• Insurance Industry Partnership - issues register

    Where appropriate, individual issues in this issues register include a reference to a public ruling which is related to the relevant issue. In some cases, the issue is itself labelled as a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953. Where an issue in this issue register simply sets out the way the law applies, rather than dealing substantially with a question of legal interpretation, we have added to the item the description 'non-interpretative'.

    From 1 July 2010, issues labelled as a public ruling in this register will continue to be a public ruling even though section 105-60 of Schedule 1 of the Taxation Administration Act 1953 has been repealed.

    A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes.

    If you rely on issues in this register that are a ruling, we must apply the law to you in the way set out in the ruling. However, if we are satisfied that the ruling is incorrect and disadvantages you, we may apply the law in a way that is more favourable for you - provided we are not prevented from doing so by a time limit imposed by the law. You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you.

    Issues in this register that have not been labelled as public rulings, constitute written guidance. If you follow our information on these issues and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we must still apply the law correctly. If that means you owe us money, we must ask you to pay it but we will not charge you a penalty. Also, if you acted reasonably and in good faith we will not charge you interest. If correcting the mistake means we owe you money, we will pay it to you. We will also pay you any interest you are entitled to.

    For GST, Luxury Car Tax and Wine Equalisation Tax purposes, from 1 July 2015, where the term ‘Australia’ is used in this document, it is referring to the ‘indirect tax zone’ as defined in subsection 195-1 of the GST Act.

    All section references are to A New Tax System (Goods and Services Tax) Act 1999 unless otherwise stated.

     

    Insurance issues

    28/05/01

    1. Operation of Division 78 and Division 11 in relation to the activities undertaken by insurers in the course of settling claims

    28/05/01

    2. Subrogation

    28/05/01

    3. Subrogation

    28/05/01

    4. Subrogation

    28/05/01

    5. Subrogation

    28/05/01

    6. Subrogation and third party payments

    28/05/01

    7. Offshore insurance or reinsurance

    28/05/01

    8. Net settlements

    28/05/01

    9. Medical expenses

    28/05/01

    10. Calculation of the GST on the unearned premium at 30 June 2000

    28/05/01

    11. Section 78-50

    28/05/01

    12. Section 78-50

    03/09/01 (u)

    13. Travel insurance

    28/05/01

    14. Co-insurance

    28/05/01

    15. Excesses

    28/05/01

    16. Excesses

    28/05/01

    17. Excesses

    28/05/01

    18. Excesses and 78-70

    28/05/01

    19. Layered policies

    28/05/01

    20. Layered policies where some of the underwriters are offshore entities

    28/05/01

    21. Attribution

    28/05/01

    22. Lost tax invoices

    03/09/01 (u)

    23. Recipient created tax invoices (RCTI)

    28/05/01

    24. Tax invoices and insurance schedules

    28/05/01

    25. Combined tax invoice and RCTI

    17/06/02 (u)

    26. Non-notification

    03/09/01 (u)

    27. Mutual defence funds

    28/05/01

    28. Division 78 and subdivision 153-B agreements

    04/09/02 (u)

    29. Recoveries and adjustment events

    28/05/01

    30. Partners and income protection insurance

    28/05/01

    31. Acquisitions directly for the purpose of settling a claim

    28/05/01

    32. Settling a claim and repairs

    28/05/01

    33. Refund of excesses

    25/08/04 (u)

    34. Insurance excesses - safe harbour arrangements

     

    Reinsurance issues

    28/05/01

    1. Financial reinsurance

    28/05/01

    2. Reporting of unearned premium by reinsurers on supplies of proportional treaty reinsurance on the BAS

    28/05/01

    3. Using the 8ths Method to calculate unearned premium as at 30 June 2000

    28/05/01

    4. Additional premium and 'risk attaching' policies

    28/05/01

    5. GSTR 2013/1

    Insurance issues

    1 Operation of Division 78 and Division 11 in relation to the activities undertaken by insurers in the course of settling claims

    Issue

    In settling claims, insurers may pay the policy holder directly, or they may pay the supplier of goods or services for the supply of goods or services to the policy holder or other beneficiary of the policy.

    Division 78 clearly applies in relation to the provision of money to the policy holder. At issue is whether the insurer is entitled to an input tax credit under Division 11 where the payment is to a supplier of goods or services but the goods or services are supplied to the policy holder or other beneficiary. The Insurance Council of Australia (ICA) view is that the insurer is entitled to an input tax credit in such circumstances.

    ICA has pointed to the UK case of Redrow in support of this view.

    ATO view

    Non-interpretative - see GSTR 2006/10External Link - Goods and services tax: insurance settlements and entitlement to input tax credits

    2 Subrogation

    Issue

    What is covered by the term subrogation as used in Division 78? Does it include all recoveries?

    This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

    ATO view

    Subrogation is limited to the circumstances where the insurer has taken over the rights of the policy holder in accordance with the terms of the contract of insurance between the insurer and the policy holder. The situation covered by Division 78 is where the insurer receives funds from an entity that is not party to the contract of insurance when the insurer is exercising rights the insured would otherwise be exercising if it had not handed those rights to the insurer.

    For a greater understanding of what is covered by the term subrogation, including the goods and services tax (GST) treatment of specific insurance recoveries, please contact the Australian Taxation Office (ATO) Infoline on 13 28 66.

    3 Subrogation

    Issue

    Does section 78-40 only apply to payments made by insurers to which Division 78 has applied and not to payments to which Division 11 applies?

    Non-interpretative - straight application of the law.

    ATO view

    Section 78-40 only operates where there has been a decreasing adjustment under Division 78. As provided by the 'chapeau' to that section:

    'Division 19 applies in relation to a *decreasing adjustment that an insurer has under this Division...'. This Division being Division 78.

    4 Subrogation

    Issue

    Section 78-35 provides that a payment to an insurer in settlement of a claim made by an insurer in exercising its rights of subrogation is not to be treated as consideration for a taxable supply. As it is not consideration for a taxable supply, there is no taxable supply and therefore there cannot be an input tax credit available to the entity making the payment to the insurer. However, the effect of section 78-40 is to provide an increasing adjustment in the hands of the insurer in relation to that payment, effectively giving rise to a GST liability for the insurer. Is this imbalance a correct interpretation?

    This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

    ATO view

    Section 78-40 does provide an increasing adjustment where an insurer has had a decreasing adjustment under Division 78 and it recovers amounts in exercise of rights of subrogation.

    Section 78-35 does have the effect that there is no input tax credit available to an entity making a payment to an insurer in settlement of a claim the insurer makes in exercise of its rights of subrogation.

    5 Subrogation

    Issue

    Most subrogation payments are between insurance companies. Instances will exist where the 'entity that is not insured under the policy' (section 78-35) (third party) is another insurance company and the provisions of section 78-15 will allow that insurer to claim an input tax credit for the claim payment. Will section 78-15 prevail over section 78-35 to allow an input tax credit to the third party insurance company?

    This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

    ATO view

    There will be occasions where the payment made to the first insurance company (the one exercising its rights of subrogation) by the second insurance company (the 'entity that is not insured under the policy') is made by the second insurance company in settlement of a claim under one of its policies. In this instance, section 78-10 and section 78-15 could operate in relation to that payment.

    Sections 78-10 and 78-15 provide for a decreasing adjustment, not an input tax credit. Section 78-35 only operates to deny an input tax credit that would otherwise be available under Division 11. In this way, sections 78-10, 78-15 and 78-35 are not mutually exclusive.

    6 Subrogation and third party payments

    Issue

    The effect of section 78-40 is to provide an increasing adjustment in the hands of the insurer in relation to that payment, effectively giving rise to a GST liability for the insurer.

    Section 78-65 provides that a claims payment to a third party will not be consideration for a taxable supply. That is, the insurer making the payment will not have an input tax credit on the payment, nor will the third party have a GST liability on the payment.

    Where both parties are insurers, it appears that on the one hand the receipt of the payment creates a GST liability whereas on the other no GST liability arises.

    Is it correct to assume that section 78-65 will prevail and ensure that no GST is payable by the insurer receiving the subrogation payment?

    This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

    ATO view

    Section 78-40 provides for the application of Division 19 in relation to decreasing adjustments under Division 78 when an insurer receives a payment in settling a claim it has made in exercise of its rights of subrogation. In other words, the insurer has an increasing adjustment under Division 19. The insurer does not have a GST liability under Division 9.

    Section 78-65 operates to provide that the payment to the third party (a payment to an entity 'made in settlement of a claim under an insurance policy under which the entity is not insured') is not consideration for a supply. That is, Division 9 does not apply to the payment so the insurer receiving the payment does not have a GST liability on the payment. As section 78-40 does not provide for a GST liability under Division 9, but an increasing adjustment under Division 19, sections 78-40 and 78-65 are not mutually exclusive. They operate on different subject matter.

    Where both parties are insurers, the receipt of the payment by the third party insurer can lead to an increasing adjustment (depending on whether or not the third party insurer has a decreasing adjustment under Division 78), but does not lead to a GST liability. The insurer making the payment is not entitled to an input tax credit for the payment.

    7 Offshore insurance or reinsurance

    Issue

    If the Singapore branch of an Australian company writes a policy in Singapore for a Singapore resident which includes incidental cover of property in Australia, is that part of the cover subject to GST in Australia?

    For source of ATO view, refer to paragraph 224 of GSTR 2000/31External Link - Goods and services tax: supplies connected with Australia.

    ATO view

    The first thing to look at is whether the supply is a taxable supply under section 9-5.

    Is the supply for consideration? Most likely yes.

    Is the supply made in the course or furtherance of the entity's enterprise? Most likely yes.

    Is the supplier registered for GST? Presuming that the branch is not a separate entity from the Australian company, most likely yes.

    Is the supply connected with Australia? Presuming that the thing is not done in Australia, does the last action necessary to make the contract of insurance binding take place outside Australia? Most likely yes.

    If all the above assumptions are correct in the particular factual situation, the supply would not be a taxable supply.

    8 Net settlements

    Issue

    An insurer and another party each make claims against the other. The parties agree to give up their respective claims on the making of a net payment by the other party to the insurer. What is the GST treatment? Are the cross claims disregarded?

    This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

    ATO view

    One entity surrenders its rights against the second entity in exchange for the second entity (a) surrendering its rights against the first entity and (b) paying it the net difference between the claims (or some other agreed amount). The first entity is making a supply of the surrender of rights in exchange for consideration (the other entity's supply of the surrender of rights and the net amount paid). The second entity is also making a supply - a supply of the surrender of its rights against the first entity - in exchange for the first entity surrendering its rights against the second entity.

    The supplies will be taxable supplies if the conditions of section 9-5 are met. There will also be accompanying creditable acquisitions if the conditions of section 11-5 are met. See also GSTR 2000/D23External Link - Goods and Services Tax: GST consequences of court orders and out-of-court settlements.

    If the supplies are taxable, what is the amount of GST? The first entity will be liable to GST of 1/11 of the monetary part of the consideration plus 1/11 of the GST inclusive market value of the second entity's supply of the surrender of its rights against the first entity.

    The second entity will be liable to GST of 1/11 of the GST inclusive market value of the first entity's supply of the surrender of its rights against the second entity.

    If the acquisitions are creditable acquisitions, what are the amount of the input tax credits? Assuming the acquisitions are 100% for a creditable purpose, the first entity will be entitled to an input tax credit equal to the GST liability the second entity has. The second entity will be entitled to an input tax credit equal to the GST liability the first entity has.

    9 Medical expenses

    Issue

    Subdivision 38-B covers GST-free medical supplies. Basically medical expenses appear to be taxable rather than GST-free where the treatment is not appropriate for the 'recipient of the supply' [s38-10(1)(c)] Normally would expect that the patient was the recipient of the supply and any arrangements by which an insurer pays the claim (for example, CTP or workers compensation) would only be a payment arrangement and not a supply. Are there any circumstances where the supply of medical services that are otherwise GST-free are taxable to the insurer?

    For source of ATO view, refer to GSTR 2006/10External Link - Goods and services tax: insurance settlements and entitlement to input tax credits.

    ATO view

    New Section 38-60, which applies on or after 1 July 2012, ensures that certain supplies made to insurers in settling insurance claims under both private health insurance policies and taxable insurance policies are GST-free to the extent that the underlying supply to the insured (policy holder or third party) is GST-free under Subdivision 38 B.

    Section 38-60 similarly provides that supplies made to a statutory compensation scheme operator or compulsory third party (CTP) scheme operator are GST-free to the extent that the underlying supply of health related goods or services to an individual is GST-free under Subdivision 38 B.

    Also, certain supplies made by health care providers to Commonwealth, State or Territory government entities are GST-free to the extent that the underlying supply of goods or services to an individual is GST-free under Subdivision 38 B.

    However, a supply is not GST-free (to any extent) under Section 38-60 if the supplier and the recipient have agreed that the supply, or supplies of a kind that include that supply, not be treated as GST-free supplies.

    See GSTR 2006/10External Link - Goods and services tax: insurance settlements and entitlement to input tax credits.

    10 Calculation of the GST on the unearned premium at 30 June 2000

    Issue

    ICA submits that there are two methods. An actual calculation where you calculate the post 30 June risk premium and charge 10% GST on that amount. The other method being a straight line method where the risk premium is apportioned equally over the pre and post GST period and GST is charged on the post GST component. The GST payable will vary slightly depending on the method chosen.

    For source of ATO view, refer to GSTB 2000/4External Link - How you calculate and pay GST on a progressive or periodic supply that spans 1 July 2000.

    ATO view

    There are two methods the ATO views as acceptable.

    Method 1

    GST on supplies of insurance that span 1 July to which section 12 of the GST Transition Act applies is calculated using the following formula:

    GST = Consideration (excluding GST & stamp duty) x number of days on or after 1 July 2000 / total days in the period x 10%

    Method 2

    If you have entered into an agreement to make a supply that spans 1 July 2000 to which section 12 of the GST Transition Act applies, and did not take GST into account when determining the price, you calculate the amount of the consideration which relates to the period on or after 1 July 2000 (consideration for the taxable supply) as:

    Price (excluding stamp duty) x number of days on or after 1 July 2000 x 11 divided by [(10 x total days in the period) + days on or after 1 July 2000]

    GST equals 1/11 of this amount.

    11 Section 78-50

    Issue

    The last time for receipt of the notification of the insured's entitlement to input tax credits on the premium is when the 'claim was first made'. This is not defined. This percentage is required to process decreasing adjustment calculations on Division 78 claims payments and subrogations. Would we be correct in presuming that the date for supplying the taxable percentage would be immediately before a claim payment or subrogation occurs?

    Non-interpretative - straight application of the law.

    ATO view

    When the claim is first made depends on the facts in each case. For example, if a claim has to be made by the claimant submitting a claims form, the claim is not made until that form has been filled out and submitted to the insurer. If, however, a claim is accepted without a claims form, for example a telephone claim for a window repair where the window repair is made without the claimant ever submitting a claims form, the claim is made when the telephone claim is made. As another example, a claimant may phone a claim in, but no action is taken until and unless a claims form is submitted, the claim is not made until the claims form is submitted.

    At a practical level, if the decreasing adjustment is correctly calculated, this is not an issue.

    12 Section 78-50

    Issue

    Section 78-50 includes the expression 'since the last payment of a premium' relating to the date of advising of the taxable percentage. What is added by these words? Is the relevant taxable percentage based on the latest policy or the policy at the time of the claims event?

    Non-interpretative - straight application of the law.

    ATO view

    It is the time the first claim is made under the policy in question that is relevant.

    13 Travel insurance

    Issue

    Is incidental local travel forming part of an overseas trip treated as overseas travel for GST purposes? (For example, a trip from Brisbane to Sydney en route to overseas location.) Thus the travel is all GST free.

