Co-insurance examples
Co-insurance examples
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Terms we use
When we say:
- co-insurance, we mean a sharing of risk among insurers in supplying insurance
- agent, we mean any person or entity that is authorised to act on behalf of another person or entity
- payment (made or received), we mean the GST term consideration
- GST credits, we mean the GST term input tax credit
- sell or sale, we mean the GST term supply
- purchase, we mean the GST term acquisition.
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The goods and services tax (GST) treatment of co-insurance arrangements depends on the nature of the arrangement between the co-insurers in each case. Below are general examples of three possible ways co-insurance could be treated for GST purposes. The examples may or may not apply to you depending on the specific circumstances of your co-insurance arrangement.
For specific advice on your particular co-insurance arrangement, you would need to seek advice based on your particular circumstances. These examples by no means cover all the possibilities of how co-insurance could be arranged.
The examples detail the following possible co-insurance arrangements.
- Agency agreement - where an agency relationship exists, Subdivision 153A of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) would apply.
- Subdivision 153-B agreement- where the co-insurance group has chosen to enter into a Subdivision 153-B agreement, the provisions of that Subdivision would apply.
- Joint venture agreement - where the co-insurance group has formed a GST joint venture, Division 51 would apply.
In the case of Subdivision 153-B agreements and GST joint venture agreements it is up to the co-insurers to choose whether they want these arrangements to apply. Note that there are various conditions outlined in the relevant parts of the GST Act that have to be met before entities can choose to apply those arrangements. These requirements are not discussed below.
If the Lead is acting as agent for the other co-insurers - such that the Lead makes creditable acquisitions (Division 11) on behalf of the principals, and also makes Division 78 settlements for which the principals may be entitled to a decreasing adjustment - the following will apply.
The other co-insurers are entitled to an input tax credit for acquisitions made through an agent. In accordance with section 153-5, they can attribute that input tax credit to the first tax period in which they or their agent (the Lead) holds a tax invoice. However, Division 11 limits the amount of input tax credit each of the co-insurers is entitled to claim. Section 11-25 states that the amount of input tax credit for a creditable acquisition is an amount equal to the GST payable. However, under section 11-30, the amount of input tax credit is reduced if the acquisition is only partly creditable.
Section 11-30 states that an acquisition is only partly creditable if you provide, or are liable to provide, only part of the consideration for the acquisition. Consequently, each co-insurer is entitled to claim an input tax credit in accordance with the percentage of consideration that they provide.
Subdivision 153-A provides that a principal must attribute input tax credits or adjustments to the first tax period when the principal holds the relevant tax invoice or adjustment note. Under Subdivision 153-A, the principal's obligations are complied with if the agent issues tax invoices and adjustment notes on behalf of the principal for those supplies made by the principal through the agent.
Where the agent incurs extra expenses - but not expenses for which it is an agent of the principal, and the principal reimburses the agent for those expenses - the principal may be entitled to claim the input tax credits for those reimbursements under Division 111. This will only be the case where the agent is not able to claim the input tax credits in their own right, such as if the agent is not registered for GST.
Under section 78-10, 'an insurer has a decreasing adjustment if, in settlement of a claim under an insurance policy, the insurer makes a payment of money, or makes a supply or makes both a payment of money and a supply'. Consequently each co-insurer, including the Lead, has a decreasing adjustment for the settlement that they make under the insurance policy. The Lead and the other co-insurers would attribute a decreasing adjustment according to the basic attribution rules set out in section 29-20 unless a special attribution rule applies. Section 29-20 states that you attribute an adjustment to the tax period in which you become aware of the adjustment. Each co-insurer would only attribute their share of the decreasing adjustment, that is, to the extent of their share in the co-insurance arrangement.
In some cases the Lead and the principals have agreed to share administration costs by way of a fee paid to the Lead. In this case the Lead makes a taxable supply of the administration services to the other co-insurers and would need to provide a tax invoice for the agreed claims administration costs, if requested by the other co-insurers.
Example 1
In this example the Lead is acting as agent for three other co-insurers.
Under the co-insurance arrangement, the Lead is agent of three other co-insurers for the purposes of:
- supplying the insurance offered by the co-insurers
- settling claims under those policies, whether by making acquisitions or importations, making acquisitions or importations directly for the purpose of settling claims, or making cash settlements.
Under the co-insurance arrangement, the four co-insurers (including the Lead) supply an insurance policy to Company W, a small supplier of invisible ink whiteboard markers for the Secret Service. The insurance premium is $110. Company W is not registered for GST and so is not entitled to input tax credits on this premium. Each co-insurer makes a quarter of the supply as they share the risks equally.
As the Lead is agent for the other co-insurers, each co-insurer has made a supply to Company W. Each co-insurer, including the Lead, will account for a supply for $27.50, including GST of $2.50.
Company W makes a claim under the policy.
