Are disaster recovery grants and insurance payouts taxable?

When a recovery grant or an insurance payout finally lands, the natural instinct is to spend all of it on getting back to normal. The problem shows up months later, at tax time, when some of that money turns out to be income — and the cash to pay the tax has already gone into the rebuild.

This page sets out what the ATO says about disaster grants and payouts for businesses. It isn’t a substitute for your accountant, but it will help you ask the right questions early.

Are disaster grants taxable?

The ATO’s guidance on natural disaster support grants for business is direct. Some government disaster support grants are non-assessable non-exempt (NANE) — you don’t include them in your tax return and don’t pay tax on them — provided you satisfy the specified criteria. The ATO keeps a list of them.

The important part is the default: if you’ve received a government disaster support grant or payment that isn’t on the list, it’s assessable and must be included in your tax return in the year you receive it.

So the first question for any grant is simply: is it on the ATO’s NANE list?

Can you still claim deductions for what the grant pays for?

Yes. The ATO says the ordinary rules about deductions apply to expenses you pay using a business support grant. Its examples include buying replacement trading stock or new assets, and repairing business premises and fit-out.

That means a grant can be assessable income and the spending can also be deductible, which often reduces the net tax effect. Timing matters, though — the income and the deductions may land in different years.

How are insurance payouts taxed?

Payout for	ATO treatment
Lost or damaged trading stock	Assessable income. The lost stock itself flows through your year-end stock valuation.
Depreciating assets (equipment, vehicles)	Balancing adjustment: payout above book value is assessable; below book value, deduct the difference.
CGT assets (buildings, some property)	Payout used to work out a capital gain or loss; small business CGT concessions and a roll-over for destroyed assets may apply.
Business premises repairs	Payout is included in assessable income; repairs are generally deductible immediately, improvements are capital.

The ATO also notes you can claim the cost of disposing of damaged stock and of moving stock to protect it from a disaster, and that an end-of-year stocktake is needed if stock value varies by more than $5,000 over the year.

Why does this matter for cash flow?

Because tax on a payout or grant is due later, it’s easy to forget. A simple habit helps:

1. When a payout or grant arrives, ask your accountant how much of it is likely to be taxable.
2. Move an estimate of that tax into a separate account.
3. Use the rest for recovery.

If setting that money aside leaves you short for the rebuild, that’s a genuine funding gap — and far better to plan for now than to discover at lodgement time. You can talk to a real person about it, and enquiring doesn’t involve a credit check.

What records should you keep for tax?

• Grant approval letters, conditions and the date received
• Insurance settlement letters showing what each part of the payout was for
• Stock records before and after the event
• Asset register or depreciation schedule
• Invoices for repairs, replacements, disposal and removal
• Notes on which costs were repairs and which were improvements

The ATO specifically reminds businesses to keep records showing how they calculated deductions for damaged or destroyed premises.

What if the tax bill arrives before you’re back on your feet?

It happens. Recovery can take longer than a financial year, and a payout received in one year can create tax at a time when trade is still weak. Options include:

• asking the ATO about a payment plan (general interest charge continues to accrue)
• varying PAYG instalments if your income has fallen
• speaking to the ATO’s Emergency Support Infoline, 1800 806 218, if you’re in a disaster-affected area
• funding the tax alongside other recovery costs — see our page on ATO disaster support

Illustrative example only: a nursery receives a payout for destroyed stock late in the financial year and spends all of it restocking. Its accountant points out the payout is assessable and the restocking deduction falls partly in the next year. The owner sets up a payment plan with the ATO for the resulting bill and uses a small facility to keep the spring stock order on track.

Where does GST fit in?

GST is a separate question from income tax, and it catches people out. Whether GST applies to a grant, and how an insurance settlement interacts with GST credits on your claim, depends on the particular payment and your registration. Ask your accountant to check each grant and payout for GST as well as income tax, and keep the grant’s terms and the insurer’s settlement letter handy when they do.

If you’re still pulling the paperwork together, our guides to documenting damage for insurance and restocking after a loss cover the records that make both the claim and the tax return easier.

Need help keeping the rebuild and the tax both covered?

Knowing the tax position early stops a nasty surprise later. If setting tax aside leaves the rebuild short, let’s look at it.

You’ll speak with an actual person who has your details in front of them. Asking what’s possible costs nothing and leaves your credit file exactly as it is. We don’t farm out enquiries — one team holds your file from start to finish.

The more precise you are about the amount, the purpose, your state and any property, the less time we spend going back and forth. Start your enquiry here.