• Insured not entitled to input tax credit - third party not registered

    Flowchart - Insured not entitled to input tax credit - third party not registered

    The insured purchased public liability insurance from a general insurer for $426. The policy premium consisted of:

    Base premium

    $380

    GST on policy

    $38

    Stamp duty on policy

    $8

    Total cost of policy

    $426

    The insured makes input taxed supplies and has notified the insurer that they do not have any entitlement to input tax credits on the policy premium. There is no excess on the policy.

    The insured injures a third party's pedigree dog in an accident. The third party is not registered for GST and is seeking compensation from the insured for the $737 (GST-inclusive) veterinary fees. The insurer is advised of the accident and forwards a cheque to the third party to cover the cost of the veterinary fees.

    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.

    $418

    G1

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

    GST on policy.

    $38

    1A

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

    Stamp duty on policy ($8).

    Nil

    Not applicable

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

    Payment to third party ($737).

    Nil

    Not applicable

    Not an acquisition. Decreasing adjustment will apply to this payment.

    Decreasing adjustment applicable to third party payment ($737).

    $67
    (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 =

    $737

    +

    0

    -

    0

    x

    11/(11-0)

    =

    $737

    +

    0

    -

    0

    x

    11/11

    =

    $737

     

     

     

     

     

     

    DA =

    1/11

    x

    $737

    x

    (1 - 0)

     

     

    =

    1/11

    x

    $737

    x

    1

     

     

    =

    $67

     

     

     

     

     

     

    Amount to be shown at 1B on the activity statement is $67.

      Last modified: 30 May 2014QC 16293