GST and payment made in settlement of a general insurance claim when the insured does not inform the insurer of its input tax credit entitlement on the premiums

Is the entity, an insured business operator, making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it: • receives a payment from the insurer in settlement of a claim under a general insurance policy, and • is entitled to an input tax credit on the insurance premiums but did not inform the insurer of this entitlement before making the claim?

Yes, the entity is making a taxable supply under section 9-5 of the GST Act when it receives a payment from the insurer in settlement of a claim under a general insurance policy and it is entitled to an input tax credit on the insurance premiums but did not inform the insurer of this entitlement before making the claim.

The entity is a business operator that is insured under a general insurance policy.

The supply of the insurance policy to the entity was a taxable supply. The entity is entitled to claim an input tax credit on the insurance premium.

The entity made a claim under the general insurance policy. The entity paid the premium relating to the period during which the event, giving rise to the insurance claim, happened. The entity did not inform the insurer of the extent to which it could claim an input tax credit on the insurance premium. The insurer made a payment of money in settlement of the claim.

The entity makes the insurance claim in the course of carrying on its enterprise in Australia and is registered for goods and services tax (GST).

Under section 9-5 of the GST Act, an entity makes a taxable supply if: • it makes the supply for consideration • the supply is made in the course or furtherance of an enterprise that it carries on • the supply is connected with Australia, and • the entity is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The entity makes the general insurance claim in the course of its enterprise that it carries on in Australia. In addition, the entity is registered for GST. Therefore, the remaining requirement of section 9-5 of the GST Act is that an entity makes a supply for consideration.

Subsection 78-45(1) of the GST Act provides that if, in settlement of a claim under an insurance policy, an insurer: • makes a payment of money • makes a supply, or • makes both a payment of money and a supply

the payment or supply is not treated as consideration for a supply made by the entity insured, or by any entity (other than the entity insured) that was entitled to an input tax credit for the premium paid for the insurance policy.

However, subsection 78-50(1) of the GST Act provides that the payment or supply is treated as consideration for a supply made by an entity if: (a) the entity paid all or a part of the premium, for the insurance policy, relating to the period during which the event giving rise to the claim happened; and (b) the entity, or the representative member of the GST group of which the entity is a member, was entitled to an input tax credit for the premium it paid; and (c) the entity: • did not, at or before the time a claim was first made under the insurance policy since the last payment of a premium, inform the insurer of the entitlement to an input tax credit for the premium it paid, or • in informing the insurer of the entitlement at or before that time, understated its extent, and (d) the insurance policy was not issued under a compulsory third party scheme.

It does not matter whether that entity is the entity insured, or whether the payment or supply is made to that entity or any other entity.

The entity paid the premium relating to the period during which the event, giving rise to the insurance claim, happened. The entity is entitled to an input tax credit for the GST included in the general insurance premium. The entity did not inform the insurer of the extent to which it could claim an input tax credit on the general insurance premiums. Therefore, the requirements in subsection 78-50(1) of the GST Act are satisfied and the payment by the insurer, in settlement of the general insurance claim, is treated as consideration for a supply made by the entity. As such, the first requirement of section 9-5 of the GST Act is satisfied.

Furthermore, the supply is neither GST-free under Division 38 of the GST Act nor input taxed under Division 40 of the GST Act.

Therefore, the entity is making a taxable supply under section 9-5 of the GST Act when it receives a payment in settlement of a general insurance claim and it does not inform the insurer of its input tax credit entitlement on the insurance premiums. Note 1: The extent to which the payment or supply is treated as consideration is the extent of the insured's entitlement to input tax credits (subsection 78-50(2) of the GST Act). Note 2: If the entity was entitled to claim an input tax credit for the insurance premium it paid, and subsection 78-50(1) of the GST Act applies so that the payment by the insurer is treated as consideration for a supply made by the entity, but at the time of settlement, the entity is no longer registered, or required to be registered for GST purposes, the entity's supply in return for the payment will still be taxable supply (subsection 78-50(3) of the GST Act). An unregistered entity that makes a taxable supply under section 78-50 of the GST Act will be required to give a GST return to the Commissioner and pay GST on the taxable supply in accordance with the provisions in Subdivision 78-D of the GST Act.