Question

Cheryl owned a warehouse destroyed by a fire. Her insurance company paid her compensation of $500,000 for the loss.To support the analysis in your answers refer where appropriate to the ITAA 1936, ITAA 1997, Tax Rulings and/or case law

Answer 1

Insurance claim received by a tax payer is proceeds received by the tax payer thus, under the Income Tax Assessment Act, 1936 and Income Tax Assessment Act, 1997 (ITAA, 1936 and ITAA, 1997). Insurance claim received is a kind of compensation received by a person for the loss suffered due to an accident. In this case Cheryl has received $500,000 from insurance company for the destruction of her warehouse due to a fire. In this case the portion of insurance claim that relate to the ordinary assessable income of Cheryl shall be treated as ordinary income under s6-5 of ITAA, 1997. Only the portion of the insurance claim that covers the loss of ordinary income shall be treated as ordinary income under the section and shall be taxable. Since, in this case no indication has provided to ascertain the portion of total insurance claim that relates to the ordinary income thus, it would not be possible to ascertain the taxable portion of the insurance claim.

Thus, the insurance claim shall be segregated into three parts, the part that covers the ordinary income, the part that covers the loss of depreciable assets present in the warehouse at the time of the fire and the part that covers the loss the capital assets. In respect of capital asset portion proceed received shall be considered to calculate capital gain. Only the portion of insurance claim that covers the loss of ordinary income shall be treated as assessable income under s 6-5 of ITAA, 1997.