For plant & equipment, the insurance proceeds become the "termination value" of the asset - so they go into the calculation of the balancing adjustment on disposal. The balancing adjustment is the difference between the written down value of the asset (the amount left to be depreciated) and the insurance proceeds, less of course any costs of disposal etc...
Then, where it was an involuntary disposal (ie fire), the balancing adjustment reduces the cost of the replacement asset rather than being included in assessable income. So basically you depreciate less cost of the new asset, but don't need to include the balancing adjustment in your taxable income.
Have a read of these two links and speak to your accountant about the actual calculations and how these rules apply to your specific circumstances: https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/depreciation-and-capital-expenses-and-allowances/general-depreciation-rules-capital-allowances/disposing-or-ceasing-to-use-a-depreciating-asset
Offsetting balancing adjustment for involuntary disposal
As a highly simplified example:
Insurance proceeds: $750
Remaining adjustable value of the equipment (ie the cost less depreciation claimed to date) : $250
Cost of new equipment: $1,000
Then balancing adjustment is $500 ($750-$250) but if conditions for replacement asset are met, nothing is included in assessable income but the value of the new equipment for depreciation purposes going forward is reduced to $500 ($1,000 cost less $500 balancing adjustment).
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