Do I Get Taxed on an Insurance Payout? What You Need to Know
Australia has had its fair share of these unfortunate events in recent years when it comes to natural disasters. From floods to drought, and last year, the bushfires, this has increased the count of insurance claims as people seek financial assistance.
Seeing as an insurance payout helps cover damages, many people think that these aren't taxable; sadly, it's not always true. To put it simply, insurance payouts for destroyed personal items are typically not taxed, but if you have a home that produces income, then that's a different story.
Besides having a home as a source of income, the rules also change when you have assets that cost more than $10,000 or if the item is a collectible, priced at $500 or more. So when the proceeds appreciate in value, then you may end up paying taxes for it.
Like any tax-related issue, this can be quite overwhelming. That's why it's a good idea to work with an experienced accountant to see what your insurance covers and if you need to pay taxes for your damaged items.
When is My Insurance Payout Taxable?
Trading Stock, Depreciating Assets, and Business Premises
When you've had damaged or destroyed trading stock in your business, know that the insurance payout for this is taxable. For instance, insurance claims submitted during the lockdown due to spoiled perishable stock include business tax returns. The reason these stocks are taxed is that it is a business expense.
If your property is damaged and insurance covers repairs, the payout you receive is taxed as income. When the premises are destroyed or damaged, the insurance company will decide whether it's taxable gain or loss. On depreciating assets like machinery, if your payout exceeds the item's value, then it's included in the business's assets.
Since rental properties are income-producing assets, typically, the costs of insurance policies related to this asset would be claimed as an expense. So if you receive a payout for this rental property due to a disaster, then you'll have to include this amount in your tax return.
These insurance payouts may include loss of rental income, replacements and repairs of destroyed assets, or money you receive from a relief fund. But essentially, it really depends on what the payout is for, how the insurance is used, and if your property was vacant or currently rented out.
It's recommended that you speak to a reliable accountant when dealing with insurance payout taxes to understand if you're paying the right amount to the ATO.
The Bottom Line: Preparation and Planning is Key to Minimize Insurance Payouts
The more that you earn, the more taxes you have to pay; that's the normal rule in life. But truly, the goal here is not to pay more taxes to the ATO than you legally have to, especially when you're seeking financial assistance through an insurance payout.
Working with a credible accountant and preparing all documents and financial reports when getting an insurance claim is crucial. This way, you'll get to cover all damages and losses and be sure that you're paying the right taxes, decreasing any hassle and unnecessary fees and costs.
How Can New Wave Accounting Help You?
When dealing with your business's insurance, taxes, and finances, things can get pretty overwhelming. That's why it's best to work with an efficient team to handle your money woes.
New Wave Accounting handles one of the best accountants in the Gold Coast, so get in touch with us for all your bookkeeping and accounting needs. Check out our services and learn more about how we can help you today!