    For source of ATO view, refer to GSTR 2000/33External Link - Goods and services tax: international travel insurance.

    ATO view

    Item 2 of section 38-355 provides that the transport of passengers on the domestic legs of international flights is GST-free if the transport is part of a wider arrangement, itinerary or contract for transport by air involving international travel and at the time that arrangement etc was entered into the air transport in Australia formed part of the same ticket or was cross reference to such a ticket issued at that time.

    That is, if the trip from Brisbane to Sydney is to connect with an international flight out of Sydney as part of the ticket for the international flight, that transport will be GST-free. If it is on a separate ticket (and not cross-referenced) it will not be GST-free.

    This issue is also dealt with in GSTR 2000/33. Paragraphs 18 to 20 of that ruling provide:

    Transport of passengers to and from place of departure

    18. Insuring transport under item 6 of section 38-355 applies to the transport of passengers from and to their place of departure, and during the period that the insured is travelling overseas. Generally, there is only one insurance policy that covers the insured for both the domestic transport and while overseas.

    19. The travel from and to the place of departure is usually a very small part of international transport. A recent sample of over 500 claims by value of claim under standard policies of industry associations shows that only 0.17% of claims arose from incidents occurring between the traveller's place of departure and the airport, and from the airport to the traveller's place of departure.

    20. This examination of claims history indicates that the value to be attributed to this domestic component of the international travel policy is less than 0.5% of the total value of the transport. Provided the claims history for a particular product demonstrates that this domestic component is less than about 0.5%, there will be no need to apportion between the taxable domestic component and the GST-free international component. That portion of the cover can be included under item 6 of section 38-355 and can be treated as being GST-free.

    14 Co-insurance

    Issue

    Is it correct to treat coinsurance as an agency arrangement with the lead insurer retaining the documentation for the input tax credits but advising the fellow co-insurers of their share of the input tax credits and GST liability?

    Non-interpretative - other references

    Refer to:

    GSTR 2000/37External Link - Goods and services tax: agency relationships and the application of the law.

    GSTR 2004/2External Link - Goods and services tax: What is a joint venture for GST purposes?

    ATO view

    Whether coinsurance arrangements are treated as agency is a question of fact in each case. See also the separate examples on the GST treatment of coinsurance available on the ATO web site.

    15 Excesses

    Issue

    If an excess is paid to an insurer before the claims settlement is made, is it still included in the calculation of the settlement amount under section 78-15 once a claims settlement is made?

    Non-interpretative - straight application of the law.

    ATO view

    Yes. The method statement in section 78-15 is not limited to excesses paid after or at the same time as the claims settlement.

    16 Excesses

    Issue

    If an excess is paid before the claims settlement is made, and the claim is going to be settled with several payments over time, none of which individually are greater than the excess, how is the excess taken into account in calculating the settlement amount under subsection 78-15(4)? Some insurers are intending, if they know that they are going to have a decreasing adjustment, to account for an amount equivalent to an increasing adjustment on the receipt of the excess. This will have the same effect as if all of the settlement and excess were paid at the one time and the settlement amount calculated on the totals. Is this acceptable?

    This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

    ATO view

    This is acceptable.

    17 Excesses

    Issue

    If an insurer settles a claim by making an acquisition and is entitled to an input tax credit under Division 11 rather than a decreasing adjustment under Division 78, and the insured pays an excess to the insurer, does the method statement in section 78-15 operate to provide an increasing adjustment?

    This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

    ATO view

    No.

    Section 78-15 only applies if the conditions in section 78-10 are met. That is, section 78-15 provides for the amount of the decreasing adjustment, so there has to be an entitlement to a decreasing adjustment before section 78-15 can be applied. Section 78-10 sets out the circumstances where there is an entitlement to a decreasing adjustment. There will be a decreasing adjustment where the insurer makes a payment or a supply or both in settlement of the claim. There may be a decreasing adjustment if the insurer makes a payment or a supply or both in settlement of the claim. If the insurer makes an acquisition and is entitled to an input tax credit it will not have made a payment in settlement of the claim. It may however, very well be on supplying what it acquires to the insured. If that supply is not a GST-free or input taxed supply, the market value of the supply is not included in the method statement in section 78-15. As there has been no payment in settlement of the claim, the amounts in step 1 and step 2 are zero. If there has been an excess paid to the insurer there would be an amount in step 3. This would then appear to give rise to a negative decreasing adjustment. However, the ATO is of the view that in the scheme of the GST Act as a whole, it is not possible to have a negative decreasing adjustment. Section 17-10 provides that decreasing adjustments are to be subtracted from the net amount. Decreasing adjustments are, in the scheme of the Act, to decrease net amounts, a negative decreasing adjustment would act to increase net amounts.

    18 Excesses and 78-70

    Issue

    Where an insured has an excess and the insurer provides them settlement funds for the amount above the excess and the insured pays the funds plus the amount it was not insured for (ie, the excess) to a third party in settlement of a liability, what amounts do section 78-70 apply to?

    Non-interpretative - straight application of the law.

    ATO view

    The amount exclusive of the excess.

    Section 78-70 applies where 'the payment is covered by a settlement of a claim' (paragraph 78-170(1)(b)) or where 'the supply is covered by a settlement of a claim' (paragraph 78-170(2)(b)). Only the amount paid by the insurer to the insured is covered by the settlement of a claim.

    19 Layered policies

    Issue

    Layered policies are those where an insured takes out cover in separate layers, for example, zero to $1 million in one layer, $1 million to $5 million in another layer, and $5 million and over in a last layer. Each layer is a separate policy. Are they separate supplies for GST purposes?

    Non-interpretative - straight application of the law.

    ATO view

    Yes

    20 Layered policies where some of the underwriters are offshore entities

    Issue

    For layered policies there may be several underwriters providing cover for one of the layers. For example, there may be three underwriters for the $1 million to $5 million layer discussed in the previous issue. Does Division 96 apply?

    Generally, the underwriters are severally liable for the percentage of the cover they are providing. For example, if each of the three underwriters discussed above takes 1/3 of the cover, each is separately liable for its third. If one of the underwriters is unable to meet its obligations, there is generally no recourse to the other two underwriters. Occasionally, the underwriters will be jointly and severally liable, in which case there will be recourse to the other two underwriters.

    This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

    ATO view

    For Division 96 to apply, there has to be a single supply. Where the underwriters are not jointly liable, we consider that each underwriter is making a separate supply of cover to the extent that it is providing cover for that layer. Continuing the example, each of the three underwriters would be making a supply of cover of 1/3 of the risk for the $1 million to $5 million layer. Each supply would be examined to determine whether it is connected with Australia. Division 96 would not apply.

    If, however, the underwriters are jointly liable, there would only be a single supply. Does Division 96 apply? Subsection 96-5(1) provides that Division 96 applies if the supply is a mixed supply and is a mixture of any two or more of the following:

    • a supply of goods,
    • a supply of real property,
    • a telecommunications supply,
    • a supply of anything other than goods or real property that is not a telecommunications supply.

    The supply of risk cover by the underwriters is not a supply of goods, it is not a supply of real property, it is not a telecommunications supply. It is a supply of anything other than goods or real property that is not a telecommunications supply. It is only one of the types of supply listed in subsection 96-5(1), not a mixture of them. Division 96 does not apply.

    21 Attribution

    Issue

    Does GSTR 2000/29 which provides that entities do not have to account for GST/Input tax credits (ITC) on supplies/acquisitions made before the entity knows they are made mean constructive knowledge or actual knowledge? Insurers are informed of supplies of policies made through agents/brokers by the agent/broker some time after the supply is made. The insurer may find out when the policy documentation is submitted by the agent/broker to them. The policy may not be processed onto the insurer's systems for some time - either due to processing delays such as caused by the large backlogs that build up after 30 June each year from the large number of renewals that occur at that date. Delays of several days between documentation arriving and being processed at other times of the year are also normal. The insurer has constructive knowledge at the time the documentation arrives, but does not have actual knowledge until it is processed into its systems. In some situations the insurer may even have knowledge earlier, such as where the insurer has some input into setting up the policy - there are occasions when the documentation is provided to the insurer by the agent/broker and the insurer makes some alteration to the policy before it is accepted and processed.

    Is the insurer required to account for the GST when it has constructive knowledge of the supply or when the supply of the policy is processed into the insurer's systems?

    For source of ATO view, refer to paragraphs 87, 88 and 124 to 143 of GSTR 2000/29External Link - Goods and services tax: attributing GST payable, input tax credits and adjustments and particular attribution rules made under section 29-25.

    ATO view

    As long as there is not an unreasonable delay - such as a delay beyond what are normal working practices - the insurer is taken to have knowledge of the supply when the supply is processed into its systems. For example, if the normal delay for an insurer during the peak period after 30 June is two weeks, but the supply of the policy is not processed into the insurer's systems until 6 weeks after the completed documentation arrives at the insurer it would be considered to be an unreasonable delay.

    22 Lost tax invoices

    Issue

    If a tax invoice or a recipient created tax invoice has previously been issued but lost by the recipient, is it possible to issue a replacement? Does it have to be noted as a replacement?

    ATO view

    If a tax invoice (including a recipient created tax invoice) is lost, a new copy can be issued as long as it is clearly identifiable as a copy.

    23 Recipient created tax invoices

    Issue

    Can recipient created tax invoices be used in the insurance industry where the recipient of the supply is under the $20 million turnover test in the RCTI ruling?

    Non-interpretative - straight application of the law.

    ATO view

    Yes, as long as all the other conditions in the RCTI ruling are met. See the Commissioner's determination issued to the ICA on behalf of the industry: RCTI 2000/30 - Insurance: reinsurance and retrocessionExternal Link.

    See also:

    RCTI 2000/44 - General Insurance AgentsExternal Link RCTI 2000/64 - General Insurance Sub-AgentsExternal Link

    24 Tax invoices and insurance schedules

    Issue

    Where an insurer makes a taxable supply of insurance through a broker, they often provide the broker with a document called an 'insurance schedule'. So they do not need to keep track of requests for tax invoices, some insurers want the insurance schedule to always be a tax invoice. In some cases, the broker will simply hand the insurance schedule to the insured, but in other cases, the broker will incorporate the information on the schedule into documentation they prepare and send to the insured. In the latter situation the broker will be issuing the tax invoice for the supply of insurance on behalf of the insurer as permitted by section 153-25.

    In this scenario, it could be interpreted that two tax invoices have been issued for the one taxable supply of insurance.

    For this reason some insurers wanted to issue the insurance schedule as a tax invoice but add a statement to the effect that the insurance schedule was not a tax invoice if the policy was arranged through a broker.

    For source of ATO view, refer to:

    • paragraph 72 of GSTR 2000/37External Link - Goods and services tax: agency relationships and the application of the law
    • GSTR 2013/1 - Goods and services tax: tax invoices

    ATO view

    Section 153-25 provides that, for supplies of insurance by an insurer through an insurance broker acting on behalf of the recipient, Subdivision 153-A applies to the broker as if they were agent of the insurer. Therefore, the following discussion applies to brokers as well as agents.

    Section 153-15 allows the recipient of a taxable supply to request a tax invoice from either the agent or the principal, and that request is complied with when either the agent or the principal gives the recipient the tax invoice. Subsection 153-15(2) provides that the agent and the principal must not both issue a tax invoice for the same taxable supply. Section 288-50 of Schedule 1 to the Taxation Administration Act 1953 (TAA) deems an entity liable to a penalty if both it and its agent issue separate tax invoices relating to the same taxable supply.

    It is the ATO's view that the penalty under section 288-50 of Schedule1 to the TAA arises when the principal and their agent both issue tax invoices for the same taxable supply, and not when the recipient receives a tax invoice from both the agent and the principal for the same taxable supply. In the scenario suggested, the fact that there are in existence two tax invoices for the same taxable supply, one incorporated into the insurance schedule and the other in the broker document, is sufficient to give rise to the penalty.

    It is the ATO's view that while section 153-15 allows a degree of choice (in that the recipient may request either the principal or the agent for a tax invoice, and their request is complied with when either the principal or the agent gives them one), there is bound up in that an obligation on the part of both the principal and the agent to ensure that they do not both issue tax invoices for the same taxable supply. Considering section 288-50 of Schedule 1 to the TAA penalises the principal where two tax invoices are issued for the same taxable supply, it would be in their interest to ensure that the scenario does not arise. We would suggest that those insurance houses that supply contracts of insurance that are taxable supplies through brokers modify their policy and procedures to ensure that only one person issues the tax invoice.

    25 Combined tax invoice and RCTI

    Issue

    Where a tax invoice is for more than one supply, and for one of those supplies it is an RCTI, what should be the heading on the invoice? Recipient Created Tax Invoice, Tax Invoice or Recipient Created Tax Invoice/Tax Invoice.

    Non-interpretative - other references

    Refer to:

    ATO view

    Provided it can be clearly ascertained from the document that it is intended to be a recipient created tax invoice and a tax invoice, it will satisfy the legislative requirements.

    26 Non-notification

    Issue

    Some workers' compensation authorities have decided that if they do not receive a notification of the extent to which there is an entitlement to input tax credits on the premium/levy/contribution, they will assume that the entitlement is 100%. Most employers will be entitled to 100% input tax credits (ITC). The result of this assumption is that the insurer will not claim a decreasing adjustment on the claim. If the assumption is incorrect, such as the employer concerned was entitled to less than 100% input tax credits, the insurer would not have claimed a decreasing adjustment to which it was entitled. Is this acceptable to the ATO?

    Non-interpretative

    ATO view

    This is acceptable to the ATO provided the insurer:

    • requests the input tax credit entitlement information from the entity (for example, as a question on the claim form); and
    • in the event the entity fails to provide that information, the insurer has made reasonable attempts to obtain information as to the entity's input tax credit entitlement.

    Workers' compensation insurance covers an employer against liability for injury, death or disease suffered by an employee as a result of their employment. It is therefore reasonable to assume that given the nature of worker's compensation insurance, it is obtained for a creditable purpose. However, given the nature of other types of insurance, the same assumption could not be made by the insurer in respect of those other types of insurance.

    27 Mutual defence funds

    Issue

    Various professions, such as the medical and legal professions, have established indemnity funds. In many cases, the funds are not insurance at law. Division 78 does not apply to them. How does GST apply to the funds? How does GST apply to the fees paid by members of the funds into the funds? How does GST apply to compensation payments made by the funds?

    Non-interpretative - straight application of the law.

    ATO view

    Generally, Division 78 will not apply as such funds generally do not supply insurance policies. This does not mean that such funds cannot, or do not supply insurance policies, rather, it is generally the case that they do not. Therefore, the general rules will apply to the fees and to the compensation payments where a mutual defence fund does not supply insurance policies.

    If the fund is registered, it could be expected that generally the fees would be subject to GST as the requirements of section 9-5 would be met.

    Whether the compensation payment is subject to GST depends on whether the requirements of section 9-5 are met.

    • Is the entity receiving the payment, such as a patient with a claim against a doctor, registered for GST?
    • Is that entity making a supply in exchange for the payment? For example, making a supply of the surrender of any further rights to pursue action against the doctor by signing a release. See GSTR 2001/4External Link.- Goods and Services Tax: GST consequences of court orders and out-of-court settlements
    • If there is supply, is it connected with Australia?
    • If there is a supply, is it in the course or furtherance of an enterprise? For example, if the action by the patient is in respect of personal injuries it could be expected that generally there would not be a supply in the course or furtherance of the enterprise as the rights being surrendered are personal. On the other hand, if the action were by a business in relation to negligence by its legal representative, it could be expected that any surrender of the right to pursue further action would be in the course or furtherance of the enterprise.

    Also note that as there may be a supply of an indemnity by the fund if it decides to provide compensation, item 7 of the table in sub regulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 may be applicable.

