Business interruption insurance: Timing of derivation

New section CG 5B of the Income Tax Act clarifies business interruption insurance and the timing of derivations. Applies from 4 Sep 2010.

Section CG 5B of the Income Tax Act 2007

New section CG 5B clarifies that amounts received under a business interruption insurance policy are generally derived in the income year in which the amount can be reasonably estimated.

Background

Business interruption insurance policies generally provide cover from losses resulting from a business interruption caused by an event, such as a fire or a natural disaster. Previously, it was not clear at law when amounts received under such a policy were derived. This lack of clarity was undesirable and could be problematic for taxpayers.

Application date

This clarification applies from 4 September 2010.

Detailed analysis

New section CG 5B is designed to apply when a person receives a payout under a business interruption insurance policy. It provides that any income arising from the payout is treated as allocated to the earlier of:

  • the income year in which the amount is received; or
  • the income year in which the amount is reasonably able to be estimated.

In some cases an insurer may make interim payments before a taxpayer;s total loss has been fully established. These interim payments are treated as allocated to the year in which they are received, even if the taxpayer;s total loss cannot yet be reasonably estimated.

Section CG 5B(2) provides that, for an insurance payout, the amount attributable to income that the taxpayer would have derived but for the event, is income of the taxpayer. This provision is meant to reflect the existing common law principle that insurance receipts that substitute for income are themselves income. Importantly, it is not intended that this section be interpreted that, if part of the insurance payment is not a substitute for income, it is not income. Existing common law principles for determining this should continue to apply.