• Insured not entitled to input tax credit

    Flowchart - Insured not entitled to input tax credit

    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 exercises their right of subrogation and recovers $3,300 from the party found at fault. The subrogation payment is received in a subsequent tax period.

    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. Decreasing adjustment will apply to this payment.

    Decreasing adjustment applicable to payment ($6,325).

    $575
    (see calculation (i) below)

    1B

    Amount of decreasing adjustment.

    Subrogation payment on later activity statement ($3,300).

    Nil

    Not applicable

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

    Increasing adjustment applicable to subrogation payment ($3,300).

    $300
    (see calculation (ii) below)

    1A

    Amount of Increasing 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.

    Corrected decreasing adjustment (DA) calculation - no 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 $6,325 and a DA using $3,025 ($6,325 less $3,300).

    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 =

    $3,025

    +

    0

    -

    0

    x

    11/(11-0)

    =

    $3,025

    +

    0

    -

    0

    x

    11/11

    =

    $3,025

     

     

     

     

     

     

    DA =

    1/11

    x

    $3,025

    x

    (1 - 0)

     

     

    =

    1/11

    x

    $3,025

    x

    1

     

     

    =

    $275

     

     

     

     

     

     

     

    Subrogation Adjustment =

    Original DA

    -

    Corrected DA

    =

    $575

    -

    $275

    =

    $300

     

     

    Amount to be shown at 1A on the activity statement as an increasing adjustment is $300.

      Last modified: 30 May 2014QC 16293