    The ATO is only too happy to address private ruling request on whether Division 78 would apply to a particular arrangement.

    28 Division 78 and subdivision 153-B agreements

    Issue

    Is the insurer entitled to claim a Division 78 decreasing adjustment (DAM) if it has entered into a subdivision 153-B agreement with agents supplying insurance on its behalf?

    Are payments by the insurer to the agent subject to GST?

    Are the agents entitled to input tax credits on acquisitions made for the purpose of settling the claim?

    Are the agents entitled to DAM on payments made to insured or third parties to settle the claim?

    This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

    ATO view

    Under subdivision 153-B, an insurer may, in writing, enter into an arrangement with an agent under which the agent will on behalf of the insurer make supplies to third parties or acquisitions from third parties, or make both.

    Both supplies and acquisitions must be specified; and, under paragraph 153-50(c) 'for the purpose of the GST law:

    i. the agent will be treated as making the supplies to the third parties, or acquisitions from the third parties, or both; and
    ii. the principal will be treated as making corresponding supplies to the agent, or corresponding acquisitions from the agent, or both;....'

    Therefore, where the agent authorises the repairs and have a contractual agreement with the repairers and are liable for the cost of the repairs, then the agent will be entitled to an input tax credit in respect of the creditable acquisitions.

    Under subparagraph 153-50(c)(ii) of the Act, the insurer will be treated as making corresponding acquisitions from the agent. That is, the amount that is reimbursed to the agent from the insurer will be consideration for a creditable acquisition by the insurer. The insurer will be entitled to an input tax credit in this scenario. The reimbursement will be consideration for a taxable supply by the agent.

    In the scenario where the agent does not authorise the repairs and does not have a contractual agreement with the repairer, but merely facilitates payment after receiving an invoice from the insured or repairer and have accepted the claim, the agent in this scenario has not made a creditable acquisitions, instead they are making a settlement. Therefore, the settlement will be considered under Division 78 of the Act. See GSTR 2000/36External Link for a discussion of when an acquisition rather than a settlement is made.

    If the supply of insurance was made through the agent and that supply was subject to the subdivision 153-B agreement, the agent is treated, for the purposes of the GST law only, as making the insurance settlement. This is because the agent is treated, for the purposes of the GST law only, as making a supply of insurance. Subparagraph 153-50(c)(i) provides 'the agent will be treated as making the supplies...'. Division 78 will therefore apply to the 'deemed' supply of insurance by the agent. The agent may be entitled to a decreasing adjustment.

    Under this scenario the insurer is also treated as making a supply of insurance to the agent, for the purposes of the GST law only. If the insurer reimburses the agent for the payment the agent has made in settlement of the claim, the insurer will therefore also be making a settlement and may be entitled to a DAM. However, as the agent would have been entitled to a full input tax credit in respect of the 'deemed' premiums paid by the agent to the insurer, the insurer will not be entitled to a DAM under Division 78 of the Act.

    29 Recoveries and adjustment events

    Issue

    Does the recovery of monies by the insurer from the at-fault third party constitute an adjustment event under Division 19 of the GST Act in relation to acquisitions made by insurers directly for the purpose of settling a claim?

    This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

    ATO view

    Where an insurer has made acquisitions under Division 11 of the GST Act directly for the purposes of settling an insurance claim and subsequently recovers money from an at-fault third party in relation to those acquisitions, the recovery of that money by the insurer does not constitute an adjustment event under Division 19.

    30 Partners and income protection insurance

    Issue

    If a partner of a partnership acquires income protection insurance, is the partnership entitled to an input tax credit on the acquisition?

    Non-interpretative - straight application of the law.

    ATO view

    Section 184-5 of the GST Act - supplies etc. by partnerships and other unincorporated bodies - provides as follows.

    '(1) For the avoidance of doubt, a supply, acquisition or importation made by or on behalf of a partner of a partnership in his or her capacity as a partner:
    (a) is taken to be a supply, acquisition or importation made by the partnership; and
    (b) is not taken to be a supply, acquisition or importation made by that partner or any other partner of the partnership.'

    Whether or not a partnership is entitled to an input tax credit in respect of an income protection policy taken out by a partner in the partner's own name will depend on the policy. That is, is the income protection, although in the name of the partner, to protect the income of the partnership or that of the partner as an individual.

    If it is the latter, then the partnership is not entitled to an input tax credit as the partner will not have acquired the insurance on behalf of the partnership. Also, the requirements under Division 11 must be met in order for the partnership to claim an input tax credit.

    31 Acquisitions directly for the purpose of settling a claim

    Issue

    What acquisitions made by insurers will be 'directly for the purpose of settling the claim' for the purposes of sections 78-18 and 78-30?

    This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

    ATO view

    Goods

    An acquisition of goods by the insurer will be directly for the purpose of settling the claim if the insurer supplies those goods in settlement of the claim to the insured and the essential character of the goods remains unchanged. That is, if the insurer supplies the goods in order to settle its liability arising under the policy, the acquisition of the goods will be directly for the purpose of settling the claim.

    Things other than goods or real property

    An acquisition of something other than goods or real property by the insurer will be directly for the purpose of settling the claim if the acquisition is made to enable the insurer to settle its liability arising under the policy. If the acquisition is made to enable the insurer to determine what that liability is, the acquisition will not be directly for the purpose of settling the claim.

    For example, an insurer makes an acquisition of a right to have a supply, such as a supply of repair services, made to the insured. The supply made by the supplier to the insured will mean that the insurer's liability arising from the insurance policy will be met. The acquisition of the right by the insurer will be directly for the purpose of settling the claim.

    For example, an insurer acquires the services of an assessor to assess the claim. The acquisition will enable the insurer to determine its liability under the policy. This will not be an acquisition directly for the purpose of settling the claim. This will also be the case where the insurer acquires legal, engineering, or investigator's services to enable it to determine its liability under the policy.

    For example, an insurer acquires a police report after an accident. It also acquires a medical report on the medical condition of the claimant. Both acquisitions are made to enable the insurer to determine its liability under the policy covering the accident. Neither acquisition will be directly for the purpose of settling the claim.

    32 Settling a claim and repairs

    Issue

    Some insurers are paying 10/11 of the total repair costs to the repairer and instructing the registered and fully creditable insured/injured party to pay the other 1/11 to repairer and then claim that amount from ATO as an input tax credit.

    For source of ATO view, refer to paragraphs 65 to 68 of GSTR 2006/10External Link - Goods and services tax: insurance settlements and entitlement to input tax credits

    ATO view

    Only if the insured/injured party pays the full repair costs will they be entitled to an input tax credit of 1/11 of the total repair costs. The insurer has to be paying the repairer on behalf of the insured/injured party. The 10/11 coming from the insurer has to actually be the insured's/injured party's money. Otherwise, the insured/injured party is only entitled to 1/11 of the consideration they provide, ie, 1/11 of 1/11 of the total repair bill.

    33 Refund of excesses

    Issue

    How does GST apply to the refund of excess payments under an insurance policy from an insurer to an insured?

    This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

    ATO view

    An excess under an insurance policy is generally the first part of a loss, which the insured agrees to bear. Often, the insured will therefore have to pay the first part of a loss themselves, such as for a replacement item or repairs or damages payments. For example, in a car repair situation the insurer may pay the excess exclusive amount to the repairer and require the insured to pay the amount of the excess to the repairer. In other cases, the insured will be required to pay that amount to the insurer rather than to another entity. For example, the insurer may pay the entire cost of repairs to the repairer and recover the excess from the insured.

    When paid by the insured to an entity other than the insurer, such as a repairer, the payment may be consideration for a supply and may be subject to GST if the requirements of section 9-5 of A New Tax System (Goods and Services Tax) Act 1999, (the GST Act) are met. On the other hand, when paid by the insured to the insurer the payment is not consideration for a supply under section 78-55 of the GST Act.

    Excess that did not give rise to a section 78-18 adjustment
    If an excess does not give rise to a section 78-18 adjustment and is refunded, the insurer does not have an adjustment in relation to the refund of the excess. Nor does the insured.

    If an insurer has an increasing adjustment under subsection 78-18(1) (because it made acquisitions or importations directly for the purpose of settling the claim and made payments or supplies in settlement of the claim) and the excess is refunded, the insurer will have a decreasing adjustment under section 78-42 only in relation to that part of the excess that gave rise to the section 78-18 increasing adjustment. The insured does not have an adjustment under section 78-42.

    Example

    An insured made a claim on its insurer. The insured paid an excess of $110 to the insurer. The insurer settled the claim by making both creditable acquisitions directly for the purpose of settling the claim (see issue 31) and by making payments in settlement of the claim. The excess relates to the creditable acquisitions directly for the purpose of settling the claim to the extent of 60%. The insurer has an increasing adjustment under section 78-18 of 1/11 of 60% of $110, which equals $6. The insurer subsequently refunds all of the $110 excess to the insured. Section 78-42 applies so that the insurer will have a decreasing adjustment of $6 under Division 19 of the GST Act. The insurer does not have an adjustment in relation to the part of the excess that does not relate to the creditable acquisitions directly for the purpose of settling the claim.
    If the insurer refunds, say, half of the excess ($55), the insurer will have a decreasing adjustment under section 78-42 on 60% of the refund. The insurer's decreasing adjustment will be 60% of 1/11 of $55, which is $3.

    Excess paid to entity other than insurer

    Where the excess has been paid to an entity other than the insurer, such as a repairer, and subsequently refunded by the insurer to the insured, the refund by the insurer will be an adjustment event for the insured under Division 19 of the GST Act (if the insured was entitled to input tax credits on the payment of the excess to the repairer). The refund by the insurer under this scenario effectively reduces the consideration the insured paid to the repairer. Therefore, the insured, if registered, will have an increasing adjustment of 1/11th of the amount refunded.

    34 Insurance excesses - safe harbour arrangements

    This issue is a public ruling for the purposes of section 105-60 of Schedule 1 to the Taxation Administration Act 1953.

    Addendum 2 - 12 July 2004

    Following a period of consultation with the Insurance Council of Australia (ICA), who co-developed the arrangements with the ATO, the existing safe harbour arrangements for apportioning payments of excess have been revised.

    Changes include:

    • revised safe harbour rates
    • amendments to safe harbour option 2 (a) to ensure that, in non-mixed settlements, an increasing adjustment is made for the balance of excess once a claim is finalised, and
    • other minor changes to ensure that the arrangements extend to excesses covered by Division 79 of A New Tax system (Goods and Services Tax) Act 1999.

    The revised arrangements will apply from 1 October 2004 and will be available to all general insurers and operators of compulsory third party schemes (CTP operators), irrespective of whether or not the insurers or CTP operators are members of the ICA.

    The existing arrangements will continue to apply to payments of excess up to 30 September 2004 and will be removed from the Insurance Industry Partnership- Issues Register after 21 October 2004.

    Revised safe harbour arrangements - 1 October 2004

    What this paper is about

    This paper provides guidelines for apportioning payments of excess under insurance policies and compulsory third party (CTP) schemes for the purpose of calculating increasing adjustments under section 78-18 and section 79-55 respectively of A New Tax System (Goods and Services Tax) Act 1999, (the Act). This paper also sets out details of the ATO accepted basis of apportioning excesses - known as a safe harbour.

    Background

    Division 78 of the Act provides special rules for the treatment of insurance settlements. Division 79 and Division 80 modify and extend the operation of these special rules so that they apply to CTP settlements and CTP settlement sharing arrangements. Any insurance or CTP related transactions that are not specifically covered by the special rules in Divisions 78, 79 and 80, fall for consideration under the basic rules of the Act.

    Section 78-55 and section 79-80 provide that the payment of an excess to an insurer, or to an operator of a CTP scheme (CTP operator), is not consideration for a supply and is therefore not subject to GST. This provides the correct treatment in cases where the insurer or CTP operator settles a claim by making a payment or a supply, because in those cases the excess is taken into account in reducing the insurer's or CTP operator's entitlement to any decreasing adjustment under Divisions 78 and 79 of the Act. (Refer to Step 2 of the method statement in subsection 78-15(4) and subsection 79-95 (3) of the Act).

    However, insurers and CTP operators will not always settle claims by making payments or supplies and may also make acquisitions in order to settle claims. Where such acquisitions are creditable acquisitions, the insurer or CTP operator will be entitled to an input tax credit under Division 11 of the Act, but the payment of any excess is not taken into account in reducing the input tax credit under the basic rules in the same way that it would have been if the insurer or CTP operator had been entitled to a decreasing adjustment for the settlement under Division 78 or Division 79 of the Act.

    To ensure that all excesses paid to an insurer or CTP operator are treated the same irrespective of how claims are settled, section 78-18 and section 79-55 of the Act were introduced to provide an increasing adjustment for that part of the excess that relates to creditable acquisitions or importations made directly for the purposes of settling a claim. The effect of these provisions is that insurers and CTP operators are required to apportion the excess between any payments or supplies made in settlement of a claim (Division 78 & 79 settlements) and any creditable acquisitions or importations made directly for the purposes of settling the claim (Division 11 settlements), and then make an increasing adjustment for that part of the excess that relates to the Division 11 settlements.

    During the course of consultation with the Insurance Council of Australia (ICA) on the introduction of section 78-18, concern was expressed that complying with the requirements of the provision would result in significant administrative costs for insurers. Particularly in relation to 'long tail' claims where the excess may be received in a tax period prior to the final make up of the settlement being known.

    In such cases, insurers would need to re-apportion the excess and re-calculate their section 78-10 decreasing adjustments and section 78-18 increasing adjustments for each tax period during which any part of a claim is settled until the claim is finalised. The GST treatment of CTP related excesses under Division 79 of the Act poses similar administrative difficulties for CTP operators.

    Safe harbour arrangements for insurance and CTP related excesses

    In recognition of the administrative difficulties faced by insurers and CTP operators, and to reduce the cost of complying with the requirements of section 78-18 and 79-55 of the Act, the ATO will accept a once only section 78-18 and section 79-55 increasing adjustment based on an industry agreed safe harbour basis of apportioning excess for each class of insurance.

    Where a safe harbour basis of apportioning excess is adopted to calculate a section 78-18 or section 79-55 increasing adjustment, the balance of the excess must be taken into account in calculating any section 78-10 or section 79-50 decreasing adjustment, as required by Step 2 of the method statements in section 78-15 and section 79-95 of the Act respectively. However, as is the case for increasing adjustments, where a safe harbour is adopted the excess is taken into account once only in reducing the relevant decreasing adjustment.

    The classes of insurance covered by these arrangements, and the applicable safe harbours, are set out in the table below. The increasing adjustment under section 78-18 and section 79-55 of the Act will be 1/11th of the apportioned value of the excess and will need to be brought to account in the tax period during which the increasing adjustment liability arises or when the excess is received. The timing of the increasing adjustment under these arrangements depends on which of the two safe harbour options is adopted. Please refer to option 2(a) and option 2(b) at the end of this paper.

    The agreed basis of apportionment for each class of insurance, referred to as a safe harbour, has been developed in consultation with the ICA and is based on historical claims data provided by ICA member insurers. The safe harbours for each class of insurance, as classified by the ICA, will be reviewed annually to take into account contemporary costs of settling claims.

    What is a safe harbour?

    A 'safe harbour' is an agreed basis for calculating a liability that will be accepted by the ATO as satisfying the requirements of the law. Safe harbours are designed to provide certainty and simplicity for taxpayers and to reduce compliance costs. However, the use of safe harbours is not mandatory. That means that a taxpayer can choose to adopt a safe harbour or calculate a liability for a particular transaction on an actual basis. If a taxpayer chooses to adopt a safe harbour and applies it to a transaction according to the terms in this paper, the taxpayer will be taken to have met their liability for the particular transaction in full.

