Insurance and depreciation

Below are details of what insurance payments need to be included in your income tax and GST returns, and what to claim as an expense or include as income if you repair or replace depreciable assets.

• Insurance payments for trading stock
• Business interruption insurance
• Business income protection
• Personal accident insurance policies
• Compensation for loss of land
• Apportioning lump sum payments
• Insurance payments for depreciable assets
• Insurance payment exceeding cost of repairs
• Destroyed assets

Insurance payments for trading stock

Insurance payments you receive to repair or replace trading stock need to be shown as income in your GST and income tax returns.

Business interruption insurance

This insurance covers any income you lose if your business assets are lost or damaged. Some insurance policies may also cover you for extra costs you've had to keep your business operating (such as extra rent for temporary accommodation).

These payments need to be shown as income in your income tax and GST returns.

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Business income protection

Business income protection covers your loss of income if you temporarily can't work because of an injury. These payments need to be included as income in your GST and income tax returns.

Personal accident insurance policies

Any insurance payment or incapacity benefits you receive for a personal insurance policy don't need to be included as income in your personal or business income tax return.

Compensation for the loss of land

If you receive a payment for the loss of land (either as money or a land swap) you won't usually need to include this in your income tax return. However, if your business is dealing in property, subdivisions or land developments, you'll need to include the payment as income in your GST and income tax returns.

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Apportioning lump sum payments

If you receive a lump sum payment that covers several insurance claims, you'll need to apportion the amount between each claim to show what relates to capital assets (generally assets that last more than a year) and what relates to revenue assets (stock etc).

Insurance payments for depreciable assets

GST Insurance payments to repair or replace depreciable business assets have to be included in your GST return.

Income tax If you claim any of the repairs to these assets as an expense in your income tax return then you'll need to include the same amount of the insurance payment as income in your income tax return. If you receive the insurance payment after your tax year has ended, you include this amount as income in your return for the next tax year.

If the insurance payment is in excess of the cost of the repairs, you may have further income to return. Please refer to "Insurance payment exceeding cost of repairs"

If you improve the asset at the same time, you can't include the cost of any improvements as an expense. Improvements are a capital expense and you can't claim the whole cost of improvements in the tax year you make them. You may be able to spread (depreciate) the cost of these improvements over time. We recommend talking to your tax agent because it's not always clear whether the expenses are a repair or a capital improvement.

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Insurance payment exceeding cost of repairs

If you receive an insurance payment for more than the cost of repairs you'll need to deduct the excess from the adjusted tax value of that asset. If there's still an excess you'll need to include this as income in your return.

The adjusted tax value for the next year becomes this year's adjusted tax value, less the difference between the insurance payment and cost of repairs.

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Destroyed business assets

You need to do the same tax calculation for insurance payments you receive for destroyed assets that you'd do if you'd sold that asset. You may want to talk to your tax advisor about this. The calculation below is only done for assets that you depreciate (spread the capital cost of the asset over the time you use it).

1. Work out the adjusted tax value.
   • capital cost of the asset
   • less depreciation you've claimed
   • equals adjusted tax value
2. subtract the insurance payment from the adjusted tax value

If your insurance payment is less than the adjusted tax value, you'll have a 'loss on sale' this needs to be shown as a deduction in your income tax return If your insurance payment is more than the adjusted tax value, you'll have a 'gain on sale'.

You need to include as income in your income tax return the lesser of:

• the difference between the insurance payment and the adjusted tax value,
• the total amount of depreciation you've claimed

If your asset had business and private use, you'll need to apportion any loss or gain between business and private use.

If the asset was depreciated as part of a pool, the insurance payment will need to be deducted from the adjusted tax value of the pool before you calculate the depreciation for the year. If this adjustment results in a negative adjusted tax value at the end of an income year, you'll need to include this negative amount as income in your tax return for that income year.

 

Date published: 05 Jul 2011

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