• Insured not entitled to input tax credit - no excess

    Cash settlement - taxable supply

    Flowchart - Cash settlement - taxable supply

    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 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.

    $1,045

    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 activity statement.

    Payment to insured ($6,325).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to settlement payment.

    $575
    (see calculation below)

    1B

    Amount of decreasing 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 ITC)

     

     

    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 activity statement is $575.

    Cash settlement - GST-free supply

    Flowchart - Cash settlement - GST-free supply

    The insured purchased a stock insurance policy from a general insurer for $2,064. The policy premium consisted of:

    Base premium

    $1,870

    GST on policy

    $170

    Stamp duty on policy

    $24

    Total cost of policy

    $2,064

    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 replace the damaged stock is $3,498 (GST-free). The insurer pays the insured $3,498 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.

    $2,040

    G1

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

    GST on policy.

    $170

    1A

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

    Stamp duty on policy ($24).

    Nil

    Not applicable

    Stamp duty is not included on the activity statement.

    Payment to insured ($3,498).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to settlement payment.

    $318
    (see calculation below)

    1B

    Amount of decreasing 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 ITC)

     

     

    Step 1

     

    Step 2

     

    Step 3

     

    Step 4

    Settlement amount =

    $3,498

    +

    0

    -

    0

    x

    11/(11-0)

    =

    $3,498

    +

    0

    -

    0

    x

    11/11

    =

    $3,498

     

     

     

     

     

     

    DA =

    1/11

    x

    $3,498

    x

    (1 - 0)

     

     

    =

    1/11

    x

    $3,498

    x

    1

     

     

    =

    $318

     

     

     

     

     

     

    Amount to be shown at 1B on the activity statement is $318.

      Last modified: 30 May 2014QC 16293