    The agreed safe harbours

    Insurers and CTP operators may calculate their section 78 -18 and section 79-55 increasing adjustments as follows:

    Increasing adjustment = $ value of excess x safe harbour x 1/11th

    Class of business

    Safe harbour

    (as % of excess )

    Class of business

    Safe harbour

    (as % of excess )

    Aviation

    0

    Marine and aviation (comb)

    13

    Commercial motor vehicle

    48

    Marine cargo

    2

    Consumer credit

    0

    Marine hull

    11

    CTP motor vehicle

    2

    Marine pleasure craft

    40

    Domestic motor vehicle

    60

    Mortgage

    0

    Employers liability

    6

    Other accident

    15

    Fire and ISR

    15

    Professional indemnity

    0

    HH building

    55

    Public and product liability

    8

    HH combined

    44

    Travel local

    1

    HH contents

    50

    Travel overseas

    0

    Inward treaty

    0

    Other: Including, extended warranty and gap insurance


    18

    Notes

    (i) The balance of excess remaining, after applying the above safe harbours to calculate a section 78-18 or section 79-55 increasing adjustment, represents the portion of excess that must be taken into account in calculating relevant decreasing adjustments under the method statements in section 78-15 and section 79-95 respectively.

    (ii) Where a policy falls into two or more classes of insurance, the allocation used for APRA1 purposes will be an acceptable basis of allocating the excess for purposes of adopting the above safe harbours.

    (iii) These arrangements do not apply to excesses that relate to GST-free insurance policies.

    Date of effect

    The safe harbours shown in the above table may be applied in respect of all section 78-18 and section 79-55 increasing adjustments arising on and from 1 October 2004, and will remain in force until a change is notified by the ATO.

    Safe harbour terms

    1. Insurers and CTP operators who adopt the above safe harbours according to the terms in this paper will satisfy their GST liability under section 78-18 and section 79-55 of the Act in full. That is, they will obtain the benefit of the protection conferred by section 37 of the Taxation Administration Act 1953.
    2. Insurers and CTP operators may adopt the safe harbour for a class of insurance or may calculate increasing adjustments under section 78-18 and section 79-55 of the Act on an actual basis.
    3. Where an insurer or CTP operator elects to adopt a safe harbour for a particular class of insurance, the insurer or CTP operator must apply the safe harbour to all relevant transactions in that class for a period of at least 12 months. The insurer or CTP operator cannot swap between a safe harbour and an actual adjustment for different transactions in the same class during the period of the election.
    4. Insurers or CTP operators, who elect to use a safe harbour for some classes of insurance, but not for others, must keep a contemporaneous record of that election. It is not necessary to send the election to the ATO, but the election must be produced if requested by the ATO to support the basis of calculating any excess related increasing adjustments.
    5. The safe harbours apply prospectively and cannot be adopted retrospectively to generate a credit entitlement. If an insurer or CTP operator calculates increasing adjustments on an actual basis and then discovers that adopting a safe harbour would have been more advantageous, the insurer or CTP operator cannot rely on a safe harbour to claim a credit or a refund of any excess GST paid in the past as a result of not using a safe harbour. However, the insurer can, at any time, elect to adopt a safe harbour for future transactions.

    Who can use a safe harbour basis of apportionment?

    The safe harbours outlined above were developed by the ICA on behalf of its members and have been agreed to by the ATO as an appropriate basis for insurers and CTP operators to apportion excess for purposes of sections 78-18, 78-15, 79-55 and 79-95 of the Act respectively. However, membership of the ICA is not a prerequisite to adopting the safe harbours. The same arrangements are available to all general insurers and CTP operators.

    Review of safe harbours

    The safe harbour rates will be reviewed annually in consultation with the ICA, but will remain in force until a change is notified by the ATO.

    Explanations

    Section 78-18 of the Act provides -

    '78-18 Increasing adjustments for payments of excess under insurance policies

    (1) An insurer has an increasing adjustment if:

    (a) there is a payment of an excess to the insurer under an insurance policy; and

    (b) the insurer makes, or has made, payments or supplies in settlement of a claim under the policy; and

    (c) the insurer makes, or has made, creditable acquisitions or creditable importations directly for the purpose of settling the claim.

    (2) The amount of the increasing adjustment is 1/11 of the amount that represents the extent to which the payment of excess relates to creditable acquisitions and creditable importations made by the insurer directly for the purpose of settling the claim.

    (3) An insurer has an increasing adjustment if:

    (a) there is a payment of an excess to the insurer under an insurance policy; and

    (b) the insurer makes, or has made, creditable acquisitions or creditable importations directly for the purpose of settling the claim; and

    (c) the insurer has not made any payments or supplies in settlement of the claim.

    The amount of the increasing adjustment is 1/11th of the amount of the payment of the excess.'

    Section 79-55 of the Act provides -

    '79-55 Increasing adjustments for payments of excess etc. under compulsory third party schemes

    (1) An operator of a compulsory third party scheme has an increasing adjustment if:

    • there is a payment of an excess to the operator under the scheme, and
    • the payment relates to a CTP compensation payment or supply that the operator makes or has made, and
    • the operator makes, or has made, creditable acquisitions or creditable importations directly for the purpose of making the CTP compensation payment or supply.

    (2) The amount of the increasing adjustment is 1/11 of the amount that represents the extent to which the payment of excess relates to creditable acquisitions or creditable importations made by the operator directly for the purpose of making the CTP compensation payment or supply.

    (3) An operator of a compulsory third party scheme has an increasing adjustment if:

    (a) there is a payment of an excess to the operator under the scheme, and

    (b) the operator makes, or has made, creditable acquisitions or creditable importations directly for the purpose of making a CTP compensation payment or supply to which the payment of excess would relate, and

    (c) the operator has not made any CTP compensation payment or supply to which the payment of excess relates.

    The amount of the increasing adjustment is 1/11th of the amount of the payment of excess.'

    Timing of the increasing adjustment

    The liability to make an increasing adjustment under the above provisions will only crystallise when both of the following conditions have been met:

    • there is a payment of an excess to the insurer or CTP operator, and
    • the insurer or CTP operator makes, or has made, a creditable acquisition directly for the purpose of, either settling a claim under an insurance policy, or making a CTP compensation payment or supply.

    Meaning of 'directly for the purpose of settling the claim'

    An acquisition or importation of goods or real property by an insurer will be directly for the purpose of settling the claim if the insurer supplies those goods or real property in settlement of the claim to the insured and the essential character of the goods or real property remains unchanged. That is, if the insurer supplies the goods or real property in order to settle its liability arising under the policy, the acquisition of the goods or real property will be directly for the purpose of settling the claim.

    Where an insurer acquires something other than goods or real property, it will be directly for the purpose of settling the claim if the acquisition is made to enable the insurer to settle its liability arising under the policy. If the acquisition is made to enable the insurer to determine what that liability is, or represents costs not covered under the terms of the policy, the acquisition will not be directly for the purpose of settling the claim.

    For example:

    • An insurer enters into a contractual arrangement with a supplier for a supply, such as a supply of repair services, to be made to an insured. The supply made by the supplier to the insured will mean that the insurer's liability under the insurance policy will be met.

    The acquisition of the supply by the insurer will be directly for the purpose of settling the claim.

    • An insurer acquires the services of an assessor to assess the claim. The acquisition will enable the insurer to determine its liability under the policy.

    This will not be an acquisition directly for the purpose of settling the claim. This will also be the case where the insurer acquires legal, engineering or investigator services to enable it to determine its liability under the policy.

    • An insurer acquires a police report after an accident. It also acquires a medical report on the medical condition of the claimant. Both acquisitions are made to enable the insurer to determine its liability under the policy covering the accident.

    Neither acquisition will be directly for the purpose of settling the claim.

    Whether or not an acquisition is directly for the purpose of settling the claim does not affect the insurer's entitlement to input tax credits for the acquisition under Division 11 of the Act.

    The same conditions are applied to the phrase 'directly for the purpose of making a CTP compensation payment or supply' in section 79-55 of the Act. If a CTP operator acquires goods or services and on-supplies those goods or services in order to settle a claim under a CTP scheme, then the acquisition of those goods or services will be regarded as being directly for the purpose of making a CTP compensation payment or supply and will, subject to the payment of an excess, trigger a liability to a section 79-55 increasing adjustment.

    If an acquisition is made to enable the CTP operator to determine a claim, for example, a medical report, it will not be regarded as being directly for the purpose of making a CTP compensation payment or supply and will not, therefore, trigger an increasing adjustment under section 79-55 of the Act. Again, whether or not an acquisition is directly for the purpose of making a CTP compensation payment or supply does not affect the CTP operator's entitlement to an input tax credit for the acquisition.

    Treatment of excesses under the GST Act

    Settlements of insurance claims are affected by the insured's entitlement to an input tax credit on the premium (ITC entitlement). Settlements of insurance claims will fall for consideration under either Division 78 of the Act, depending on the insured's ITC entitlement - they may give rise to a decreasing adjustment for the insurer, or they may be creditable acquisitions under Division 11 of the Act, which will give rise to an input tax credit for the insurer.

    The intent of the legislation is that when payment of an excess is received by an insurer, it should affect any credit entitlement that the insurer may have for settling the claim. The method statement in section 78-15 of the Act operates to ensure that any payment of excess to the insurer reduces the amount of the decreasing adjustment available to the insurer in respect of the settlement, while section 78-18 of the Act provides for an increasing adjustment to the insurer to the extent that the excess relates to a settlement that gave rise to an input tax credit.

    The combined effect of these provisions is that the excess will need to be apportioned to section 78-15 and section 78-18 of the Act in the same proportion as the settlement comprises Division 78 payments or supplies and Division 11 acquisitions. Furthermore, if the excess is received in a tax period prior to the final settlement of a claim, it will need to be re-apportioned each time that any part settlement of the claim is made, until the claim is finally settled in full.

    The same principles apply to the treatment of CTP related excesses. Where a payment of excess relates to the settlement of a claim under an insurance policy, it will be taken into account under section 78-15 and section 78-18 of the Act to reduce any credit entitlement available to the insurer for settling the claim as discussed above.

    Where a payment of excess relates to the settlement of a claim for compensation under a CTP scheme, it will similarly be taken into account to reduce any credit entitlement available to the operator for settling the claim. Section 79-95 of the Act will reduce any decreasing adjustment available to the CTP operator for any payment or supply made in settlement of the claim and section 79-55 of the Act will give rise to an increasing adjustment to the extent that the excess relates to a creditable acquisition made by the operator directly for the purpose of settling the claim.

    As is the case for excesses covered by Division 78 of the Act. Excesses that fall for consideration under Division 79 of the Act will need to be apportioned between section 79-95 and section 79-55 of the Act in the same proportion as the settlement of the claim for compensation comprises payments or supplies covered by Division 79 and acquisitions covered by Division 11 of the Act.

    Examples of the GST treatment of excesses under the Act (Scenarios 1-5)

    The following examples are designed to illustrate the GST consequences of the payment of an excess under an insurance policy. The examples assume that the insurer and the insured are both registered for GST and that the insurer has monthly tax periods.

    The GST treatment of payments of excess under a CTP scheme, covered by Division 79 of the Act, will be effectively the same as that which applies to payments of excess under insurance policies illustrated in the following examples.

    Scenario 1: Excess paid to repairer

    An insured asset is damaged and the GST inclusive cost of repair is $5,500. The GST associated with this repair is 1/11th of $5,500 or $500. The insurer contracts with the repairer for the repair services and agrees to pay $5,400 towards the total cost of the repair. The Insured is required to contribute the balance or the excess of $100. The policyholder pays the $100 to the repairer.

    Input tax credit

    Insurer:

    The insurer is entitled to an input tax credit under Division 11 of the Act of up to $490.91 (1/11th of $5,400).

    Insured:

    The policyholder may be entitled to claim an input tax credit under Division 11 of the Act on their contribution of up to $9.09 (1/11th of $100).

    Section 78-18 increasing adjustment:

    No increasing adjustment as no excess is paid to the insurer.

    Tax invoices

    If requested, the repairer must supply a tax invoice. The amount shown on the tax invoice should equate to what the repairer has collected from the entity making the request.

    Insurer:

    A tax invoice would be issued to the insurer for $5,400.

    Insured:

    If requested, a tax invoice would issue to the policyholder for $100.

    Scenario 2: Excess paid directly to insurer and the insurer has made a creditable acquisition directly for the purpose of settling the claim.

    An insured asset that is used 100% for business purposes is stolen and the GST inclusive replacement cost is $5,500. The GST associated with the replacement is 1/11th of $5,500 or $500. The insurer contracts with a supplier for the replacement of the goods and agrees to pay the full cost of the supply. $5,500 is paid directly by the insurer to the supplier being the total replacement cost. To assist with the claim, the insurer engages an external loss assessor for a GST inclusive fee of $66. The $100 excess associated with this policy is paid by the insured directly to the insurer.

    In this scenario the insurer pays the full $5,500 to the supplier and $66 to the loss assessor. Both acquisitions are creditable acquisitions on the part of the insurer.

    Input tax credit:

    Insurer:

    The insurer is entitled to an input tax credit under Division 11 of the Act of up to $506 (1/11th of ($5,500 +$66)).

    Insured:

    No input tax credit entitlement. The payment of excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the Act. The policyholder is therefore not entitled to claim an input tax credit for the excess paid to the insurer.

    Section 78-18 Increasing adjustment:

    Section 78-18 of the GST Act will operate as the requirements of subsection 78-18(3) have been met. The insurer will have an increasing adjustment equal to 1/11th of the amount of the excess. That is, (1/11th x $100 ) or $9.09.

    The net result of the above transactions is an input tax credit for the insurance claim equal to $496.91 ($506 - $9.09).

    Tax invoices:

    If a tax invoice is requested:

    Insurer:

    A tax invoice would be issued to the insurer for $5,500 from the supplier and one from the loss assessor for $66.

    No adjustment note is required as the section 78-18 increasing adjustment is not an adjustment event for the purposes of Division 19 of the Act.

    Insured:

    No tax invoice entitlement. The payment of the $100 excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the Act. The insurer is therefore not required to issue a tax invoice to the policyholder.

    Scenario 3: Excess paid directly to insurer and the insurer has made a creditable acquisition directly for the purpose of settling the claim.

    An insured asset used 60% of the time for business is damaged and the GST inclusive cost of repair is $7,700. The GST associated with this repair is 1/11th of $7,700 or $700. The insurer contracts with the repairer for the repair services and agrees to pay the full cost of the repair. $7,700 is paid directly by the insurer to the repairer being the total cost of the repair. In addition to the repair cost, the insurer uses an external loss assessor for a GST inclusive fee of $3,300 per month to assess claims. The $100 excess associated with this policy is paid by the insured directly to the insurer.

    In this scenario the insurer pays the full $7,700 to the repairer and $3,300 to the loss assessor. Both are creditable acquisitions made for the purpose of settling the claim.

    Input tax credit:

    Insurer:

    The insurer is entitled to an input tax credit under Division 11 of the Act of up to $1,000 [(1/11th x $7,700) + (1/11th x $3,300)].

    Insured:

    No input tax credit entitlement. The payment of excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the Act. The insured is therefore not entitled to claim an input tax credit for the excess paid to the insurer.

    Section 78-18 increasing adjustment:

    Section 78-18 of the Act will operate as the requirements of subsection 78-18(3) have been met. The insurer will have an increasing adjustment equal to 1/11th of the amount of the excess. That is, (1/11th x $100) or $9.09.

    The net result of the above transactions is an input tax credit for the claim equal to $990.91 [(1/11th x ($7,700 + $3,300)) - $9.09].

    Tax invoices:

    If a tax invoice is requested:

    Insurer:

    A tax invoice would be issued to the insurer for $7,700 from the repairer and one from the loss assessor for $3,300.

