Insurance Claims and Tax

Getting the Tax Right

Many Canterbury business owners have or are making insurance claims as a result of the earth moving.
Here is a guide to the tax treatment of insurance payments.

• Tax treatment will depend on the purpose of the insurance policy. The insurance will be taxable if it compensates or replaces revenue items. E.g. loss of profits or business interruption insurance. Generally the insurance will not be taxable if the insurance is to compensate or replace a capital asset.

• A lump sum payment covering several claims may need to be apportioned. Compensation for the loss of land will generally be capital (non-taxable), unless you are taxpayer who is in the business of dealing in property (then taxable).

• Insurance payments in respect of irreparably damaged property are treated as a deemed sale – amounts received above adjusted tax value are generally taxable. A compensation payment from the Earthquake Commission in respect of damage to residential property is generally not taxable.

• Repairs to paddocks that are not capital are deductible (s.DA 1(1)(b)(i)). Repairs that are capital are not deductible.