When you need to pay CGT for compensation payments

Payments related to permanent damage or permanent reduction of an asset's value, including an insurance payout for a rental property's major damage, will be treated as a recoupment of the asset's acquisition cost. The cost base and reduced cost base are reduced by the compensation amount.

When a compensation payment is not related to an underlying asset but compensates for the disposal of the right to compensation, the capital gain or loss is the difference between the compensation amount and the incidental costs.

Compensation given to a taxpayer has no CGT liabilities if he acquired the underlying asset before 20 September 1985 or if the asset is CGT exempt. A temporary fluctuation in the value of a goodwill is not considered a permanent damage or reduction in the value of the goodwill.

PS.

Those who make a capital gain from a compensation of a loss, destruction or compulsory acquisition of a capital gain tax asset may defer it. For more information about capital gains tax in Australia, contact a Specialist to discuss your particular circumstances.

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