    No adjustment note is required as the section 78-18 increasing adjustment is not an adjustment event for the purposes of Division 19 of the Act.

    Insured:

    No tax invoice entitlement. The payment of the $100 excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the Act. The insurer is therefore not required to issue a tax invoice to the policyholder.

    Scenario 4: Excess paid directly to insurer and the insurer has made both a creditable acquisition and a cash payment directly for the purpose of settling the claim in the same tax period.

    An insured asset used 80% of the time for business is destroyed. To settle the claim the insurer arranges for a cash payment of $8,800 and contracts with a supplier to supply certain goods. The GST inclusive cost of those goods is $2,200. In addition to the repair cost, the insurer uses an external loss assessor for a GST inclusive fee of $770 to assess the claim. The $1,100 excess associated with this policy is paid by the insured directly to the insurer.

    In this scenario the insurer pays the full $2,200 for the cost of the goods to the supplier and $770 to the loss assessor. Both are creditable acquisitions made for the purpose of settling the claim.

    Input tax credit:

    Insurer:

    The insurer is entitled to an input tax credit under Division 11 of the Act of up to $270 [(1/11th x $2,200) + (1/11th x $770)].

    Insured:

    No input tax credit entitlement. The payment of excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the Act. The insured is therefore not entitled to claim an input tax credit for the excess paid to the insurer.

    Decreasing adjustment:

    Insurer:

    The insurer is entitled to a decreasing adjustment under Division 78 of the Act of 1/11th x settlement amount* x (1 - extent of input tax credit).

    The settlement amount is $8,800 - the excess to the extent it does not relate to the acquisition directly for the purpose of settling the claim multiplied by 11 and divided by (11 - extent of input tax credit on the premium).

    As the cash settlement is $8,800 and the acquisition directly for the purpose of settling the claim was for $2,200, the total amount of the settlement is $11,000.

    The acquisition directly for the purpose of settling the claim represents 20% ($2,200 is 20% of $11,000) of the total settlement and the cash payment represents 80% ($8,800 is 80% of $11,000) of the total.

    Thus the excess relates to the acquisition directly for the purpose of settling the claim to the extent of 20% and to the cash payment to the extent of 80%. The amount of the excess included in working out the settlement amount is therefore 80% of $1,100, which is $880.

    The settlement amount is:

    • ($8,800 - $880) x 11/10.2, which is $8,541.18.

    The amount of the decreasing adjustment is:

    • 1/11th x 8,541.18 x (1 - 0.8), which is $155.29.

    * Refer to method statement contained in subsection 78-15(4) of the Act.

    Section 78-18 Increasing adjustment:

    Section 78-18 of the Act will operate as the requirements of subsection 78-18(1) have been met. The insurer will have an increasing adjustment equal to 1/11th of the amount that represents the extent to which the payment of excess relates to creditable acquisitions ($2,200/$11,000 or 20%), made by the insurer directly for the purpose of settling the claim. That is, (1/11th x $1,100 x 20%) or $20.

    The net result of the above transactions is an input tax credit for the claim equal to $250 [(1/11th x ($2,200 + $770)) - $20].

    Tax invoices:

    If a tax invoice is requested:

    Insurer:

    A tax invoice would be issued to the insurer for $2,200 from the supplier and one from the loss assessor for $770.

    No adjustment note is required, as the section 78-18 increasing adjustment is not an adjustment event for the purposes of Division 19 of the Act.

    Insured:

    No tax invoice entitlement. The payment of the $1,100 excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the Act. The insurer is therefore not required to issue a tax invoice to the policyholder.

    Scenario 5: Excess paid directly to insurer and the insurer has made both cash payments and creditable acquisitions directly for the purpose of settling the claim in different tax periods.

    An insured asset used 80% of the time for business is destroyed. In part settlement of the claim the insurer makes a cash payment of $8,800 on 1 June 2001 and also contracts with a supplier to supply certain goods during the same period. The GST inclusive cost of those goods is $2,200. In addition to the repair cost, the insurer uses an external loss assessor for a GST inclusive fee of $770 to assess the claim. The $1,100 excess associated with this policy is paid by the insured directly to the insurer on 1 June 2001.

    In this scenario the insurer pays the full $2,200 for the cost of the goods to the supplier and $770 to the loss assessor in June 2001. Both are creditable acquisitions, but only the $2,200 acquisition is considered to be made directly for the purpose of settling the claim. The $770 payment to the loss assessor is made to enable the insurer to determine its liability under the claim. On 15 July 2001 the insurer acquires further goods costing $1,100 to restore the asset to its original condition and settle the claim in full.

    GST treatment of the settlement

    June tax period

    Input tax credit:

    Insurer:

    The insurer is entitled to an input tax credit under Division 11 of the Act of up to $270 [(1/11th x $2,200) + (1/11th x $770)].

    Insured:

    No input tax credit entitlement. The payment of excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the Act. The insured is therefore not entitled to claim an input tax credit for the excess paid to the insurer.

    Decreasing adjustment:

    Insurer:

    The insurer is entitled to a decreasing adjustment under Division 78 of the Act of 1/11th x settlement amount* x (1 - Extent of input tax credit)

    The settlement amount is $8,800 - the excess to the extent it does not relate to the acquisition directly for the purpose of settling the claim multiplied by 11 and divided by (11 - extent of input tax credit on the premium).

    As the cash settlement is $8,800 and the acquisition directly for the purpose of settling the claim was for $2,200, the total amount of the settlement is $11,000.

    The acquisition directly for the purpose of settling the claim represents 20% ($2,200 is 20% of $11,000) of the total settlement and the cash payment represents 80% ($8,800 is 80% of $11,000) of the total.

    Thus the excess relates to the acquisition directly for the purpose of settling the claim to the extent of 20% and to the cash payment to the extent of 80%.

    The amount of the excess included in working out the settlement amount is therefore 80% of $1,100, which is $880.

    The settlement amount is:

    • ($8,800 - $880) x 11/10.2, which is $8,541.18.

    The amount of the decreasing adjustment is:

    • 1/11th x 8,541.18 x (1 - 0.8), which is $155.29.

    * Refer to method statement contained in subsection 78-15(4).

    Section 78-18 Increasing adjustment:

    Section 78-18 of the Act will operate as the requirements of subsection 78-18(1) have been met. The insurer will have an increasing adjustment equal to 1/11th of the amount that represents the extent to which the payment of excess relates to creditable acquisitions made by the insurer directly for the purpose of settling the claim. That is, (1/11th x $1,100 x 20%) or $20.

    The net result of the above transactions is an input tax credit for the claim equal to $250 [(1/11th x ($2,200 + $770)) - $20].

    Tax invoices:

    If a tax invoice is requested:

    Insurer:

    A tax invoice would be issued to the insurer for $2,200 from the supplier and one from the loss assessor for $770.

    No adjustment note is required, as the section 78-18 increasing adjustment is not an adjustment event for the purposes of Division 19 of the Act.

    Insured:

    No tax invoice entitlement. The payment of the $1,100 excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the Act. The insurer is therefore not required to issue a tax invoice to the policyholder.

    July tax period

    Input tax credit:

    Insurer:

    The insurer is entitled to an input tax credit under Division 11 of the Act of up to $100 (1/11th x $1,100).

    Decreasing adjustment:

    Insurer:

    The insurer is not entitled to a decreasing adjustment under Division 78 of the ACT for the $1,100 creditable acquisition. However, as the make up of the total settlement has changed, the proportion of excess that relates to creditable acquisitions has also changed*. This gives rise to an adjustment event requiring a recalculation of the decreasing adjustment previously made in the June tax period, as follows:

    The settlement amount is $8,800 - the excess, to the extent it does not relate to the acquisition directly for the purpose of settling the claim multiplied by 11 and divided by (11 - extent of input tax credit on the premium).

    As the cash settlement is $8,800 and the sum of acquisitions directly for the purpose of settling the claim is now $3,300, the excess relates to acquisitions to the extent of 3/11. The amount of the excess included in working out the settlement amount is therefore 8/11 of $1,100, which is $800.

    The settlement amount is:

    • ($8,800 - $800) x 11/10.2, which is $8,627.45.

    The amount of the decreasing adjustment is:

    • 1/11th x $8,627.45 x (1 - 0.8), which is $156.86.

    The calculation results in a higher amount than the previously calculated decreasing adjustment of $155.29.

    The additional decreasing adjustment of $1.57 is claimed in the July BAS.

    * Refer to method statement contained in subsection 78-15(4) of the Act.

    Section 78-18 Increasing adjustment:

    The insurer does not have a section 78-18 increasing adjustment during this period as no payment of excess was received. However, as the make up of the total settlement has changed, the proportion of excess that relates to creditable acquisitions has also changed. This gives rise to an adjustment event which requires a re-calculation of the section 78-18 increasing adjustment made in June as follows:

    1/11th of the amount that represents the extent to which the payment of excess relates to creditable acquisitions ($3,300/$12,100) or 3/11.

    That is, (1/11th x $1,100 x 3/11) = $27.27. The recalculated section 78-18 increasing adjustment is $7.27 more than that made in the June tax period. Therefore, a further increasing adjustment of $7.27 needs to be made and included in the July activity statement.

    Examples of the GST treatment of excesses adopting a safe harbour basis of apportionment (Scenarios 6 and 7)

    Scenario 6: Using the same details as in scenario 5 above -

    'Excess paid directly to insurer and the insurer has made both cash payments and creditable acquisitions directly for the purpose of settling the claim in different tax periods.'

    Assume that the class of insurance was 'Extended Warranty' and that the insurer has chosen to adopt a safe harbour.

    An insured asset used 80% of the time for business is destroyed. In part settlement of the claim the insurer makes a cash payment of $8,800 on 1 June 2001 and also contracts with a supplier to supply certain goods during the same period. The GST inclusive cost of those goods is $2,200. In addition to the repair cost, the insurer uses an external loss assessor for a GST inclusive fee of $770 to assess the claim. The $1,100 excess associated with this policy is paid by the insured directly to the insurer on 1 June 2001.

    In this scenario the insurer pays the full $2,200 for the cost of the goods to the supplier and $770 to the loss assessor in June 2001. Both are creditable acquisitions, but only the $2,200 acquisition is considered to be made directly for the purpose of settling the claim. The $770 payment to the loss assessor is made to enable the insurer to determine its liability under the claim. On 15 July 2001 the insurer acquires further goods costing $1,100 to restore the asset to its original condition and settle the claim in full.

    June tax period

    Input tax credit:

    The insurer is entitled to an input tax credit for creditable acquisitions made in June - [(1/11th x $2,200) + (1/11th x $770)] = $270.

    Section 78 -18 increasing adjustment:

    The insurer will have an increasing adjustment as it has received payment of an excess and made creditable acquisitions directly for the purpose of settling the claim triggering the operation of section 78-18. The increasing adjustment will be - [1/11 x ($1,100 x safe harbour (19%)] = $ 19.

    Decreasing adjustment:

    The insurer is entitled to a decreasing adjustment under Division 78 of -
    1/11th x settlement amount* x (1 - Extent of input tax credit)

    The settlement amount is $8,800 minus the excess to the extent that it does not relate to acquisitions directly for the purpose of settling the claim, multiplied by 11 and divided by (11 minus extent of input tax credit on the premium).

    Refer to method statement contained in subsection 78-15(4) of the Act.

    As the taxpayer has adopted a safe harbour basis of apportioning the excess for purposes of section 78-18 of the Act, the amount of excess to be deducted in working out the settlement amount (that is, the section 78-15 portion of excess), is 81% of $1,100, which is $891.

    Therefore, the settlement amount is - [($8,800 - $891) x 11/ (11-0.8)] = $ 8,529.31.

    The amount of the decreasing adjustment is - [1/11th x 8,529.31 x (1 - 0.8)] = $155.08.

    July tax period

    Input tax credit:

    The insurer made a creditable acquisition in July of $1100 directly for purposes of settling the claim and is therefore entitled to an input tax credit of - [1/11 x $1,100] = $100

    Section 78-18 increasing adjustment:

    NIL - The insurer has made creditable acquisitions of $1,100 to which section 78-18 of the Act applies. However, the adjustment that would otherwise need to be made to reflect the changed proportion of excess resulting from the July acquisitions, does not need to be made because a safe harbour was used to calculate the section 78-18 increasing adjustment in the tax period when the excess was first received.

    Decreasing adjustment:

    NIL - There is no Div 78 settlement in July in relation to the claim, and the adjustment that would otherwise need to be made under section 78-15 of the Act to reflect the changed proportion of excess resulting from the creditable acquisitions of $1,100 made in July is not required under the safe harbour arrangements.

    Under the terms of the safe harbour arrangements, the insurer's liability for section 78-18 increasing adjustments is satisfied by a once only increasing adjustment. Therefore, once a section 78-18 increasing adjustment is made using a safe harbour basis of apportionment, no further adjustment for the excess will be required in respect of any subsequent acquisitions made directly for the purpose of settling the claim, which would otherwise change the proportion of excess that relates to creditable acquisitions.

    Similarly, under the safe harbour arrangements the excess is apportioned once only for purposes of reducing a decreasing adjustment under section 78-15 of the Act. Therefore, once the safe harbour arrangements are applied to apportion the excess under both section 78-15 and section 78-18 of the Act, any credit entitlements arising from any future settlement of a particular claim will be unaffected by the excess.

    In the above example, there will be no need for the insurer to recalculate the Division 78 decreasing adjustment or the section 78-18, increasing adjustment to reflect the creditable acquisitions of $1,100 made in July 2001 and the insurer will be entitled to the benefit of a full input tax credit of $100 for those acquisitions.

    If instead of making creditable acquisitions in July, the insurer had made a payment of $1,100 to the insured for purposes of settling the claim, the insurer would have a Division 78 decreasing adjustment for the $1,100. Again, as the excess was previously taken into account using a safe harbour basis of apportionment, the insurer would not need to take the excess into account in calculating its entitlement to a decreasing adjustment for the $1100.

    The settlement amount for the payment of $1,100 would be:

    • (Payments of money - applicable excess) x 11 / (11 - Extent of input tax credit of insured)
    • [(1,100 - 0) x 11 / (11-0.8)] = $1,186.27

    The decreasing adjustment for the $1,100 would be:

    • 1/11 x settlement amount x (1- Extent of input tax credit of insured)
    • [1/11 x 1,186.27 x 0.2] = $21.56.

    Additional option for adopting the safe harbour arrangements

    Adoption of the safe harbour arrangements outlined in Scenario 6 above relies on the insurers' systems ability to track previous safe harbour apportionments in order to achieve a once only adjustment for excess under both section 78-15 and section 78-18 of the Act. From discussions with the ICA on the implementation of the safe harbour arrangements, it is understood that programming and tracking difficulties may arise where, for example, a claim is progressively settled by a mixture of payments or supplies and creditable acquisitions over a number of tax periods.

    In such cases, the insurers' systems would need to be able to track payments or supplies and acquisitions made in settlement of a claim and distinguish between settlements relating to claims which have already had the excess applied (for purposes of sections 78-15 and 78-18 of the Act), and settlements relating to claims which have not had the excess applied or taken into account.

    In recognition of the system difficulties that may arise in certain circumstances, it will also be acceptable for insurers who adopt the safe harbour arrangements for a class of insurance, to calculate their section 78-15 2 and section 78 -18 liabilities in relation to excess on receipt of the excess. The same option is extended to CTP operators to calculate their section 79-95 and section 79-55 increasing adjustments. Insurers and CTP operators who adopt this option will need to make an increasing adjustment for the excess when the excess is received, but can then ignore the excess in the GST treatment of any payments, supplies or acquisitions made in settlement of the claim.

