A client has received payout from PI insurance of former tax agent. Bascially the tax agent was negligant and under stated income. The ATO audited and the client had to back pay taxes.
Client received paypout from PI insurance for "release/discharge of any claims, demands, actions, suits or proceedings".
Is this taxable income for the client, or their business?. The payout is not for loss of income for the client or the business.
Hi @taxagent123,
The tax treatment of this professional indemnity insurance payout depends on what the payment compensates for. Insurance payouts aren't automatically tax-free – it depends on what loss or expense they're replacing.
In this case, the client received the payout to cover the cost of back paying taxes due to the tax agent's negligence. The payout appears to compensate for the financial loss your client suffered – essentially reimbursing them for an expense they had to pay.
Generally, if an insurance payout compensates for a non-deductible expense (like paying a tax debt), the payout itself isn't assessable income.
However, the tax treatment can vary depending on the specific terms of the settlement and what exactly the payout covers. If the payout includes compensation for other losses beyond just reimbursing the tax debt – such as interest, penalties, or consequential losses – different tax rules may apply to those components.
For a definitive answer on this specific payout, your client should consider the exact nature of what's being compensated under the 'release/discharge' terms. You can read more about compensation and insurance payments on our website. If the situation remains unclear, you may need to reach out to our early engagement team for advice.
The insurance has said its "release and discharge of any claims, demands, actions suits or proceedings whatsoever in relation to the matter. It was full and final settlement, without an admission of liability".
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