In order to settle the claim, the Lead acquired building services and replacement equipment in its own right (to the extent of its share in the arrangement) and as agent for the other co-insurers (to the extent of their share in the arrangement). The total acquisitions cost $17,600, including GST of $1,600. The Lead and each co-insurer would be entitled to their share of the input tax credits for these acquisitions, that is, $400 each. This is because the Lead is acting as agent for the three other co-insurers.
The Lead also makes a payment of $2,200 to Company W in settlement of the claim. As the Lead is acting as agent for the other co-insurers - and in its own right to the extent of its share in the co-insurance arrangement in making the cash settlement - each co-insurer has made a quarter of the payment. Each will have a deceasing adjustment on their share of the payment. As Company W was not entitled to input tax credits on the premium, the amount of the decreasing adjustment will be one-eleventh of their share, that is, one-eleventh of $550, which is $50.
The Lead would therefore need to inform the other three co-insurers of:
- the quantum of the acquisitions it has made as their agent, including the portion of input tax credit available and whether it holds the relevant tax invoice
- the quantum of any Division 78 settlement amount and the decreasing adjustment (if any) that is available.
Under this co-insurance arrangement, the other co-insurers reimburse the Lead for the administration costs. The Lead would also need to provide a tax invoice for the agreed claims administration costs, if requested by the other co-insurers. This is because the Lead has made a taxable supply of the administration services to the other co-insurers.
Subdivision 153-B simplifies the way you can account for GST by allowing entities to enter into an arrangement under which an agent is treated as a separate supplier or acquirer. The general effect of entering into these arrangements in respect of both supplies and acquisitions is that the principal and agent are treated as acting as between a principal and another principal.
These arrangements do not impact on other taxation laws except where specifically noted. Nor do the arrangements impact upon other laws or contractual arrangements between the parties. The option exists for GST purposes only and allows an alternative way for agents and principals to account for GST.
From 1 July 2010, the range of entities that can access these arrangements has been extended to include intermediaries that facilitate transactions but are not common law agents. The changes apply to supplies and acquisitions made by intermediaries on or after 1 July 2010.
The following would be the effect of a Subdivision 153-B, if the Lead and the three other co-insurers have a Subdivision 153-B arrangement for transactions in relation to supplying insurance and processing claims, and under the co-insurance arrangement, the Lead is agent for the other co-insurers for the purposes of:
- supplying the insurance offered by the co-insurers
- settling claims under those policies, whether by making acquisitions or importations, making acquisitions or importations directly for the purpose of settling claims, or making cash settlements.
Under the agreement, the Lead would be treated as making the supplies of insurance to the third parties and the acquisitions from the third parties entirely in its own right for GST purposes only. The principals would be treated as making corresponding supplies to the Lead and corresponding acquisitions from the Lead.
For GST purposes, the Lead would be treated as having made the acquisitions for the co-insurers - such as building services, replacement equipment, and general claims costs - in its own right and would claim the full input tax credit for those acquisitions. The Lead would also be treated as supplying those things acquired to each of the co-insurers to the extent of their share of the co-insurance arrangement. For GST purposes, each co-insurer would be treated as having made an acquisition of that supply from the Lead.
If the Lead makes a payment in settlement of the claim, the Lead would claim the appropriate decreasing adjustment (if any). This is because the Lead is treated as having made the supply of insurance in its own right for GST purposes.
The other three co-insurers are entitled to an input tax credit for the corresponding acquisitions from the Lead and a decreasing adjustment (if any) for the corresponding payment in settlement of the claim if they reimburse the Lead for the payment. However, generally it is expected that the other co-insurers will have no decreasing adjustment as the Lead is the entity that is treated as having acquired the insurance from the other co-insurers. It is generally expected that the Lead would have had a full input tax credit on the payment they are treated as having made to the co-insurers for that supply.
Subsections 153-55(3) and 153-60(3) provide that the payment of commission or similar payment to the agent (the Lead) for the agent's supply to the third party or acquisition from a third party is not a taxable supply.
Example 2
Under the co-insurance arrangement, the Lead is agent of three other co-insurers for the purposes of:
- supplying the insurance offered by the co-insurers
- settling claims under those policies, whether by making acquisitions or importations, making acquisitions or importations directly for the purpose of settling claims, or making cash settlements.
Under the co-insurance arrangement, the four co-insurers (including the Lead) supply an insurance policy to Company X, a supplier of housing loans to members of the Secret Service. The insurance premium is $11,000. Company X is not entitled to input tax credits on this premium. Each co-insurer makes a quarter of the supply as they share the risks equally.
As the co-insurers have a Subdivision 153-B agreement in place, the co-insurers are treated as making a supply of insurance to the Lead equal to their share of the supply to Company X, and the Lead as making a supply of that insurance to Company X. The Lead still supplies its share of the insurance to Company X.
