to damage to the car.
Other insurance receipts
If you receive insurance proceeds and those proceeds relate to an expense you previously claimed a tax deduction for (it doesn’t matter if you claimed the amount in one year or over many years), you will need to include the proceeds in your assessable income as an assessable recoupment (to the extent that you have previously claimed a deduction).
GST on insurance payouts
Generally, if you advise your insurer what proportion of your premium is for business purposes (ie what percentage of the GST on the premium you can claim); you won’t have to pay GST on any insurance payout under that policy. However, if you don’t advise your insurer, or you tell them the wrong percentage, a pro rata amount of GST will be payable. It is therefore very important that you take the time to inform your insurer the correct proportion of the GST on your premium you can claim.
The above advice is general in nature, is based on Boyce Chartered Accountant’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time. Boyce recommends getting in contact with your appropriate advisor to assist in what information is applicable to your circumstance and gain access to the appropriate support and funding.
Boyce Chartered Accountants is one of Australia’s top regional accounting firms located across five centres in NSW and provides accountancy and advisory services to clients across the country. Their five offices are located in Cooma, Goulburn, Dubbo, Moree and Wagga Wagga.
For more information, please visit the Boyce Chartered Accountants’ website.