GST and reimbursement of towing fees by an insurer

Is the entire fee collected by the entity, Towing Company 2, consideration for a taxable supply it made to an insurance company under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when: • the fee includes reimbursement to the entity for a release amount charged to the insurance company, and • the fee is paid to the entity by an auction house acting on behalf of the insurance company?

No, the entire fee collected by the entity is not consideration for a taxable supply made to the insurance company under section 9-5 of the GST Act.

The release amount does not form part of the consideration for the entity's supply to the insurance company.

The entity is a towing company (Towing Company 2). The entity made a taxable supply to an insurance company. The supply consisted of towing a damaged vehicle from a holding yard to an auction house. The entity is registered for goods and services tax (GST).

After the accident another towing company, (Towing Company 1), towed the vehicle to the holding yard. The entity was authorised by the insurance company to collect the vehicle from the holding yard.

Before the entity can access the vehicle in the holding yard, it must pay Towing Company 1 a release amount. The release amount consists of an amount for the original towing service (from the accident site to the holding yard) and a holding fee. The insurance company is liable for this release amount as the supplies of the towing service and the storage of the vehicle in the holding yard were made to the insurance company. The entity paid the release amount and towed the vehicle to the auction house.

The entity then invoiced the auction house, as agent of the insurance company, for the entity's towing services. The invoice included the release amount charged by Towing Company 1. The auction house, in its capacity as agent paid the entity.

The transactions can be illustrated as:

The entity made a taxable supply of towing services to an insurance company under section 9-5 of the GST Act.

The total fee charged by the entity included an amount for the entity's towing services, plus an amount to reimburse the entity for the release amount charged to it on behalf of the insurance company by Towing Company 1. The auction house, as agent of the insurance company, paid the total fee.

The payment for the entity's towing service was connected with the entity's supply to the insurance company of delivering the vehicle to the auction house and is therefore, consideration for the entity's supply.

However, it needs to be determined whether the part of the fee that reimburses the entity for the release amount charged by Towing Company 1 is also consideration for the entity's supply.

Paragraph 49 of Goods and Services Tax Ruling GSTR 2000/37 outlines the GST consequences where one entity, a solicitor, acts as a paying agent for a client and on charges the amount paid: If a disbursement is made by a solicitor and incurred in the solicitor's capacity as a paying agent for a particular client, then no GST is payable by the solicitor on the subsequent reimbursement by the client. This is because the goods or services to which the disbursement relates are supplied to the client, not to the solicitor, by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services by the solicitor.

This example is similar to the entity's arrangement. By authorising the entity to collect the damaged vehicle from the holding yard, the insurance company authorised the entity to act on its behalf. When the entity paid the release amount it did so in its capacity as paying agent for the insurance company. The release payment is for the supply of the towing service and the storage of the vehicle in the holding yard made by Towing Company 1 to the insurance company, not the entity. Therefore, when the entity is reimbursed by the auction house, as agent for the insurance company, the payment does not form part of the consideration payable for the entity's services.

The entire amount collected by the entity is not consideration for the taxable supply it made under section 9-5 of the GST Act, when the fee includes an amount to reimburse the entity for a payout amount charged to it on behalf of the insurance company by another towing company. Note 1: The entity does not include the release amount when calculating the GST payable on its supply under section 9-70 of the GST Act. Note 2: If the supply by Towing Company 1 to the insurance company was a taxable supply, the insurance company will be entitled to an input tax credit if the requirements of Division 11 of the GST Act are satisfied.