• Purchase of insurance policy and cash settlement to the insured

    Insured entitled to full input tax credit - no excess

    Cash settlement - taxable supply (goods)

    Flowchart - Cash settlement - taxable supply (goods)

    The insured purchased business contents insurance from a general insurer for $1,330. The policy premium consisted of:

    Base premium

    $1,200

    GST on policy

    $120

    Stamp duty on policy

    $10

    Total cost of policy

    $1,330

    The insured is registered for GST and has notified the insurer of their entitlement to a full 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 possible input tax credit entitlement on use of the settlement funds. There is no excess on this policy.

    The insured had a break-in at their business premises. The insurer is advised that the cost to repair the damaged contents is $8,800 (GST-inclusive). The insurer pays the insured $8,000 in full settlement of the claim.

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

    Description of payment

    Amount shown on activity statement

    Activity statement label

    Reason

    Base premium inclusive of GST.

    $1,320

    G1

    Payment for a sale made in the course of the insurance business.

    GST on policy.

    $120

    1A

    GST in respect of the sale made in the course of the insurance business.

    Stamp duty on policy ($10).

    Nil

    Not applicable

    Stamp duty on insurance is not included on the activity statement.

    Payment to insured ($8,000).

    Nil

    Not applicable

    Not an acquisition. A decreasing adjustment does not apply to this transaction as the insured was entitled to a full input tax credit on the premium.

    Cash settlement - taxable supply (services)

    Flowchart- Cash settlement - taxable supply (services)

    The insured renewed their motor vehicle policy with a motor vehicle insurer for $1,330. The vehicle was insured for $22,000 and the policy premium consisted of:

    Base premium

    $1,200

    GST on policy

    $120

    Stamp duty on policy

    $10

    Total cost of policy

    $1,330

    The insured is registered for GST and has notified the insurer of their entitlement to a full 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 possible input tax credit entitlement on the purchase of a replacement vehicle. There is no excess on this policy.

    The motor vehicle is damaged in an accident and the insurer is advised that the GST-inclusive costs of repairs is more than the vehicle is worth. The insurer pays out $20,000. That is, the full face value of the policy less the input tax credit entitlement of the insured if it spent $22,000 on a new vehicle. On pay-out, the insurer acquires the wreck from the insured and then sells it to a motor vehicle wrecker for $660.

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

    Description of payment

    Amount shown on activity statement

    Activity statement label

    Reason

    Base premium inclusive of GST.

    $1,320

    G1

    Payment for a sale made in the course of the insurance business.

    GST on policy.

    $120

    1A

    GST in respect of the sale made in the course of the insurance business.

    Stamp duty on policy ($10).

    Nil

    Not applicable

    Stamp duty on insurance is not included on the activity statement.

    Payment to insured ($20,000).

    Nil

    Not applicable

    Not an acquisition. A decreasing adjustment does not apply to this transaction.

    Sale to motor wrecker inclusive of GST.

    $660

    G1

    Payment for a sale made in the course of the insurance business.

    GST on motor wrecker sale.

    $60

    1A

    GST in respect of the sale made in the course of the insurance business.

    Cash settlement - GST-free supply

    Flowchart - Cash settlement - GST-free supply

    The insured takes out a workers' compensation insurance policy with a workers' compensation insurer for $1,665. The policy premium consisted of:

    Base premium

    $1,500

    GST on policy

    $150

    Stamp duty on policy

    $15

    Total cost of policy

    $1,665

    The insured is registered for GST and has notified the insurer of their entitlement to a full 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 possible input tax credit entitlement on use of the settlement funds. There is no excess on this policy.

    An employee of the insured is injured at work and is treated at the local hospital. The employee has paid the medical expenses and is now seeking compensation from the insured. The insurer is advised of the claim and makes a cash settlement to the employee of $15,500.

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

    Description of payment

    Amount shown on activity statement

    Activity statement label

    Reason

    Base premium inclusive of GST.

    $1,650

    G1

    Payment for a sale made in the course of the insurance business.

    GST on policy.

    $150

    1A

    GST in respect of the sale made in the course of the insurance business.

    Stamp duty on policy ($15).

    Nil

    Not applicable

    Stamp duty on insurance is not included on the activity statement.

    Payment to employee ($15,500).

    Nil

    Not applicable

    Not an acquisition. A decreasing adjustment does not apply to this transaction as the insured was entitled to a full input tax credit on the premium.

      Last modified: 30 May 2014QC 16293