    The increasing adjustment required under this option from insurers will be 1/11th of the section 78-15, safe harbour portion of the excess, adjusted to take into account the insured's ITC entitlement on the premium. Plus 1/11th of the section 78-18, safe harbour portion of the excess.

    CTP operators will need to make an increasing adjustment equal to 1/11th of the section 79-95 portion of the excess, adjusted to take into account the applicable average input tax credit fraction 3 instead of the insured's ITC entitlement on the premium. Plus 1/11th of the section 79-55 safe harbour portion of the excess.

    The formula developed by the ICA and accepted by the ATO for calculating the liability in respect of the section 78 -15, safe harbour portion of the excess is as follows:

    • Increasing Adjustment = E x (1- S) x (1 - T) / (11 - T)
    • E = excess.
    • S = the section 78-18 safe harbour percentage expressed as a decimal.
    • T = the insured's percentage ITC entitlement on the premium expressed as a decimal.

    The same formula can be adopted by CTP operators to calculate their liability for the section 79-95, safe harbour portion of excess. Except that instead of 'T' representing the insured's ITC entitlement on the premium expressed as a decimal, it will represent the applicable average input tax credit fraction (AAITCF) expressed as a decimal.

    Scenario 7

    Using the details in Scenario 6 above, the increasing adjustment for the section 78-15, safe harbour portion of the excess would be:

    • [E x (1 - S) x (1 - T) / (11 - T)]
    • [1,100 x (1 - 0.19) x (1 - 0.80) / (11 - 0.80)]
    • [1,100 x 0.81 x 0.2 / 10.2] = $17.47

    The section 78-18 increasing adjustment for the excess would be:

    • [E x S x 1/11]
    • [1,100 x 0.19 x 1/11] = $19.00
    • Total increasing adjustment for the excess = $ 36.47

    Summary of options

    Insurers and CTP operators effectively have three choices for calculating adjustments relating to excess:

    1. Making actual adjustments under section 78-15, section 78-18, section 79-55 and section 79-95 of the Act for every settlement transaction which triggers the operation of those provisions as per Scenarios 1-5, or
    2. Adopting the safe harbour arrangements outlined in this paper. Where insurers or CTP operators adopt the safe harbour arrangements for a class of insurance, they will have two options:

    Making a once only apportionment of excess under sections 78-15, 78-18, 79-55 and 79-95 of the Act, as the case may be, when the operation of those provisions is first triggered as per Scenario 6, or

    Calculating the GST liability that arises under sections 78-15, 78-18, 79-55 and 79-95 of the Act in respect of the excess, when the excess is first received as per Scenario 7. Under this option, insurers and CTP operators will need to use the formula to ensure that the insured's ITC entitlement on the premium, or the AAITCF, is taken into account when calculating the increasing adjustment for the section 78-15 or section 79-95, safe harbour portion of the excess.

    Notes

    (i) Option 2 (a) is only available where the insurer's or CTP operator's systems can adequately track apportionments of excess to payments or supplies and acquisitions made in settlement of a claim.

    (ii) Where the excess relates to a non-mixed 4 settlement, the balance of that excess (the amount remaining after applying the safe harbour rate) must be brought to account under the relevant provision once the claim is finalised.

    Footnotes

    Australian Prudential Regulatory Authority

    Excess has the effect of reducing the insurer's entitlement to a decreasing adjustment (see Step 2 section 78-15(4)). Under the terms of the safe harbour arrangements, the reduced entitlement to a Division 78 decreasing adjustment can be brought to account as a Division 19 increasing adjustment.

    3

    Refer to definition in section 79-95

    For purposes of these arrangements the term `non-mixed settlement' refers to cases where a claim is settled in full, either entirely by way of cash payments or supplies (i.e. Division 78 or 79 settlements), or entirely by way of creditable acquisitions or importations (i.e. Division 11 settlements). This is in contrast to mixed settlements, where claims are settled by a combination of both.

    End to Addendum 2 - 12 July 2004

    ADDENDUM dated 5 September 2002

    Under the terms of the industry agreed arrangements for apportioning payments of excess for purposes of calculating section 78-18 increasing adjustments, the safe harbours for the various classes of insurance listed in the table under the heading - 'The Agreed Safe Harbours' need to be reviewed annually. Following discussions with the Insurance Council of Australia (ICA), who co-developed the arrangements with the ATO, it has been decided to extend the existing safe harbours to 30 June 2003. The extension applies to all general insurers who have chosen to adopt the safe harbour arrangements, irrespective of whether or not they are members of the ICA.

    Safe harbour arrangements

    What this paper is about

    This paper provides guidelines for apportioning payments of excess under insurance policies for the purpose of calculating increasing adjustments under section 78-18 of A New Tax System (Goods and Services Tax) Act 1999, (the Act). This paper also sets out details of an Australian Taxation Office (ATO accepted basis of apportioning excesses, known as a safe harbour.

    Background

    Division 78 of the Act provides special rules for the treatment of insurance. Any insurance related transactions that are not specifically covered by the special rules in Division 78 fall for consideration under the basic rules of the Act. Section 78-55 provides that the payment of an excess to an insurer by the insured is not consideration for a supply and is therefore not subject to GST. This provides the correct treatment in cases where the insurer settles an insurance claim by making a payment or a supply, because in those cases, the excess is taken into account in reducing the insurer's entitlement to any decreasing adjustment under Division 78 of the Act. [Refer to Step 2 of the method statement in subsection 78-15(4)]. However, insurers will not always settle claims by making payments or supplies covered by Division 78. Insurers may also make acquisitions in order to settle claims. Where such acquisitions are creditable acquisitions, the insurer is entitled to an input tax credit under Division 11 of the Act, but the payment of any excess to the insurer is not taken into account in reducing the input tax credit in the same way that it would have been if the insurer had been entitled to a decreasing adjustment under Division 78.

    To ensure that all excesses paid to an insurer are treated the same irrespective of how insurance claims are settled, section 78-18 was introduced by Taxation Laws Amendment Bill (No 8) 2000 to provide an increasing adjustment for that part of the excess that relates to creditable acquisitions or importations made directly for purposes of settling a claim. The effect of the new provision is that insurers are now required to apportion the excess between any payments or supplies made in settlement of a claim (Division 78 settlements) and any creditable acquisitions or importations made directly for purposes of settling the claim (Division 11 settlements), and then make an increasing adjustment for that part of the excess that relates to the Division 11 settlements. Section 78-18 applies retrospectively to the first tax period after the Treasurer's press release of 17 August 2000. For most insurers that means that they will have section 78-18 increasing adjustments on and from 1 September 2000.

    During the course of consultation with the Insurance Council of Australia ('ICA') on the proposed section 78-18, concern was expressed that complying with the requirements of the provision would result in significant administrative costs for insurers. Particularly in relation to `long tail' claims where the excess may be received in a tax period prior to the final make up of the settlement being known. In such cases, insurers would need to re-apportion the excess and re-calculate their section 78-10 decreasing adjustments and section 78-18 increasing adjustments for each tax period during which any part of a claim is settled until the claim is finalised.

    Safe harbour arrangements for insurance excesses

    In recognition of the administrative difficulties faced by insurers, and to reduce the cost of complying with the requirements of section 78-18, the ATO will accept a once only section 78-18 increasing adjustment based on an industry agreed safe harbour basis of apportioning excess for each class of insurance. Where a safe harbour basis of apportioning excess is adopted to calculate a section 78-18 increasing adjustment, the balance of the excess must be taken into account in calculating any section 78-10, decreasing adjustments as required by Step 2 of the method statement in section 78-15. However, as is the case for section 78-18 increasing adjustments, where a safe harbour is adopted, the excess is taken into account once only in calculating the decreasing adjustment.

    The classes of insurance covered by these arrangements and the applicable safe harbours are set out in the table below. The section 78-18 increasing adjustment will be 1/11th of the apportioned value of the excess and will need to be brought to account in the tax period that the excess is received by the insurer.

    The agreed basis of apportionment for each class of insurance, referred to as a safe harbour, has been developed in consultation with the ICA and is based on historical claims data provided by ICA member insurers. The safe harbours for each class of insurance, as classified by the ICA, will be reviewed annually to take into account contemporary costs of settling claims.

    What is a safe harbour?

    A 'Safe Harbour' is an agreed basis for calculating a liability that will be accepted by the ATO as satisfying the requirements of the law. Safe harbours are designed to provide certainty and simplicity for taxpayers and to reduce costs of compliance. However, the use of safe harbours is not mandatory. That means that a taxpayer can choose to adopt a safe harbour or calculate a liability for a particular transaction on an actual basis. If a taxpayer chooses to adopt a safe harbour and applies it to a transaction according to its terms, the taxpayer will be taken to have met its liability for the particular transaction in full.

    The agreed safe harbours

    Insurers may calculate their section 78 -18 increasing adjustments as follows:

    Increasing Adjustment = $ value of excess x Safe Harbour x 1/11

    Safe harbours

    Class Of Business

    Safe Harbour
    (s. 78-18 component of excess as %)

    Class Of Business

    Safe Harbour
    (s.78-18 component of excess as %)

    Aviation

    N/A

    Marine & aviation (comb)

    25

    Commercial motor vehicle

    65

    Marine cargo

    0

    Consumer credit

    0

    Marine hull

    9

    CTP motor vehicle

    0

    Marine pleasure craft

    11

    Domestic motor vehicle

    67

    Mortgage

    0

    Employers liability

    10

    Other accident

    16

    Fire and ISR

    41

    Professional indemnity

    5

    HH building

    47

    Public & product liability

    0

    HH combined

    57

    Travel local

    10

    HH contents

    29

    Travel overseas

    0

    Inward treaty

    0

    *Other: Including, extended warranty & gap insurance


    19

    Notes

    (i) The balance of excess remaining after applying the above safe harbours to calculate a section 78-18 increasing adjustment, represents the section 78-15 component of the excess.

    (ii) Where a policy falls into two or more classes of insurance, the allocation used for APRA1 purposes will be an acceptable basis of allocating the excess for purposes of adopting the above safe harbours.

    Date of effect

    The safe harbours shown in the above table may be applied in respect of all section 78-18 increasing adjustments arising on and from 1 September 2000. The safe harbours will be reviewed annually commencing on 1 July 2002.

    Safe harbour terms

    1. Insurers who adopt the above safe harbours according to the terms in this paper will satisfy their GST liability under section 78-18 in full. That is, they will obtain the benefit of the protection conferred by section 37 of the Taxation Administration Act 1953.
    2. Insurers may adopt the safe harbour for a class of insurance or may calculate their increasing adjustments under section 78-18 on an actual basis.
    3. Where an insurer elects to adopt a safe harbour for a particular class of insurance, the insurer must apply it to all relevant transactions in that class for a period of at least 12 months. The insurer cannot swap between a safe harbour and an actual adjustment for different transactions in the same class during the period of the election.
    4. Insurers who elect to use a safe harbour for some classes of insurance, but not for others, must keep a contemporaneous record of that election. It is not necessary for the insurer to send the election to the ATO. But the election must be produced if requested by the ATO to support the basis of calculating section 78-18 increasing adjustments.
    5. The safe harbours apply prospectively and cannot be adopted retrospectively to generate a credit entitlement. If an insurer calculates increasing adjustments on an actual basis and then discovers that adopting a safe harbour would have been more advantageous, the insurer cannot rely on a safe harbour to claim a credit or a refund of any excess GST paid in the past as a result of not using a safe harbour. However, the insurer can, at any time, elect to adopt a safe harbour for all future transactions for a class of insurance.

    Who can use a safe harbour basis of apportionment?

    The safe harbours outlined above were developed by the ICA on behalf of its members and have been agreed to by the ATO as an appropriate basis for insurers to apportion excess for purposes of section 78-18 and section 78-15. However, membership of the ICA is not a prerequisite to adopting the safe harbours. The same arrangements are available to all insurers in the general insurance industry.

    Review of safe harbours

    The safe harbours will be reviewed annually. The annual review will be undertaken by the ICA on behalf of its members and referred to the ATO for approval by 30 April each year. The ATO will notify the ICA and other insurers (ie. non-ICA members) of any changes by 31 May each year and the revised safe harbours will take effect on and from 1 July each year.

    Retrospective adjustments

    Section 78-18 of the Act applies retrospectively to the first tax period after the Treasurer's press release of 17 August 2000. For most insurers this means that they will have section 78-18 increasing adjustments from 1 September 2000 onwards. Insurers who have not made increasing adjustments in respect of affected excesses since 1 September 2000 may avail themselves of the relevant safe harbours to calculate those adjustments.

    The correct procedure for bringing to account adjustments or to correct errors which relate to previous tax periods is for taxpayers to revise their Business Activity Statement (BAS) for the relevant tax periods. However, for purposes of bringing to account any increasing adjustments accrued under section 78-18 since 1 September 2000 and recalculating any affected decreasing adjustments under section 78-15, the ATO will accept a single adjustment, provided that:

    • the adjustment is brought to account no later than the BAS due for the month of December 2001, and
    • details of the adjustment (monthly summaries will suffice) are forwarded by post or email to either -

    Mr Phil Russo

    Email: phil.russo@ato.gov.au or

    Mr Andrew Cluff

    Email: andrew.cluff@ato.gov.au

    General Insurance Segment
    GST Large Enterprise Compliance,
    PO BOX 9990
    PARRAMATTA NSW 2123

    Insurers who experience difficulty meeting the above requirements should contact Mr Phil Russo or Mr Andrew Cluff at the above address to make other arrangements.

    Explanations

    Section 78-18

    Section 78-18 of the Act provides -

    '78-18 Increasing adjustments for payments of excess under insurance policies
    (1) An insurer has an increasing adjustment if:
    (a) there is a payment of an excess to the insurer under an insurance policy; and
    (b) the insurer makes, or has made, payments or supplies in settlement of a claim under the policy; and
    (c) the insurer makes, or has made, creditable acquisitions or creditable importations directly for the purpose of settling the claim.
    (2) The amount of the increasing adjustment is 1/11 of the amount that represents the extent to which the payment of excess relates to creditable acquisitions and creditable importations made by the insurer directly for the purpose of settling the claim.
    (3) An insurer has an increasing adjustment if:
    (a) there is a payment of an excess to the insurer under an insurance policy; and
    (b) the insurer makes, or has made, creditable acquisitions or creditable importations directly for the purpose of settling the claim; and
    (c) the insurer has not made any payments or supplies in settlement of the claim.
    The amount of the increasing adjustment is 1/11 of the amount of the payment of the excess.'

    The legislation uses the phrase 'directly for the purpose of settling the claim'.

    It is the ATO view that an acquisition or importation of goods or real property by the insurer will be directly for the purpose of settling the claim if the insurer supplies those goods or real property in settlement of the claim to the insured and the essential character of the goods or real property remains unchanged. That is, if the insurer supplies the goods or real property in order to settle its liability arising under the policy, the acquisition of the goods or real property will be directly for the purpose of settling the claim.

    Where an insurer acquires something other than goods or real property, it will be directly for the purpose of settling the claim if the acquisition is made to enable the insurer to settle its liability arising under the policy. If the acquisition is made to enable the insurer to determine what that liability is, or represents costs not covered under the terms of the policy, the acquisition will not be directly for the purpose of settling the claim.

    For example:

    • An insurer makes an acquisition of a right to have a supply, such as a supply of repair services, made to the insured. The supply made by the supplier to the insured will mean that the insurer's liability arising from the insurance policy will be met.

    The acquisition of the right by the insurer will be directly for the purpose of settling the claim.

    • An insurer acquires the services of an assessor to assess the claim. The acquisition will enable the insurer to determine its liability under the policy.

    This will not be an acquisition directly for the purpose of settling the claim. This will also be the case where the insurer acquires legal, engineering or investigator services to enable it to determine its liability under the policy.

