Dessent and Commissioner of Taxation (Taxation)

[2021] AATA 1206

Dessent and Commissioner of Taxation (Taxation) [2021] AATA 1206 (11 May 2021)

Division:TAXATION AND COMMERCIAL DIVISION

File Number(s):      2020/4242, 2020/4243

Re:Mathew Leonard Dessent

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Mr Rob Reitano, Member

Date:11 May 2021

Place:Sydney

I affirm the decision under review.

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Mr Rob Reitano, Member         

CATCHWORDS

TAXATION – where applicant received insurance payment – whether insurance payment is treated as assessable recoupment under s 20-20 of the Income Tax Assessment Act 1997 (Cth) – decision under review affirmed

LEGISLATION

Income Tax Assessment Act 1997 (Cth) ss 20-20, 20-25, 20-40

REASONS FOR DECISION

Mr Rob Reitano, Member

11 May 2021

1. To some the notion that an insurance payment paid to compensate for loss occasioned to an income generating asset might in some circumstances be treated in the same way as income for tax purposes seems inherently unfair, but that is exactly what s 20-20 of the Income Tax Assessment Act 1997 (Cth) (ITAA) provides.

   BACKGROUND

2. In early 2013 Mathew Dessent (Mr Dessent) bought a property in High Street in Maitland (property). He rented part of the property to make money which was used to run a café by Mr Dessent’s tenant. The tenant paid rent of about $24,000 each year.

3. In early 2015 Mr Dessent prudently took out insurance over the property which insured him for the risk associated with damage to the property. The policy covered damage to the property, interruption to business, glass and broadform liability.

4. In April 2015 the property was damaged because of a storm and a subsequent flood. Mr Dessent made a claim on his insurance policy.

5. In the tax year ending 30 June 2016 Mr Dessent received an insurance payment of about $24,000 which was in respect of lost rental income that he otherwise would have been paid to him by his tenant but was not because the property presumably could not in that period have been used as a café. He declared that amount as income. As the reasons below demonstrate it probably was not income but an assessable recoupment. I do not need to deal with that here as it is not subject to this review.

6. In November 2016 Mr Dessent received another insurance payment of $250,000 which was in consideration of Mr Dessent releasing the insurer from all liability past, present and future under the insurance policy. The money paid to Mr Dessent was described in the recitals to a Deed between Mr Dessent and his insurer as being for loss of rent and any other benefits under the policy of insurance. Mr Dessent says that the money paid to him under the policy was not income or rent and was not used to ‘enable him to repair his property.’

7. On 28 September 2018 Mr Dessent lodged his income tax returns for the income tax years 2017 and 2018. He did not, perhaps unsurprisingly, in either return identify the amount of $250,000 as income or otherwise identify or report receipt of the amount to the Commissioner. He did, however, claim an amount of $62,308 for repairs to the property in the 2017 income tax year and $69,809 for repairs to the property in the 2018 income tax year.

8. On 13 June 2019, following an income tax audit some months earlier the Commissioner issued Notices of Amended Assessment in respect of both years which increased Mr Dessent’s taxable income in both years by the amounts he had claimed as expenses in respect of the property for both years. This was because the Commissioner regarded the insurance payments received by Mr Dessent in both years as an ‘assessable recoupment’ under s 20-20 of the ITAA.

9. On 18 October 2019 Mr Dessent objected to the Commissioner’s Notices of Amendment Assessment. On 13 July 2020 the Commissioner decided to disallow the objections.

10. The issue is whether the amount of $250,000 received by Mr Dessent is an assessable recoupment under s 20-20(2) of the ITAA.

    ‘ASSESSABLE RECOUPMENTS’

11. Section 20-20 of the ITAA provides:

    Exclusion

    (1)  An amount is not an assessable recoupment to the extent that it is *ordinary income, or it is *statutory income because of a provision outside this Subdivision.

    Insurance or indemnity

    (2)  An amount you have received as *recoupment of a loss or outgoing is an assessable recoupment if:

    (a)  you received the amount by way of insurance or indemnity; and

    (b)  you can deduct an amount for the loss or outgoing for the *current year, or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act.

12. Section 20-25(1) says that a recoupment of a loss or outgoing includes: “any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described…”. [underlining added]

13. Section 20-40(1) has the effect of carrying forward the treatment of insurance payments in subsequent years as assessable recoupments so long as the full amount has not been applied as deductions in previous years.

    CONSIDERATION

14. There are two limbs to the criteria for an assessable recoupment: first, was the amount received by way of insurance and, second, can or could an amount be deducted under the ITAA for that loss or outgoing for the current year or has been or could be deducted for an earlier year. I will deal with each separately.

15. So far as the first limb of the criteria is concerned, the amount paid to Mr Dessent was paid by way of insurance. The amount was paid by an insurer. It would not have been paid if there was not a policy of insurance that covered the damage that was done to the property and occasioned the loss. The policy insured Mr Dessent in respect of the very loss that was associated with the damage to his property. He received the payment from the insurer in settlement of his claim under the policy for loss of rent and other benefits. Those benefits were all consequent upon the occasioning of loss. The first limb of the definition of assessable recoupment is satisfied.

16. As to the second limb it is important to keep in mind that it does not matter for the purpose of s 20-20 whether the actual money paid under the policy of insurance was actually used for the purpose of the repairs. Section 20-20(2)(b) refers only to the existence of ‘an’ allowable deduction for the loss or outgoing in any year of income and not to the fact that the actual amount paid by the insurer was used for that purpose. The use of the definite article ‘an’, in the sub-section is significant. There is no doubt that cost of repairs undertaken by Mr Dessent to the property in the following years under the ITAA were deductible in each of the ‘current years’. The fact that he did seek to have those amounts treated as deductions and that they were allowed by the Commissioner demonstrates so much. There is no doubt that amounts for repairs in future years would also be deductions.

17. Because both limbs of s 20-20(2) are satisfied it follows that the amount of $250,000 is an assessable recoupment for the purpose of s 20-20 of the ITAA. The Commissioner was right to treat it that way.

18. I should add, although it is strictly irrelevant, that the purpose of the provisions does appear to be directed to ensuring that a person is not effectively compensated twice for the same loss: once by an insurer and once by allowing deductions to be made against income for taxation purposes. Having received compensation for the loss he incurred from the insurer there is, so the legislative purpose would make clear, no sound reason why Mr Dessent should again be compensated for that loss by being able to deduct expenses for repairs that were the very reason for the insurance payment he received.

    CONCLUSION

19. I affirm the decision under review.

I certify that the preceding 19 (nineteen) paragraphs are a true copy of the reasons for the decision herein of Mr Rob Reitano, Member

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Associate

Dated: 11 May 2021

Date of hearing:	11 May 2021
Applicant:	Self-represented
Solicitors for the Respondent:	Mr T Ahmed, Commissioner of Taxation