Business interruption insurance for a replacement property and capital contribution

Section YA 1 of the Income Tax Act 2007

Previously, if a person received a business interruption insurance payment for a replacement property to restart or continue their business operations, the payment was not recognised in the person's taxable income as it is of a capital nature. Also the person could claim full depreciation deductions for the cost of the replacement property even though they had not paid for the replacement property. Allowing the person to capitalise and claim full depreciation deductions for the total cost of the new replacement property was not consistent with the policy to only allow depreciation deductions for the cost of the property which is actually borne by the person.

Key feature

A business interruption insurance payment that relates to a purchase of a replacement property is now a capital contribution for the purposes of sections CG 8, DB 64 and EE 48.

Detailed analysis

The definition of "capital contribution" in section YA 1 of the Income Tax Act 2007, for the purposes of sections CG 8, DB 64 and EE 48, has been amended to include a business interruption insurance payment that relates to a purchase of a replacement property.

An amount will now be treated as a capital contribution if the amount:

• is paid by a person (other than in their capacity of settlor, partner or shareholder of the recipient) to a recipient under an agreement between them;
• is not income of the recipient, ignoring section CG 8;
• is paid, under the express terms and conditions of the agreement, as a contribution for depreciable property owned or to be acquired by the recipient; and
• if the agreement is a contract of insurance, indemnity or compensation, is paid in relation to an interruption or impairment of business activities.

A capital contribution, including the business interruption insurance payment that relates to a replacement property, is treated as income of the recipient under section CG 8 unless the recipient chooses to reduce the cost base of the replacement property under section DB 64.

Application date

This generic amendment applies for the 2011-12 and later income years.

There is a "savings" provision for people who filed returns before 28 August 2012, which is the date on which the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Bill was first considered by a Committee of the whole House.