As I talk to business owners I am dismayed at the radically different treatment businesses have received from their insurance companies in relation to storm damage claims. Even though it was eventually decided we did not have a flood, but rather storm damage, numbers of insurance companies have still not paid out their customers. When you look at the tax implications, those that received no insurance or part insurance are even further disadvantaged.
The tax treatment of expenses and monies received in relation to the storm has a number of complexities to it. For example, money received by way of the $25,000 Government grants is tax free. Whereas, insurance proceeds are considered taxable income, except where it is related to substantial damage.
Where businesses have had substantial damage to their buildings, it has given them an opportunity to update and improve their premises. An improvement is capital expenditure and not tax deductible. If your building has been substantially damaged special provisions allow for part of it to be treated as a capital loss. A capital loss is only of use though if it can be written off against a future capital gain. This effectively means you get no immediate tax benefit for restoring your building unless you received an insurance payout.
If you received insurance for your building that was substantially damaged then the insurance is offset against your capital loss. This effectively means you receive the insurance monies tax free.
In practice, the distinction between repairs and improvements can be a fine line. The tax difference, though, is poles apart. A repair will give you a full tax deduction. A repair is defined as bringing something back to its former appearance, form, state of condition without changing its character. By contrast an improvement will only give you a 2.5% deduction. An improvement is defined as bringing a thing into a more valuable or desirable form or condition and enhancing it.
Where your equipment and other depreciable assets have been destroyed and replaced there are two deductions available to you. Firstly you can claim a deduction for the written down value of the equipment. Secondly, you can claim a depreciation deduction for the new equipment.
Another twist involves those generous people who helped out those that suffered loss. Those trades’ people, for example, that supplied materials and equipment are technically not allowed a deduction as they earned no income from that expenditure.
Not only has the storm damage caused heartache for many people they may also suffer further headaches handling the tax and insurance implications. However, it is something your accountant will be able to guide you through.
Published by Toowoomba Chronicle www.thechronicle.com.au on Saturday 19 March 2011.
