ASSESSABLE INCOME:

COMPENSATION FOR BUSINESS

LOSSES

1
Compensation for business losses
• Follows the replacement principle where:
– Income: replacement of an amount that would have been
ordinary income (ie, from the normal course of business or
some isolated and extraordinary transactions).
– Capital: amounts for the loss of capital or capital item.

What type of compensation

has the business received?

Compensation for Compensation for Compensation by

breach of loss of an asset way of insurance
contract of the business proceeds

• GST consequences also need to be considered. See

Chapter 25 and Ruling GSTR 2001/4 (not examinable)
Compensation for business losses:
Compensation for breach of contract
• Application of the replacement principle to payments received
for the breach / cancellation of contracts:
Income Capital
• Generally income where • Breach of contract that goes
compensation is for the: to the fundamental structure
• Breach of an ordinary of business:
trading contract • Usually termination of a
• Breach of contract for the contract resulting in
sale of goods cessation of the business
• Loss of anticipated profits as a whole

• See:
• Heavy Minerals Pty Ltd v
FCT (1966)
• Allied Mills Industries Pty
Ltd v FCT (1989)
• See:
• California Oil Products Ltd
(in Liq) v FCT (1934)
Compensation for business losses:
Compensation for loss of a business asset
Loss of depreciable assets
• Compensation received for the loss or damage to a
depreciable asset falls under Div 40 capital allowances
– Disposal triggers a balancing adjustment.
Loss of trading stock
• Compensation for loss of trading stock is ordinary income s 6-
5, or if not ordinary income, assessable by s 70-115.
Compensation for business losses:
Compensation for loss of a business asset
Loss of capital assets
• Characterisation depends on extent of damage to the asset:
– Permanently destroyed/disabled: generally capital in nature
(see, Glenboig Union Fireclay v IR Commissioner (1922))
– Temporarily disabled: generally income in nature (see,
Ensign Shipping Co Ltd (1928)).
Compensation for business losses:
Compensation by way of insurance
• Statutory inclusion (s 15-30)
– Amounts received by way of insurance or indemnity are still
assessable if the lost amount would have been included in
assessable income but not as ordinary income.