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  • Purchase of insurance policy and cash settlement to the insured

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    Insured entitled to full input tax credit - no excess

    Cash settlement - taxable supply (goods)

    Flowchart - Cash settlement - taxable supply (goods)

    The insured purchased business contents insurance from a general insurer for $1,330. The policy premium consisted of:

    Base premium

    $1,200

    GST on policy

    $120

    Stamp duty on policy

    $10

    Total cost of policy

    $1,330

    The insured is registered for GST and has notified the insurer of their entitlement to a full input tax credit on the policy premium. Under the terms and conditions of the policy, the insurer can adjust settlement amounts paid under the policy to reflect the insured's possible input tax credit entitlement on use of the settlement funds. There is no excess on this policy.

    The insured had a break-in at their business premises. The insurer is advised that the cost to repair the damaged contents is $8,800 (GST-inclusive). The insurer pays the insured $8,000 in full settlement of the claim.

    Table: How the insurer would treat this situation on their activity statement

    Description of payment

    Amount shown on activity statement

    Activity statement label

    Reason

    Base premium inclusive of GST.

    $1,320

    G1

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

    GST on policy.

    $120

    1A

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

    Stamp duty on policy ($10).

    Nil

    Not applicable

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

    Payment to insured ($8,000).

    Nil

    Not applicable

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

    Cash settlement - taxable supply (services)

    Flowchart- Cash settlement - taxable supply (services)

    The insured renewed their motor vehicle policy with a motor vehicle insurer for $1,330. The vehicle was insured for $22,000 and the policy premium consisted of:

    Base premium

    $1,200

    GST on policy

    $120

    Stamp duty on policy

    $10

    Total cost of policy

    $1,330

    The insured is registered for GST and has notified the insurer of their entitlement to a full input tax credit on the policy premium. Under the terms and conditions of the policy, the insurer can adjust settlement amounts paid under the policy to reflect the insured's possible input tax credit entitlement on the purchase of a replacement vehicle. There is no excess on this policy.

    The motor vehicle is damaged in an accident and the insurer is advised that the GST-inclusive cost of repairs is more than the vehicle is worth. The insurer pays out $20,000. That is, the full face value of the policy less the input tax credit entitlement of the insured if it spent $22,000 on a new vehicle. On pay-out, the insurer acquires the wreck from the insured and then sells it to a motor vehicle wrecker for $660.

    Table: How the insurer would treat this situation on their activity statement

    Description of payment

    Amount shown on activity statement

    Activity statement label

    Reason

    Base premium inclusive of GST.

    $1,320

    G1

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

    GST on policy.

    $120

    1A

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

    Stamp duty on policy ($10).

    Nil

    Not applicable

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

    Payment to insured ($20,000).

    Nil

    Not applicable

    Not an acquisition. A decreasing adjustment does not apply to this transaction.

    Sale to motor wrecker inclusive of GST.

    $660

    G1

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

    GST on motor wrecker sale.

    $60

    1A

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

    Cash settlement - GST-free supply

    Flowchart - Cash settlement - GST-free supply

    The insured takes out a workers' compensation insurance policy with a workers' compensation insurer for $1,665. The policy premium consisted of:

    Base premium

    $1,500

    GST on policy

    $150

    Stamp duty on policy

    $15

    Total cost of policy

    $1,665

    The insured is registered for GST and has notified the insurer of their entitlement to a full input tax credit on the policy premium. Under the terms and conditions of the policy, the insurer can adjust settlement amounts paid under the policy to reflect the insured's possible input tax credit entitlement on use of the settlement funds. There is no excess on this policy.

    An employee of the insured is injured at work and is treated at the local hospital. The employee has paid the medical expenses and is now seeking compensation from the insured. The insurer is advised of the claim and makes a cash settlement to the employee of $15,500.

    Table: How the insurer would treat this situation on their activity statement

    Description of payment

    Amount shown on activity statement

    Activity statement label

    Reason

    Base premium inclusive of GST.

    $1,650

    G1

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

    GST on policy.

    $150

    1A

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

    Stamp duty on policy ($15).

    Nil

    Not applicable

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

    Payment to employee ($15,500).

    Nil

    Not applicable

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

    Insured entitled to full input tax credit - excess

    Flowchart - Insured entitled to full input tax credit - excess

    The insured renewed a business contents policy with a general insurer for $2,435. The business and contents were insured for $550 000 and the policy premium consisted of:

    Base premium

    $2,200

    GST on policy

    $220

    Stamp duty on policy

    $15

    Total cost of policy

    $2,435

    The insured is registered for GST and has notified the insurer of their entitlement to a full input tax credit on the policy premium. Under the terms and conditions of the policy, the insurer can adjust settlement amounts paid under the policy to reflect the insured's possible input tax credit entitlement on use of the settlement funds. There is a $5,000 excess on this policy.

    The business and all its contents were destroyed by fire, leaving nothing able to be salvaged. The insurer agrees to pay the insured, the full face value of the policy less the insured's possible ITC entitlement on use of the funds and excess, that is, $495,000.

