COVID-19 has caused major disruption to our customer’s businesses. Where a customer receives an amount under an insurance policy there are both income tax and GST considerations.
Income tax treatment of insurance payments
Any insurance or compensation amounts received are dealt with under section CG 5B of the Income Tax Act 2007. The amounts are income if they are:
- received for an interruption or impairment of business activities resulting from an event
- and attributable to a loss of income that the business would have otherwise derived.
The income can be allocated to the later of:
- the income year that the replaced income relates to
- or the year in which the amount is received or can be reasonably estimated.
In practical terms this means that loss of income insurance is taxable, but if received prior to 31 March 2020 it can be spread if it relates to income that would have been derived after 31 March (the 2021 year).
GST treatment of insurance payments
Receipts of insurance for loss of income are deemed to be in the course or furtherance of a taxable activity and are therefore subject to GST (section 5(13) Goods and Services Tax Act 1985).