Insurance payout treated as income

If your investment property has suffered damage, perhaps due to fire, flood or other natural disaster, any insurance payouts will need to be included as income in your tax return. This includes payouts for loss of rental income, repairs and replacements. You may be able to claim a deduction for some of the property repair costs.

If the money is spent on repairs, it will be deductible but if the money is spent on improvements, the outlay will be capital and added to the CGT cost base of the property (or you may be able to claim capital allowances or capital works deductions).

The distinction between a repair and an improvement can be subtle so it’s important to get advice from a tax professional. A repair restores an item; an improvement goes beyond restoration and improves function. For example, replacing part of a wooden fence that burnt down with a new wooden fence would count as a deductible repair but replacing a wooden fence with a new metal fence would count as a capital improvement because the quality and robustness of the fence has been improved.

Where your investment property is completely destroyed, insurance payouts are treated differently. The total destruction of your property gives rise to a CGT event. The amount of insurance proceeds received is treated the same way as proceeds arising on sale, meaning you need to work out your capital gain or loss and include it in your tax return.