    • An insurer acquires a police report after an accident. It also acquires a medical report on the medical condition of the claimant. Both acquisitions are made to enable the insurer to determine its liability under the policy covering the accident.

    Neither acquisition will be directly for the purpose of settling the claim.

    Whether or not an acquisition is directly for the purpose of settling the claim does not affect the insurer's entitlement to input tax credits for the acquisition under Division 11 of the Act.

    Treatment of excesses

    Settlements of insurance claims are affected by the insured's entitlement to an input tax credit on the premium (ITC entitlement). Settlements of insurance claims will fall for consideration under either Division 78 where, depending on the insured's ITC entitlement, they may give rise to a decreasing adjustment for the insurer, or they may be creditable acquisitions under Division 11 which will give rise to an input tax credit for the insurer.

    The intent of the legislation is that, when payment of an excess is received by an insurer, it should affect any credit entitlement that the insurer may have for settling the claim. The method statement in section 78-15 ensures that any payment of excess to the insurer effects a reduction in the amount of the decreasing adjustment available to the insurer, while new section 78-18 provides for an increasing adjustment to the insurer to the extent that the excess relates to settlements that gave rise to an input tax credit.

    The combined effect of these provisions is that an apportionment of the excess will be required each time that a claim is settled. Furthermore, if the excess is received prior to the final settlement of a claim, it will need to be re-apportioned each time that any part settlement of the claim is made until the claim is finally settled in full.

    Examples of the GST treatment of excesses under the law (Scenarios 1-5)

    The payment of an excess under an insurance policy will have the following GST consequences. In the following examples it is assumed that the insurer and the insured are both registered for GST and the insurer has monthly tax periods.

    Scenario 1: Excess paid to repairer

    An insured asset is damaged and the GST inclusive cost of repair is $5500. The GST associated with this repair is 1/11th of $5500 or $500. The insurer contracts with the repairer for the repair services and agrees to pay $5400 towards the total cost of the repair. The Insured is required to contribute the balance or the excess of $100. The policyholder pays the $100 to the repairer.

    • input tax credit:
    Insurer:
    The insurer is entitled to an input tax credit under Division 11 of the GST Act of up to $490.91 (1/11th of $5400).
    Insured:
    The policyholder may be entitled to claim an input tax credit under Division 11 of the GST Act on their contribution of up to $9.09 (1/11th of $100).
    • section 78-18 increasing adjustment:
    No increasing adjustment as no excess is paid to the insurer.
    • tax invoices:
    If requested, the repairer must supply a tax invoice. The amount shown on the tax invoice should equate to what the repairer has collected from the entity making the request.
    Insurer:
    A tax invoice would issue to the insurer for $5400
    Insured:
    If requested, a tax invoice would issue to the policyholder for $100.

    Scenario 2: Excess paid directly to insurer and the insurer has made a creditable acquisition directly for the purpose of settling the claim.

    An insured asset that is used 100% for business purposes is stolen and the GST inclusive replacement cost is $5500. The GST associated with the replacement is 1/11th of $5500 or $500. The insurer contracts with a supplier for the replacement of the goods and agrees to pay the full cost of the supply. $5500 is paid directly by the insurer to the supplier being the total replacement cost. To assist with the claim, the Insurer engages an external loss assessor for a GST inclusive fee of $66. The $100 excess associated with this policy is paid by the insured directly to the insurer.

    In this scenario the insurer pays the full $5500 to the supplier and $66 to the loss assessor. Both acquisitions are creditable acquisitions on the part of the insurer.

    • input tax credit:
    Insurer:
    The insurer is entitled to an input tax credit under Division 11 of the GST Act of up to $506 (1/11th of ($5500 +$66)).
    Insured:
    No input tax credit entitlement. The payment of excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the GST Act. The policyholder is therefore not entitled to claim an input tax credit for the excess paid to the insurer.

    Section 78-18 Increasing Adjustment:

    Section 78-18 of the GST Act will operate as the requirements of subsection 78-18(1) have been met. The insurer will have an increasing adjustment equal to 1/11th of the excess amount ($100) that represents the extent to which the payment of excess relates to creditable acquisitions ($5500/$5500 or 100%) made by the insurer directly for the purpose of settling the claim. That is, (1/11th x $100 x 100%) or $9.09.
    The net result of the above transactions is an input tax credit for the insurance claim equal to $496.91 ($506 - $9.09).
    • Tax Invoices
    If requested would issue to:
    Insurer:
    A tax invoice would issue to the insurer for $5500 from the supplier and one from the loss assessor for $66.
    No adjustment note is required as the section 78-18 increasing adjustment is not an adjustment event for the purposes of Division 19 of the GST Act.
    Insured:
    No tax invoice entitlement. The payment of the $100 excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the GST Act. The insurer is therefore not required to issue a tax invoice to the policyholder.

    Scenario 3: Excess paid directly to insurer and the insurer has made a creditable acquisition directly for the purpose of settling the claim.

    An insured asset used 60% of the time for business is damaged and the GST inclusive cost of repair is $7700. The GST associated with this repair is 1/11th of $7700 or $700. The insurer contracts with the repairer for the repair services and agrees to pay the full cost of the repair. $7700 is paid directly by the insurer to the repairer being the total cost of the repair. In addition to the repair cost, the insurer uses an external loss assessor for a GST inclusive fee of $3300 per month to assess claims. The $100 excess associated with this policy is paid by the insured directly to the insurer.

    In this scenario the insurer pays the full $7700 to the repairer and $3300 to the loss assessor. Both are creditable acquisitions made for the purpose of settling the claim.

    • input tax credit

    Insurer:

    The insurer is entitled to an input tax credit under Division 11 of the GST Act of up to $1000 [(1/11th x $7700) + (1/11th x $3300)].

    Insured:

    No input tax credit entitlement. The payment of excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the GST Act. The insured is therefore not entitled to claim an input tax credit for the excess paid to the insurer.

    • Section 78-18 Increasing Adjustment:
    Section 78-18 of the GST Act will operate as the requirements of subsection 78-18(1) have been met. The insurer will have an increasing adjustment equal to 1/11th of the excess amount (ie $100) that represents the extent to which the payment of excess relates to creditable acquisitions ($7700/$7700 or 100%) made by the insurer directly for the purpose of settling the claim. That is, (1/11th x $100 x 100%) or $9.09.
    The net result of the above transactions is an input tax credit for the claim equal to $990.91 [(1/11th x ($7700 + $3300)) - $9.09].
    • Tax Invoices
    If requested would issue to:
    Insurer:
    A tax invoice would issue to the insurer for $7700 from the repairer and one from the loss assessor for $3300.
    No adjustment note is required as the section 78-18 increasing adjustment is not an adjustment event for the purposes of Division 19 of the GST Act.
    Insured:
    No tax invoice entitlement. The payment of the $100 excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the GST Act. The insurer is therefore not required to issue a tax invoice to the policyholder.

    Scenario 4: Excess paid directly to insurer and the insurer has made both a creditable acquisition and a cash payment directly for the purpose of settling the claim.

    An insured asset used 80% of the time for business is destroyed. To settle the claim the insurer arranges for a cash payment of $8800 and contracts with a supplier to supply certain goods. The GST inclusive cost of those goods is $2200. In addition to the repair cost, the insurer uses an external loss assessor for a GST inclusive fee of $770 to assess the claim. The $1100 excess associated with this policy is paid by the insured directly to the insurer.

    In this scenario the insurer pays the full $2200 for the cost of the goods to the supplier and $770 to the loss assessor. Both are creditable acquisitions made for the purpose of settling the claim.

    • input tax credit
    Insurer:
    The insurer is entitled to an input tax credit under Division 11 of the GST Act of up to $270 [(1/11th x $2200) + (1/11th x $770)].
    Insured:
    No input tax credit entitlement. The payment of excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the GST Act. The insured is therefore not entitled to claim an input tax credit for the excess paid to the insurer.
    • decreasing Adjustment
    Insurer:
    The insurer is entitled to a decreasing adjustment under Division 78 of:
    1/11th x settlement amount* x (1 - Extent of input tax credit).
    The settlement amount is $8800 - the excess to the extent it does not relate to the acquisition directly for the purpose of settling the claim multiplied by 11 and divided by (11 - extent of input tax credit on the premium).
    As the cash settlement is $8800 and the acquisition directly for the purpose of settling the claim was for $2200, the total for settling the claim is $11 000.
    The acquisition directly for the purpose of settling the claim represents 20% ($2200 is 20% of $11 000) of the total for settling the claim and the cash settlement represents 80% ($8800 is 80% of $11 000) of the total.
    Thus the excess relates to the acquisition directly for the purpose of settling the claim to the extent of 20% and to the cash settlement to the extent of 80%. The amount of the excess included in working out the settlement amount is therefore 80% of $1100, which is $880.
    The settlement amount is:
    ($8800 - $880) x 11/10.2, which is $8541.18.
    The amount of the decreasing adjustment is:
    1/11th x 8541.18 x (1 - 0.8), which is $155.29.
    * Refer to method statement contained in subsection 78-15(4).
    • Section 78-18 Increasing Adjustment:
    Section 78-18 of the GST Act will operate as the requirements of subsection 78-18(1) have been met. The insurer will have an increasing adjustment equal to 1/11th of the excess amount (ie $1100) that represents the extent to which the payment of excess relates to creditable acquisitions ($2200/$11000) or 20%, made by the insurer directly for the purpose of settling the claim. That is, (1/11th x $1100 x 20%) or $20.
    The net result of the above transactions is an input tax credit for the claim equal to $250 [(1/11th x ($2200 + $770)) - $20].
    • Tax Invoices
    If requested would issue to:
    Insurer:
    A tax invoice would issue to the insurer for $2200 from the supplier and one from the loss assessor for $770.
    No adjustment note is required, as the section 78-18 increasing adjustment is not an adjustment event for the purposes of Division 19 of the GST Act.
    Insured:
    No tax invoice entitlement. The payment of the $1100 excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the GST Act. The insurer is therefore not required to issue a tax invoice to the policyholder.

    Scenario 5: Excess paid directly to insurer and the insurer has made both cash payments and creditable acquisitions directly for the purpose of settling the claim in different tax periods.

    An insured asset used 80% of the time for business is destroyed. In part settlement of the claim the insurer makes a cash payment of $8800 on 1 June 2001 and also contracts with a supplier to supply certain goods during the same period. The GST inclusive cost of those goods is $2200. In addition to the repair cost, the insurer uses an external loss assessor for a GST inclusive fee of $770 to assess the claim. The $1100 excess associated with this policy is paid by the insured directly to the insurer on 1 June 2001.

    In this scenario the insurer pays the full $2200 for the cost of the goods to the supplier and $770 to the loss assessor in June 2001. Both are creditable acquisitions, but only the $2200 acquisition is considered to be made directly for the purpose of settling the claim. The $770 payment to the loss assessor is made to enable the insurer to determine its liability under the claim. On 15 July 2001 the insurer acquires further goods costing $1100 to restore the asset to its original condition and settle the claim in full.

    GST treatment of the settlement

    June tax period -

    • input tax credit
    Insurer:

    The insurer is entitled to an input tax credit under Division 11 of the GST Act of up to $270 [(1/11th x $2200) + (1/11th x $770)].

    Insured:

    No input tax credit entitlement. The payment of excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the Act. The insured is therefore not entitled to claim an input tax credit for the excess paid to the insurer.
    • decreasing Adjustment
    Insurer:
    The insurer is entitled to a decreasing adjustment under Division 78 of:
    1/11th x settlement amount* x ( 1 - Extent of input tax credit)
    The settlement amount is $8800 - the excess to the extent it does not relate to the acquisition directly for the purpose of settling the claim multiplied by 11 and divided by (11 - extent of input tax credit on the premium).
    As the cash settlement is $8800 and the acquisition directly for the purpose of settling the claim was for $2200, the total for settling the claim is $11 000.
    The acquisition directly for the purpose of settling the claim represents 20% ($2200 is 20% of $11 000) of the total for settling the claim and the cash settlement represents 80% ($8800 is 80% of $11 000) of the total.
    Thus the excess relates to the acquisition directly for the purpose of settling the claim to the extent of 20% and to the cash settlement to the extent of 80%.
    The amount of the excess included in working out the settlement amount is therefore 80% of $1100, which is $880.
    The settlement amount is:
    ($8800 - $880) x 11/10.2, which is $8541.18.
    The amount of the decreasing adjustment is:
    1/11th x 8541.18 x (1 - 0.8), which is $155.29.
    * Refer to method statement contained in subsection 78-15(4).
    • Section 78-18 Increasing Adjustment:
    Section 78-18 of the GST Act will operate as the requirements of subsection 78-18(1) have been met. The insurer will have an increasing adjustment equal to 1/11th of the excess amount (ie $1100) that represents the extent to which the payment of excess relates to creditable acquisitions ($2200/$11000) or 20%, made by the insurer directly for the purpose of settling the claim. That is, (1/11th x $1100 x 20%) or $20.
    The net result of the above transactions is an input tax credit for the claim equal to $250 [(1/11th x ($2200 + $770)) - $20].
    • Tax Invoices
    If requested would issue to:
    Insurer:
    A tax invoice would issue to the insurer for $2200 from the supplier and one from the loss assessor for $770.
    No adjustment note is required, as the section 78-18 increasing adjustment is not an adjustment event for the purposes of Division 19 of the GST Act.
    Insured:
    No tax invoice entitlement. The payment of the $1100 excess to the insurer is not treated as consideration for a supply by virtue of section 78-55 of the GST Act. The insurer is therefore not required to issue a tax invoice to the policyholder.

    July tax period -

    • input tax credit
    Insurer:
    The insurer is entitled to an input tax credit under Division 11 of the GST Act of up to $100 (1/11th x $1100).
    • decreasing Adjustment
    Insurer:
    The insurer is not entitled to a decreasing adjustment under Division 78 for the $1100 creditable acquisition. However as the proportion of the excess that relates to creditable acquisitions and the subject of a section 78-18 increasing adjustment has changed*, an adjustment event arises requiring a recalculation of the decreasing adjustment as follows:
    The settlement amount is $8800 - the excess, to the extent it does not relate to the acquisition directly for the purpose of settling the claim multiplied by 11 and divided by (11 - extent of input tax credit on the premium).
    As the cash settlement is $8800 and the acquisition directly for the purpose of settling the claim was for $3300, the excess relates to the acquisition to the extent of 3/11. The amount of the excess included in working out the settlement amount is therefore 8/11 of $1100, which is $800.
    The settlement amount is:
    ($8800 - $800) x 11/10.2, which is $8627.45.
    The amount of the decreasing adjustment is:
    1/11th x $8627.45 x (1 - 0.8), which is $156.86.
    The calculation results in a higher amount than the previously calculated decreasing adjustment of $155.29. The additional decreasing adjustment of $1.57 is claimed in the July BAS.
    * Refer to method statement contained in subsection 78-15(4).
    • Section 78-18 Increasing Adjustment:

    The insurer does not have a section 78-18 increasing adjustment during this period as no payment of excess was received. However as the proportion of the excess that relates to creditable acquisitions and the subject of a previous section 78-18 increasing adjustment has changed, an adjustment arises which requires a re-calculation of the increasing adjustment as follows:

    1/11th of the excess amount (ie $1100) that represents the extent to which the payment of excess relates to creditable acquisitions ($3300/$ 12100) or 3/11.

    That is, (1/11th x $1100 x 3/11) = $27.27. The section 78-18 increasing adjustment is $7.27 more than previously calculated and a further increasing adjustment needs to be made. The $7.27 adjustment is included in the July BAS

    Example of the GST treatment of excesses adopting a safe harbour basis of apportionment (Scenarios 6 and 7)

    Scenario 6: Using the same details as in scenario 5 above - Excess paid directly to insurer and the insurer has made both cash payments and creditable acquisitions directly for the purpose of settling the claim in different tax periods. Assume that the class of insurance was 'Extended Warranty' and that the insurer has chosen to adopt a safe harbour.

