Issue
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 • understated the extent to which it was entitled to an input tax credit on the insurance premium, at the time of making the claim?
Decision
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, at the time of making the claim, it understated the extent to which it was entitled to an input tax credit on the insurance premium.
Facts
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 premiums.
The entity made a claim under the general insurance policy. At the time of making the insurance claim, the entity informed the insurer that it was entitled to an input tax credit on the insurance premiums. However, the entity understated the extent to which it was entitled to the input tax credit.
The entity paid the premium relating to the period during which the event, giving rise to the insurance claim, happened. The insurer made a payment of money in settlement of the claim.
The entity made the insurance claim in the course of carrying on its enterprise in Australia and is registered for goods and services tax (GST).
Reasons for Decision
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 one or more of the following: • a payment of money • a payment of digital currency, or • 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 insurance premium relating to the period during which the event, giving rise to the insurance claim, happened. At the time of making the insurance claim, the entity informed the insurer that it was entitled to an input tax credit on the general insurance premiums. However, the entity understated the extent to which it was entitled to the input tax credit on the insurance premium. Therefore, the requirements in subsection 78-50(1) of the GST Act is satisfied and the payment by the insurer, in settlement of the general insurance claim, will be 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 from the insurer in settlement of a claim under a general insurance policy and, at the time of making the claim, it understated the extent to which it was entitled to an input tax credit on the insurance premium. Note 1: The extent to which the payment is treated as consideration is the extent to which the entitlement was understated (subsection 78-50(2) of the GST Act). For example, if an entity is entitled to an input tax credit equal to the GST payable on the insurance premiums, but informs the insurer that they are entitled to an input tax credit equal to 70% of the GST payable on the premiums, then 30% of the settlement payment will be consideration for a supply made by the entity. If the entity makes the general insurance claim in the course or furtherance of its enterprise that it carries on in Australia, the GST payable by the entity will be: 1/11 * 30% of the settlement payment. Note 2: If the entity was registered, or required to be registered for GST and was entitled to claim an input tax credit for the insurance premium it paid, but at the time of settlement, the entity is no longer registered, or required to be registered for GST purposes, the entity will still make a taxable supply where the other requirements of section 9-5 are satisfied (subsection 78-50(3) of the GST Act).
Amendment History
Date of Amendment Part Comment 23 February 2018 Reasons for Decision Update to include digital currency
Date of Amendment | Part | Comment
23 February 2018 | Reasons for Decision | Update to include digital currency