The Lead will account for the entire supply of insurance to Company X, that is, $11,000, including GST of $1,000. Each of the other co-insurers will account for a taxable supply to the Lead of one-quarter of the supply to Company X, that is, $2,750, including GST of $250. The Lead will account for input tax credits on each of the supplies from the other co-insurers, that is, three acquisitions of $2,750, with input tax credits of $250 each.
Company X later makes a claim under the policy.
The Lead settles the claim by making an acquisition of services for $495 and a cash settlement of $1,925. The Lead will claim an input tax credit of $45 and a decreasing adjustment of $175.
Presuming the other co-insurers reimburse the Lead for the acquisition, the Lead will be treated as making supplies of those services to each of the co-insurers to the extent of their share of the co-insurance arrangement, that is, three supplies for $123.75 each, including GST of $11.25 each. Each co-insurer would account for these supplies as acquisitions, that is, one acquisition each for $123.75, with an input tax credit of $11.25.
Presuming the other co-insurers reimburse the Lead for the cash settlement and the Lead has claimed for this reimbursement, each co-insurer would be treated as making a payment in settlement of the claim by the Lead under the insurance policy that each co-insurer has been treated as having made to the Lead. None of the other co-insurers would be entitled to a decreasing adjustment on these settlements as the Lead was entitled to a full input tax credit on the acquisition of the insurance it is treated as having made from the other co-insurers.
If eligible, the members of a co-insurance group can form a GST joint venture with the Lead nominated as the joint venture operator. The participants in the joint venture would need to have a joint venture agreement. The joint venture operator must notify us of the formed GST joint venture.
The Lead as the joint venture operator would be liable for the GST payable on any taxable supply or taxable importation it makes on behalf of another entity that is a participant in the joint venture, in the course of the activities for the joint venture - subsection 51-30(1).
The Lead as the joint venture operator would be entitled to claim an input tax credit for creditable acquisitions or creditable importations it makes on behalf of another entity that is a participant in the joint venture, in the course of the activities for the joint venture - section 51-35.
The Lead as the joint venture operator would account for any adjustments relating to any supply, acquisition or importation it makes on behalf of another entity that is a participant in the joint venture, in the course of the activities for the joint venture at the time the adjustment arises - section 51-40.
Any supply that the Lead as the joint venture operator makes to a participant in the GST joint venture is not a taxable supply provided that the participant acquired the supply in the course of activities for the joint venture.
The Lead as the joint venture operator would give us a GST return for each tax period applying to the operator detailing the net amount relating to the GST joint venture.
Participants in a GST joint venture will be jointly and severally liable for any amount payable by the joint venture operator that relates to the joint venture. Participants will each be taken to have committed offences by the joint venture operator but certain defences will be available to them. However, joint venture participants can enter into an indirect tax sharing agreement with the joint venture operator to limit their exposure to joint and several liability for the joint venture operator's indirect tax liability.
If the Lead is the joint venture operator of a co-insurance GST joint venture and as the operator made acquisitions - such as building services, replacement equipment, or general claims costs - in its own right (to the extent of its share of the co-insurance arrangement) and as agent for the other co-insurers (to the extent of their share of the co-insurance arrangement), the Lead will be entitled to the input tax credits on the acquisition. The Lead, as the joint venture operator, would also be entitled to any decreasing adjustments arising under Division 78.
As supplies that the joint venture operator makes to participants of the GST joint venture are not taxable supplies, the Lead's supply of administration services to the other co-insurers would not be a taxable supply.
The Lead, as the joint venture operator, would recover:
- the acquisitions costs net of any input tax credit claimed
- any Division 78 settlement amount net of any decreasing adjustment
- any administration services fee.
Example 3
Under the co-insurance arrangement, the Lead is agent of three other co-insurers for the purposes of:
- supplying the insurance offered by the co-insurers
- settling claims under those policies, whether by making acquisitions or importations, making acquisitions or importations directly for the purpose of settling claims, or making cash settlements.
The four co-insurers form a GST joint venture with the Lead as joint venture operator.
Under the co-insurance arrangement, the four co-insurers (including the Lead) supply an insurance policy to Company Y, a supplier of fashionable men's clothing to members of the Secret Service. The supply is made through the Lead as agent for the other three co-insurers and in its own right. The insurance premium is $22,000. Company Y is entitled to full input tax credits on this premium. Each co-insurer makes one-quarter of the supply as they share the risks equally.
The Lead, as joint venture operator, has the full GST liability on the supply of $2,000.
Company Y makes a claim under the policy.
The Lead settles the claim by making a creditable acquisition of services for $1,650 and a cash settlement of $10,000. The Lead will claim a full input tax credit of $150. The Lead would also claim the full decreasing adjustment, but in this case there was a full input tax credit on the insurance premium, so there is no decreasing adjustment.
More information
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Australian Taxation Office
PO Box 3524
ALBURY NSW 2640.
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Last Modified: Friday, 16 September 2011
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