Insurers guide to the business activity statement instructions

Insured entitled to partial input tax credit

The insured purchased building and contents insurance from a general insurer at a cost of $12,352. The policy premium consisted of:

Base premium (including FSL)	$11,000
GST on policy	$1,100
Stamp duty on policy	$252
Total cost of policy	$12,352

The insured is registered for GST and has notified the insurer of their entitlement to a 70% input tax credit on the policy premium. Under the terms and conditions of the policy, the insurer can adjust settlement amounts paid under the policy to reflect the insured's input tax credit entitlement. There is no excess on this policy.

The insured makes a claim against the policy and the insurer assesses the damages as being $11,000 (GST-inclusive). The insurer forwards a cheque to the insured for $10,300 as the insured would be entitled to an input tax credit of $700 if it spent the money on an acquisition for which it was entitled to 70% input tax credits. The $700 is 70% of the GST included in a $11,000 GST-inclusive acquisition. The insurer exercises its right of subrogation and recovers $8,034 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 FSL and GST.	$12,100	G1	Payment for a sale made in the course of the insurance business.
GST on policy.	$1,100	1A	GST in respect of the sale made in the course of the insurance business.
Stamp duty on policy ($252).	Nil	Not applicable	Stamp duty on insurance is not included on the BAS.
Payment to insured ($10,300).	Nil	Not applicable	Not an acquisition. Decreasing adjustment will apply to this payment.
Decreasing adjustment applicable to payment ($10,300).	$300 (see calculation (i) below)	1B	Amount of decreasing adjustment.
Subrogation payment on later BAS ($8,034)	Nil	Not applicable	Not an acquisition. Increasing adjustment will apply to this subrogation payment.
Increasing adjustment applicable to subrogation payment ($8,034)	$234 (see calculation (ii) below)	1A	Amount of increasing adjustment.

Decreasing adjustment (DA) calculation - partial 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 =	$10,300	+	0	-	0	x		11
								11 - 0.7
=	$10,300	+	0	-	0	x		11
								10.3
=	$11,000

DA =	1/11	x	$11,000	x	(1 - 0.7)
=	1/11	x	$11,000	x	0.3
=	$300

Amount to be shown at 1B on the BAS is $300.

Corrected decreasing adjustment (DA) calculation - partial 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 $10,300 and a DA using $2266 ($10,300 less $8,034).

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 =	$2,266	+	0	-	0	x		11
								11 - 0.7
=	$2,266	+	0	-	0	x		11
								10.3
=	$2,420

DA =	1/11	x	$2,420	x	(1 - 0.7)
=	1/11	x	$2,420	x	0.3
=	$66

Subrogation Adjustment =	Original DA	-	Corrected DA
=	$300	-	$66
=	$234

Amount to be shown at 1A on the BAS as an increasing adjustment is $234.

Sections within Subrogation

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