Issue
Is an 'instalment deposit' received by the entity, an insurer, a deposit for the purposes of Division 99 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when an insured's subsequent instalment payments are calculated as a percentage of the total premium, less the amount paid for the 'instalment deposit'?
Decision
No, an 'instalment deposit' received by the entity is not a deposit for the purposes of Division 99 of the GST Act when an insured's subsequent instalment payments are calculated as a percentage of the total premium, less the amount paid for the 'instalment deposit'.
Facts
The entity is an insurer that is registered for goods and services tax (GST). The entity supplies insurance to an insured, under an insurance policy. The insured is required to pay an annual insurance premium to maintain the insurance policy.
The insured had the option of either paying the annual insurance policy premium in a lump sum payment or by way of instalments and elected to pay by instalments.
Under the terms of the insurance policy, the insured is required to pay the entity an initial instalment. The initial instalment is known as an 'instalment deposit'. Payment of the 'instalment deposit' is to be followed by further instalment payments.
The insured's subsequent instalment payments are calculated as a percentage of the total premium, less the amount paid for the 'instalment deposit'.
Reasons for Decision
Under Division 99 of the GST Act, a deposit that is held to secure the performance of an obligation, will not be treated as consideration nor attributed until such time as it is either forfeited or is applied as consideration.
Paragraph 4 of Goods and Services Tax Determination GSTD 2000/1 provides that Division 99 of the GST Act only applies to those deposits that are at risk of forfeiture on failure to perform an obligation under the agreement. If an amount is actually part payment for a supply, Division 99 of the GST Act does not apply.
When the election is made to pay the insurance policy premium by instalments, the insured is required to pay the entity an 'instalment deposit'. Under the terms of the insurance policy, subsequent instalment payments are calculated by reducing the total premium payable by the amount paid for the 'instalment deposit'. While the 'instalment deposit' is referred to as a deposit, it is not held as security, but rather the entity applies this payment, together with the other instalment payments, to form the overall consideration due for the insured's insurance policy premium. The insured is simply exercising its option to pay the premium by instalments and the 'instalment deposit' is actually a part payment for the entity's supply of insurance.
Therefore, the 'instalment deposit' received by the entity is not a deposit for the purposes of Division 99 of the GST Act when the insured's subsequent instalment payments are calculated as a percentage of the total premium, less the amount paid for the 'instalment deposit'.