    An insured asset used 80% of the time for business is destroyed. In part settlement of the claim the insurer makes a cash payment of $8800 on 1 June 2001 and also contracts with a supplier to supply certain goods during the same period. The GST inclusive cost of those goods is $2200. In addition to the repair cost, the insurer uses an external loss assessor for a GST inclusive fee of $770 to assess the claim. The $1100 excess associated with this policy is paid by the insured directly to the insurer on 1 June 2001.

    In this scenario the insurer pays the full $2200 for the cost of the goods to the supplier and $770 to the loss assessor in June 2001. Both are creditable acquisitions, but only the $2200 acquisition is considered to be made directly for the purpose of settling the claim. The $770 payment to the loss assessor is made to enable the insurer to determine its liability under the claim. On 15 July 2001 the insurer acquires further goods costing $1100 to restore the asset to its original condition and settle the claim in full.

    June tax period -

    • input tax credit
    The insurer is entitled to an input tax credit for creditable acquisitions made in June -
    [(1/11th x $2200) + (1/11th x $770)] = $270.
    • Section 78 -18 Increasing Adjustment
    The insurer will have an increasing adjustment as it has received payment of an excess and made creditable acquisitions directly for the purpose of settling the claim triggering the operation of section 78-18. The increasing adjustment will be -
    [1/11 x (1100 x safe harbour (19%)] = $ 19.
    • Decreasing Adjustment
    The insurer is entitled to a decreasing adjustment under Division 78 of -
    1/11th x settlement amount* x (1 - Extent of input tax credit)
    The settlement amount is $8800 minus the excess to the extent that it does not relate to acquisitions directly for the purpose of settling the claim, multiplied by 11 and divided by (11 minus extent of input tax credit on the premium).
    *Refer to method statement contained in subsection 78-15(4).
    As the taxpayer has adopted a safe harbour basis of apportioning the excess for purposes of section 78-18, the amount of excess to be deducted in working out the settlement amount, ie. the section 78-15 component of excess, is 81% of $1100, which is $891.
    Therefore, the settlement amount is -
    [($8800 - $891) x 11/(11-0.8)] = $ 8529.31.
    The amount of the decreasing adjustment is -
    [1/11th x 8529.31 x (1 - 0.8)] = $155.08.

    July tax period -

    • INPUT TAX CREDIT
    The insurer made a creditable acquisition in July of $1100 directly for purposes of settling the claim and is therefore entitled to an input tax credit of -
    [1/11 x $1100] = $100
    • INCREASING ADJUSTMENT
    NIL - The insurer has made creditable acquisitions of $1100 to which section 78-18 applies. However, the adjustment that would otherwise need to be made to reflect the changed proportion of excess resulting from the July acquisitions, does not need to be made because a safe harbour was used to calculate the section 78-18 increasing adjustment in the tax period when the excess was first received.
    • DECREASING ADJUSTMENT
    NIL - There is no Div 78 settlement in July in relation to the claim, and the adjustment that would otherwise need to be made under section 78-15 to reflect the changed proportion of excess resulting from the creditable acquisitions of $1100 made in July is not required under the safe harbour arrangements.
    Under the terms of the safe harbour arrangements, the insurer's liability for section 78-18 increasing adjustments is satisfied by a once only increasing adjustment. Therefore, once a section 78-18 increasing adjustment is made using a safe harbour basis of apportionment, no further adjustment for the excess will be required in respect of any subsequent acquisitions directly for the purpose of settling the claim that would otherwise change the proportion of excess that relates to creditable acquisitions. Similarly, under the safe harbour arrangements the excess is apportioned once only for purposes of calculating a decreasing adjustment under section 78-15. Therefore, once the safe harbour arrangements are applied to apportion the excess under both section 78-15 and section 78-18, future credit entitlements arising from any future settlement of a particular claim will be unaffected by the excess.
    In the above example, there will be no need for the insurer to recalculate the Division 78 decreasing adjustment or the section 78-18 increasing adjustment to reflect the creditable acquisitions of $1100 made in July 2001 and the insurer will be entitled to the benefit of a full input tax credit of $100 for those acquisitions.
    If instead of making creditable acquisitions in July, the insurer had made a payment of $1100 to the insured for purposes of settling the claim, the insurer would have a Division 78 decreasing adjustment for the $1100. Again, as the excess was previously taken into account using a safe harbour basis of apportionment, the insurer would not need to take the excess into account in calculating its entitlement to a decreasing adjustment for the $1100.

    The settlement amount for the payment of $1100 would be :
    (Payments of money - applicable excess) x 11/(11 - Extent of input tax credit of insured)

    [(1100 - 0) x 11/(11-0.8)] = $1186.27
    The decreasing adjustment for the $1100 would be:
    1/11 x settlement amount x (1- Extent of input tax credit of insured)
    [1/11 x 1186.27 x 0.2 ] = $21.56.

    Additional option for implementing the safe harbour arrangements

    Implementation of the safe harbour arrangements as outlined in Scenario 6 above relies on the insurers' systems ability to track previous safe harbour apportionments in order to achieve a `once only' adjustment for excess under both section 78-15 and section 78-18. Following discussions with the ICA on the implementation of the safe harbour arrangements, it is understood that programming and tracking difficulties may arise where, for example, a claim is progressively settled by a mixture of payments, supplies or creditable acquisitions, over a number of tax periods. In such cases, the insurers' systems would need to be able to track payments, supplies or acquisitions made in settlement of a claim ('settlements') and distinguish between settlements relating to claims which have already had the excess apportioned (for purposes of sections 78-15 and 78-18) and settlements relating to claims which have not had the excess apportioned.

    In recognition of the systems difficulties that may arise in certain circumstances, it will also be acceptable to this Office for insurers who adopt the safe harbour arrangements for a class of insurance, to calculate their section 78-152 and section 78 -18 liability in relation to excess on receipt of the excess. Insurers who adopt this option will need to make an increasing adjustment for the excess when the excess is received, but can then ignore the excess in the GST treatment of any payments, supplies or acquisitions made in settlement of the claim.

    The increasing adjustment required under this option will be 1/11th of the section 78-15 safe harbour component of the excess, adjusted to take into account the insured's ITC entitlement on the premium. Plus, 1/11th of the section 78-18 safe harbour component of the excess.

    The formula developed by the ICA and accepted by the ATO for calculating the increasing adjustment relating to the section 78 -15 safe harbour component of the excess is as follows :

    Increasing Adjustment = E x (1- S) x (1 - T) / (11 - T)

    E = Excess
    S = The section 78-18 safe harbour percentage expressed as a decimal
    T = The insured's percentage ITC entitlement on the premium expressed as a decimal

    Scenario 7

    Using the details in the Scenario 6 example above, the increasing adjustment for the section 78-15 safe harbour component of the excess would be:

    [ E x (1- S) x (1 - T) / (11 - T)]

    [1100 x (1 - 0.19) x (1- 0.80)/(11- 0.80)]

    [1100 x 0.81 x 0.2 / 10.2 ] = $17.47

    The section 78-18 increasing adjustment for the excess would be:

    [E x S x 1/11]

    [1100 x 0.19 x 1/11] = $19.00

    Total increasing adjustment for the excess = $ 36.47

    Summary

    Insurers will now effectively have three choices for calculating adjustments relating to excess.

    1. Making actual adjustments under section 78-15 and section 78-18 for every settlement transaction which triggers the operation of those provisions as per Scenarios 1-5; or

    2. Adopting the safe harbour arrangements outlined in this paper. Where insurers adopt the safe harbour arrangements for a class of insurance, they will have two options :

    (a) making a `once only' apportionment of excess under section 78-15 and section 78-18 when the operation of those provisions is first triggered as per Scenario 6. This option is available provided that the insurer's system can adequately track apportionments of excess to payments, supplies or acquisitions made in settlement of a claim; or
    (b) calculating the GST liability that arises under section 78-15 and section 78-18 in respect of the excess, when the excess is first received as per Scenario 7. Under this option, insurers will need to use the formula to ensure that the insured's ITC entitlement on the premium is taken into account when calculating the increasing adjustment for the section 78-15 component of the excess.

    Reinsurance issues

    1 Financial reinsurance

    Issue

    TR 96/2 states that the ATO treats financial reinsurance as a loan arrangement rather than reinsurance. By contrast, APRA recognises that it may be insurance. If it is insurance we would expect it was taxable whereas if it is not and therefore a financial supply, it will be input taxed. If taxable, the reinsurer pays the government GST and the insurer claims an equal input tax credit. If it is a financial supply there will be no GST paid or refunded. Clearly with the round robin it makes no difference for insured and reinsurers so long as we know the correct method to be used. Should it be treated as a financial supply?

    Non-interpretative - straight application of the law.

    ATO view

    Contracts of reinsurance are specifically excluded from being a financial supply (item 7 or regulation 40-13). It is therefore a question of fact as to whether it is a contract of reinsurance. Where it is a bona fide contract of reinsurance it will not be a financial supply.

    Note that there is not a round robin as if it is a financial supply, the reinsurer making the supply is not entitled to input tax credits on acquisitions to the extent they relate to making the supply.

    2 Reporting of unearned premium by reinsurers on supplies of proportional treaty reinsurance on the BAS

    Issue

    Section 10 of the Transition Act attributes it to the first tax period. Due to timing factors and complexities of calculation not all reinsurers will have received the information from the respective insurers within their first tax period. Are reinsurers able to report unearned premium on a later BAS?

    Non-interpretative - straight application of the law.

    ATO view

    Strictly applying the law, no. The reinsurer would be required to amend the BAS for the first tax period.

    3 Using the 8ths Method to calculate unearned premium as at 30 June 2000

    Issue

    Section 12 of the GST Transition Act states that a supply for a period that spans 1 July 2000 is taken to be made continuously and uniformly throughout the period.

    This requires a supplier to apportion the supply purely on the basis of the period of the supply. For example, if a supply is made for 12 months with 165 days before 1 July, 200/365ths of the supply would be subject to GST.

    Some reinsurers have stated that they are unable to calculate accurately the unearned premium of each of their proportional treaties1 using the 365ths method and to do so would incur large compliance costs.

    Under the proportional risk attaching treaties, the supply of reinsurance covers the policies supplied by the insurer in the twelve month period of the reinsurance cover. This means that a 12 month proportional risk attaching treaty reinsurance policy has a life of 2 years as an underlying policy supplied by the insurer of the last day covered by the treaty that also runs for twelve months will not end until twelve months after the treaty ends.

    The reinsurer will not know how many policies are supplied by the insurer on any given day covered by the treaty.

    For reinsurance supplied under a proportional risk attaching treaty many insurers have adopted the 8ths method, an industry accepted accounting method, to determine unearned premium.

    The 8ths method assumes that all underlying policies attach half way though the quarter in which they actually attach and that their period of risk is 12 months. (There are 8 half quarters in each year).

    Where the insurer has used the 8ths methods to calculate the unearned premium, the 365ths method would require the insurer to go back and check each underlying policy for the attachment date and period of the policy. This information is not always readily available and the insurer would need to expend considerable resources to achieve this.

    For example under a proportional reinsurance treaty the reinsurer agrees to reinsure 30% of all comprehensive motor vehicle insurance written by the insurer. This could entail thousands of underlying policies to be rechecked.

    Non-interpretative - other references

    Refer to:

    GSTR 2000/7External Link - Goods and services tax: transitional arrangements - supplies, including supplies of rights, made before 1 July 2000 and the extent to which such supplies are taken to be made on or after 1 July 2000

    GSTR 2000/19External Link - Goods and services tax: making adjustments under Division 19 for adjustment events

    ATO view

    Where possible, the 365ths method should be used to calculated unearned premiums as at 30 June 2000.

    Where this is not possible the 8ths method is acceptable to calculate unearned premium as at 30 June 2000, provided that both the insurer and reinsurer are registered for GST. The insurer will only be able to claim at most as an input tax credit the same amount that the reinsurer accounts for as GST.

    4 Additional premium and 'risk attaching' policies

    Issue

    See example 3.2 - Risk attaching policies in the ATO reinsurance examples.

    How is 'additional premium' for risk attaching policies that span 1 July 2000 to be treated for GST purposes? Is it apportioned over the period of the treaty or is it subject to full GST as it is paid after 1 July 2000?

    The September Quarter has two underwriting quarters. One for the previous underwriting year and one for the current underwriting year. Reinsurers have stated that at the end of June they do not know what is the proper premium due to information coming in 6 months to 3 years after the policy.

    For source of ATO view, refer to:

    GSTR 2000/7External Link - Goods and services tax: transitional arrangements - supplies, including supplies of rights, made before 1 July 2000 and the extent to which such supplies are taken to be made on or after 1 July 2000

    GSTR 2000/19External Link - Goods and services tax: making adjustments under Division 19 for adjustment events

    ATO view

    Calculate the GST on the premium as it is known. Any additional amount of premium leads to an adjustment event (for change in consideration) under Division 19 as the additional amounts are paid. For policies that span 1 July 2000 and have been apportioned under section 12 of the GST Transition Act, the additional premium needs to be apportioned in the same proportions as the original premium.

    Example

    Both the Insurer and Reinsurer are registered for GST.

    The Insurer places a 'risks attaching' property surplus treaty for the period 1 July 1999 to 30 June 2000 with the Reinsurer. The insurer receives a 20% commission from the Reinsurer paid quarterly.

    The Insurer will calculate the unearned premium as at 30 June 2000 in accordance with section 12 of the Transition Act. In this example all the primary policies attaching to this Treaty are for 12 months duration. The method used to determine the unearned premium was the actual date of the attachment of the individual policies. The total Unearned Premium was calculated as $271,875.

    The Insurer sends an RCTI to the Reinsurer as follows:

    Unearned premium as at 30 June 2000 $271,875.00
    GST on unearned premium (payment attached) $27,187.50

    Additional premium of $45,000 was paid on 1 October 2000 and relates to the premium earned under the 'risk attaching' treaty for the period 1 July 1999 to 30 June 2001. Therefore 365/731 of the additional premium relates to the period 1 July 2000 to 30 June 2001. This portion of the additional premium is subject to GST as it relates to the supply of reinsurance made after 30 June 2000.

    End of example

    Calculation

    Premium Adjustment 365/731 x $45,000 = $22,469.22
    GST on Premium Adjustment = $2,246.92

    The Insurer will issue a recipient created adjustment note as follows:

    Additional Premium

    $45,000.00

    GST on Additional Premium

    $2,246.92

    Net due to Reinsurer

    $47,246.92

    5 GSTR 2013/1

    Issue

    Does apply to reinsurance brokers?

    Does GSTR 2013/1External Link - Goods and services tax: tax invoices apply to reinsurance brokers?

    Non-interpretative - straight application of the law.

    ATO view

    Yes - where it refers to insurance brokers, this includes reinsurance brokers.

    1. Proportional reinsurance = A reinsurance under which the insurer and the reinsurer share the risk in agreed proportions which may be fixed or variable depending on the insurer's retention and the sum insured. The reinsurer shares proportionally the premiums earned and the claims incurred plus certain expenses incurred by the insurer.

    Treaty reinsurance = A standing agreement between Insurers and Reinsurers for the cession or assumption of certain risks as defined in the contract. Treaty reinsurance may be divided into two broad classifications:

    1. The participating type which provides for sharing of risks between the Insurer and the Reinsurer. (Proportional Reinsurance)
    2. The excess of loss type which provides for indemnity by the Reinsurer only for loss, or losses, which exceed some specified predetermined amount. (Non-Proportional Reinsurance).
      Last modified: 27 May 2014QC 16371