    Table: How the insurer would treat this situation on their activity statement

    Description of payment

    Amount shown on activity statement

    Activity statement label

    Reason

    Base premium inclusive of GST.

    $2,420

    G1

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

    GST on policy.

    $220

    1A

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

    Stamp duty on policy ($15).

    Nil

    Not applicable

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

    Payment to insured ($495,000).

    Nil

    Not applicable

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

    Insured entitled to partial input tax credit - no excess

    Cash settlement - taxable supply

    Flowchart - Cash settlement - taxable supply

    The insured purchased building and contents insurance from a general insurer at a cost of $12,352. The policy premium consisted of:

    Base premium (including fire service levy)

    $11,000

    GST on policy

    $1,100

    Stamp duty on policy

    $252

    Total cost of policy

    $12,352

    The insured is registered for GST and has notified the insurer of their entitlement to a 70% input tax credit on the policy premium. Under the terms and conditions of the policy, the insurer can adjust settlement amounts paid under the policy to reflect the insured's possible input tax credit entitlement on use of the settlement funds. There is no excess on this policy.

    The insured makes a claim against the policy and the insurer assesses the damages as being $11,000 (GST-inclusive). The insured is still entitled to a 70% input tax credit so if they spend $11,000 on acquisitions they will be entitled to a $700 input tax credit. The insurer forwards a cheque to the insured for $10,300.

    Table: How the insurer would treat this situation on their activity statement

    Description of payment

    Amount shown on activity statement

    Activity statement label

    Reason

    Base premium inclusive of GST.

    $12,100

    G1

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

    GST on policy.

    $1,100

    1A

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

    Stamp duty on policy ($252).

    Nil

    Not applicable

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

    Payment to insured ($10,300).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to settlement payment.

    $300
    (see calculation below)

    1B

    Amount of decreasing adjustment.

    Decreasing adjustment (DA) calculation - partial entitlement to input tax credits

    The section 78-15 decreasing adjustment is calculated as follows:

    DA = 1/11th × Settlement amount × (1 − extent of input tax credit)

    The settlement amount is calculated as follows:

    • Step 1: The sum of the payments of money made in settlement of the claim
    • plus
    • Step 2: The GST-inclusive market value of the supplies (if any) made by the insurer in settlement of the claim (other than supplies that would have been taxable supplies but for section 78-25)
    • minus
    • Step 3: The sum of any payments of excess made to the insurer under the insurance policy in question (except to the extent that they are payments of excess to which section 78-18 applies)
    • multiplied by

    Step 4

    11/(11-extent of ITC)

     Table: Example of calculating the settlement amount

     

    Step 1

     

    Step 2

     

    Step 3

     

    Step 4

    Settlement amount =

    $10,300

    +

    0

    0

    ×

    11/(11−0.7)

    =

    $10,300

    +

    0

    0

    ×

    11÷10.3

    =

    $11,000

     

     

     

     

     

     

    DA =

    1/11

    ×

    $11,000

    ×

    (1 - 0.7)

     

     

    =

    1/11

    ×

    $11,000

    ×

    0.3

     

     

    =

    $300

     

     

     

     

     

     

    Amount to be shown at 1B on the activity statement is $300.

    Cash settlement - GST-free supply

    Flowchart - Cash settlement - GST-free supply

    The insured purchased building and contents insurance from a general insurer at a cost of $6,726. The policy premium consisted of:

    Base premium (including fire service levy)

    $6,000

    GST on policy

    $600

    Stamp duty on policy

    $126

    Total cost of policy

    $6,726

    The insured is registered for GST and has notified the insurer of their entitlement to a 60% input tax credit on the policy premium. Under the terms and conditions of the policy, the insurer can adjust settlement amounts paid under the policy to reflect the insured's possible input tax credit entitlement on use of the settlement funds. There is no excess on this policy.

    The insured makes a claim against the policy in relation to GST-free contents and the insurer assesses the damages as being $8,632 (GST-free). The insurer forwards a cheque for $8,632 to the insured.

    Table: How the insurer would treat this situation on their activity statement

    Description of payment

    Amount shown on activity statement

    Activity statement label

    Reason

    Base premium inclusive of GST.

    $6,600

    G1

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

    GST on policy.

    $600

    1A

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

    Stamp duty on policy ($126).

    Nil

    Not applicable

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

    Payment to insured ($8,632).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to settlement payment.

    $332
    (see calculation below)

    1B

    Amount of decreasing adjustment.

    Decreasing adjustment (DA) calculation - partial entitlement to input tax credits

    The section 78-15 decreasing adjustment is calculated as follows:

    DA = 1/11th × Settlement amount × (1 − extent of input tax credit)

    The settlement amount is calculated as follows:

    • Step 1: The sum of the payments of money made in settlement of the claim
    • plus
    • Step 2: The GST-inclusive market value of the supplies (if any) made by the insurer in settlement of the claim (other than supplies that would have been taxable supplies but for section 78-25)
    • minus
    • Step 3: The sum of any payments of excess made to the insurer under the insurance policy in question (except to the extent that they are payments of excess to which section 78-18 applies)
    • multiplied by

    Step 4

    11/(11-extent of ITC)

     Table: Example of calculating the settlement amount

     

    Step 1

     

    Step 2

     

    Step 3

     

    Step 4

    Settlement amount =

    $8,632

    +

    0

    0

    ×

    11÷(11−0.6)

    =

    $8,632

    +

    0

    0

    ×

    11÷10.4

    =

    $9,130

     

     

     

     

     

     

    DA =

    1/11

    ×

    $9,130

    ×

    (1 − 0.6)

     

     

    =

    1/11

    ×

    $9,130

    ×

    0.4

     

     

    =

    $332

     

     

     

     

     

     

    Amount to be shown at 1B on the activity statement is $332.

