Insurers guide to the business activity statement instructions

Insured not entitled to input tax credit

The insured purchased a contents insurance policy from a general insurer for $1,057. The policy premium consisted of:

Base premium	$950
GST on policy	$95
Stamp duty on policy	$12
Total cost of policy	$1,057

The insured is registered for GST and makes only input taxed supplies. The insured has notified the insurer that they do not have any entitlement to input tax credits on the policy premium. There is no excess on this policy.

The insured makes a claim and the insurer is advised that the cost to repair the damaged contents is $6,325 (GST-inclusive). The insurer pays the insured $6,325 in full settlement of the claim.

The insurer exercises their right of subrogation and recovers $3,300 from the party found at fault. The subrogation payment is received in a subsequent tax period.

The insurer would treat this situation on their business activity statement as follows.

Description of payment	Amount shown on BAS	BAS label	Reason
Base premium inclusive of GST.	$1,045	G1	Payment for a sale made in the course of the insurance business.
GST on policy.	$95	1A	GST in respect of the sale made in the course of the insurance business.
Stamp duty on policy ($12)	Nil	Not applicable	Stamp duty on insurance is not included on the BAS.
Payment to insured ($6,325)	Nil	Not applicable	Not an acquisition. Decreasing adjustment will apply to this payment.
Decreasing adjustment applicable to payment ($6,325).	$575 (see calculation (i) below)	1B	Amount of decreasing adjustment.
Subrogation payment on later BAS ($3,300)	Nil	Not applicable	Not an acquisition. Increasing adjustment will apply to this payment.
Increasing adjustment applicable to subrogation payment ($3,300)	$300 (see calculation (ii) below)	1A	Amount of Increasing adjustment.

Decreasing adjustment (DA) calculation - no entitlement to input tax credits

The section 78-15 decreasing adjustment is calculated as follows:

DA = 1/11th x Settlement amount x (1 - extent of input tax credit)

The settlement amount is calculated as follows:

Step 1 The sum of the payments of money made in settlement of the claim

plus

Step 2 The GST-inclusive market value of the supplies (if any) made by the insurer in settlement of the claim (other than supplies that would have been taxable supplies but for section 78-25)

minus

Step 3 The sum of any payments of excess made to the insurer under the insurance policy in question (except to the extent that they are payments of excess to which section 78-18 applies)

multiplied by

Step 4	11
	11 - extent of input tax credit

	Step 1		Step 2		Step 3			Step 4
Settlement amount =	$6,325	+	0	-	0	x		11
								11 - 0
=	$6,325	+	0	-	0	x		11
								11
=	$6,325

DA =	1/11	x	$6,325	x	(1 - 0)
=	1/11	x	$6,325	x	1
=	$575

Amount to be shown at 1B on the BAS is $575.

Corrected decreasing adjustment (DA) calculation - no entitlement to input tax credits

The exercise of the insurer's right of subrogation effectively overstates the original decreasing adjustment. Division 19 requires a correcting calculation to be performed. The correction is the difference between what was originally claimed and what should have been claimed, that is, the difference between the DA using $6,325 and a DA using $3,025 ($6,325 less $3,300).

The section 78-15 decreasing adjustment is calculated as follows:

DA = 1/11th x Settlement amount x (1 - extent of input tax credit)

The settlement amount is calculated as follows:

Step 1 The sum of the payments of money made in settlement of the claim

plus

Step 2 The GST-inclusive market value of the supplies (if any) made by the insurer in settlement of the claim (other than supplies that would have been taxable supplies but for section 78-25)

minus

Step 3 The sum of any payments of excess made to the insurer under the insurance policy in question (except to the extent that they are payments of excess to which section 78-18 applies)

multiplied by

Step 4	11
	11 - extent of input tax credit

	Step 1		Step 2		Step 3			Step 4
Settlement amount =	$3,025	+	0	-	0	x		11
								11 - 0
=	$3,025	+	0	-	0	x		11
								11
=	$3,025

DA =	1/11	x	$3,025	x	(1 - 0)
=	1/11	x	$3,025	x	1
=	$275

Subrogation Adjustment =	Original DA	-	Corrected DA
=	$575	-	$275
=	$300

Amount to be shown at 1A on the BAS as an increasing adjustment is $300.

Sections within Subrogation

• Insured entitled to full input tax credit
• Insured entitled to partial input tax credit
• Insured not entitled to input tax credit