Is insurance payout considered taxable income?

[BusyLizzy]

Hi, I'm not sure of this is a silly question or not, but as I sit here doing my accounts, I was wondering how to classify an insurance payout that. The payout was to cover damages, cleaning and loss of rent. Is it a 'negative' insurance expense, or is it income? As income, is it taxable? (I would think not... but who know how IRD thinks!)

[xris]

Good question. A similar question would relate to exemplorary damages awarded at the TT. Is it income? How should it be accounted for?

My opinion on the insurance question is that I await the opinion of others.

xris

[roseneath_rat]

I would class the 'loss of rent' portion as earnings as it replaces an obvious source of revenue.

In terms of the funds for repairs, this would cancel out with the actual repairs completed. ($1,000 repairs claimed as expense, $1,000 insurance payment claimed as revenue). Gets a bit more complicated if you are performing the labour yourself.

[Monid]

I would have thought yes was the answer. For the reason that Roseneath Rat gives namely that if it isn't income you end up with a non-balanced sheet since you will claim the repairs as expenses but not the money you get to make those repairs.

But that is a decidedly non-expert opinion

Cheers
David

[BusyLizzy]

Presumably I would need to provide a breakdown of the claim to the accountant then. This will be interesting as the insurance company paid out a fixed $ amount but without providing a breakdown of what expenses they actually paid out on. And the total $ doesn't add up to the expenses I claimed in the first place.

[roseneath_rat]

Busy if that is the case I would strongly recommend that you approach the insurance company and get a summary of how they calculated the sum.

In situations like this the actual repairs can exceed the amount that the insurance company pays out so you could be left in a deficit position. This would be more common with 'indemnity' type of policies that pay the market value of your property rather than replacement value.

I had a collegue recently describe what happened to them earlier this year:

* House in Wellington, owner occupied upstairs, rented flat downstairs
* Small fire in downstairs premises, causing damage including smoke damage in addition to actual burn damage
* Insurance company appointed an assessor to claim
* Cash offer made to owner in lieu of completing repairs
* Owner requested breakdown of repairs by cost
* Insurance company unable to do this
* Owner counter-offered with new sum (approx 60% higher than initial offer).
* Offer accepted by insurance company & paid

[Gatekeeper]

I would code an insurance claim to "other income", to keep it totally separate from insurance expenses.

[Julian]

As I see it the payout minus the expenses fixing the place is income.
Julian

[JohnL]

If its a large job it could appear more on the balance sheet side of things, within the depreciation schedule ie treated as a capital improvement that insurance payout paid for? A very interesting question.

John

[Philmc1]

If it is to cover repairs you have had done which will show in repairs and maintenance, then just code it as r&m and when the figure is entered at the end of the year it goes in as a negative amount offsetting what you have paid out. If it's more than what you have paid out then it will need to be split. Whatever way the bottom line still ends up the same.

cheers
Phil