Compensation for natural disasters: The tax consequences

Abstract

The financial impact of natural disasters (including floods and cyclones) on business taxpayers can be immense and, in some cases, sufficient to result in the business ceasing to operate. As a result of recent natural disasters, federal and state governments have made certain grants to affected businesses in the form of cash payments and reimbursements. This article reviews the potential application of goods and services tax on the receipt of such grants, in addition to the entitlement to input tax credits for related acquisitions. This article also reviews the income tax treatment of certain grants and the availability of tax deductions for expenditure related to the grant moneys received.