• Insured entitled to partial input tax credit - excess

    Cash settlement - taxable supply

    Flowchart - Cash settlement - taxable supply

    The insured purchased stock insurance from a general insurer at a cost of $5,525. The policy premium consisted of:

    Base premium (including FSL)

    $5,000

    GST on policy

    $500

    Stamp duty on policy

    $25

    Total cost of policy

    $5,525

    The insured is registered for GST and has notified the insurer of their entitlement to a 90% 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. The excess on this policy is $1,200.

    The insured makes a claim against the policy and the insurer assesses the loss as being $19,289 (GST-inclusive). The insurer forwards a cheque to the insured for $16,160 in full settlement of the claim. No excess is actually paid to the insurer as the insurer merely provides the settlement exclusive of the amount of the excess.

    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.

    $5,500

    G1

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

    GST on policy.

    $500

    1A

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

    Stamp duty on policy ($25).

    Nil

    Not applicable

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

    Payment to insured ($16,160).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to settlement payment.

    $160
    (see calculation below)

    1B

    Amount of decreasing adjustment.

    Decreasing adjustment (DA) calculation - no/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 ITC)

     

     

    Step 1

     

    Step 2

     

    Step 3

     

    Step 4

    Settlement amount =

    $16,160

    +

    0

    -

    0

    x

    11/(11-0.9)

    =

    $16,160

    +

    0

    -

    0

    x

    11/10.1

    =

    $17,600

     

     

     

     

     

     

    DA =

    1/11

    x

    $17,600

    x

    (1 - 0.9)

     

     

    =

    1/11

    x

    $17,600

    x

    0.1

     

     

    =

    $160

     

     

     

     

     

     

    Amount to be shown at 1B on the activity statement is $160.

    Note: There is no section 78-18 increasing adjustment applicable to the excess from the insured. The insurer has not made creditable acquisitions directly for the purposes of settling the claim.

    Cash settlement - GST-free supply

    Flowchart - Cash settlement - GST-free supply

    The insured purchased stock insurance from a general insurer at a cost of $8,197. The policy premium consisted of:

    Base premium (including FSL)

    $7,480

    GST on policy

    $680

    Stamp duty on policy

    $37

    Total cost of policy

    $8,197

    The insured is registered for GST and has notified the insurer of their entitlement to a 60% 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. The excess on this policy is $1,400.

    The insured makes a claim against the policy and the insurer assesses the loss as being $24,800 (GST-free). The insurer forwards a cheque to the insured for $23,400 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.

    $8,160

    G1

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

    GST on policy.

    $680

    1A

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

    Stamp duty on policy ($37).

    Nil

    Not applicable

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

    Payment to insured ($23,400).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to settlement payment.

    $900
    (see calculation below)

    1B

    Amount of decreasing 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 ITC)

     

     

    Step 1

     

    Step 2

     

    Step 3

     

    Step 4

    Settlement amount =

    $23,400

    +

    0

    -

    0

    x

    11/(11-0.6)

    =

    $23,400

    +

    0

    -

    0

    x

    11/10.4

    =

    $24,750

     

     

     

     

     

     

    DA =

    1/11

    x

    $24,750

    x

    (1 - 0.6)

     

     

    =

    1/11

    x

    $24,750

    x

    0.4

     

     

    =

    $900

     

     

     

     

     

     

    Amount to be shown at 1B on the activity statement is $900.

    Note: There is no section 78-18 increasing adjustment applicable to the excess from the insured. The insurer has not made creditable acquisitions directly for the purposes of settling the claim.

      Last modified: 30 May 2014QC 16293