    Insured entitled to partial input tax credit - excess

    Cash settlement - taxable supply

    Flowchart - Cash settlement - taxable supply

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

    Base premium (including fire service levy)

    $5,000

    GST on policy

    $500

    Stamp duty on policy

    $25

    Total cost of policy

    $5,525

    The insured is registered for GST and has notified the insurer of their entitlement to a 90% input tax credit on the policy premium. Under the terms and conditions of the policy, the insurer can adjust settlement amounts paid under the policy to reflect the insured's possible input tax credit entitlement on use of the settlement funds. The excess on this policy is $1,200.

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

    Table: How the insurer would treat this situation on their activity statement

    Description of payment

    Amount shown on activity statement

    Activity statement label

    Reason

    Base premium inclusive of GST.

    $5,500

    G1

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

    GST on policy.

    $500

    1A

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

    Stamp duty on policy ($25).

    Nil

    Not applicable

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

    Payment to insured ($16,160).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to settlement payment.

    $160
    (see calculation below)

    1B

    Amount of decreasing adjustment.

    Decreasing adjustment (DA) calculation - no/partial entitlement to input tax credits

    The section 78-15 decreasing adjustment is calculated as follows:

    DA = 1/11th × Settlement amount × (1 − extent of input tax credit)

    The settlement amount is calculated as follows:

    • Step 1: The sum of the payments of money made in settlement of the claim
    • plus
    • Step 2: The GST-inclusive market value of the supplies (if any) made by the insurer in settlement of the claim (other than supplies that would have been taxable supplies but for section 78-25)
    • minus
    • Step 3: The sum of any payments of excess made to the insurer under the insurance policy in question (except to the extent that they are payments of excess to which section 78-18 applies)
    • multiplied by

    Step 4

    11/(11-extent of ITC)

     Table: Example of calculating the settlement amount

     

    Step 1

     

    Step 2

     

    Step 3

     

    Step 4

    Settlement amount =

    $16,160

    +

    0

    0

    ×

    11÷(11−0.9)

    =

    $16,160

    +

    0

    0

    11÷10.1

    =

    $17,600

     

     

     

     

     

     

    DA =

    1/11

    ×

    $17,600

    ×

    (1 − 0.9)

     

     

    =

    1/11

    ×

    $17,600

    ×

    0.1

     

     

    =

    $160

     

     

     

     

     

     

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

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

    Cash settlement - GST-free supply

    Flowchart - Cash settlement - GST-free supply

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

    Base premium (including fire service levy)

    $7,480

    GST on policy

    $680

    Stamp duty on policy

    $37

    Total cost of policy

    $8,197

    The insured is registered for GST and has notified the insurer of their entitlement to a 60% input tax credit on the policy premium. Under the terms and conditions of the policy, the insurer can adjust settlement amounts paid under the policy to reflect the insured's possible input tax credit entitlement on use of the settlement funds. The excess on this policy is $1,400.

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

    Table: How the insurer would treat this situation on their activity statement

    Description of payment

    Amount shown on activity statement

    Activity statement label

    Reason

    Base premium inclusive of GST.

    $8,160

    G1

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

    GST on policy.

    $680

    1A

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

    Stamp duty on policy ($37).

    Nil

    Not applicable

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

    Payment to insured ($23,400).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to settlement payment.

    $900
    (see calculation below)

    1B

    Amount of decreasing adjustment.

    Decreasing adjustment (DA) calculation - partial entitlement to input tax credits

    The section 78-15 decreasing adjustment is calculated as follows:

    DA = 1/11th × Settlement amount × (1 − extent of input tax credit)

    The settlement amount is calculated as follows:

    • Step 1: The sum of the payments of money made in settlement of the claim
    • plus
    • Step 2: The GST-inclusive market value of the supplies (if any) made by the insurer in settlement of the claim (other than supplies that would have been taxable supplies but for section 78-25)
    • minus
    • Step 3: The sum of any payments of excess made to the insurer under the insurance policy in question (except to the extent that they are payments of excess to which section 78-18 applies)
    • multiplied by

    Step 4

    11/(11-extent of ITC)

     Table: Example of calculating the settlement amount

     

    Step 1

     

    Step 2

     

    Step 3

     

    Step 4

    Settlement amount =

    $23,400

    +

    0

    0

    ×

    11÷(11−0.6)

    =

    $23,400

    +

    0

    0

    ×

    11÷10.4

    =

    $24,750

     

     

     

     

     

     

    DA =

    1/11

    ×

    $24,750

    ×

    (1 − 0.6)

     

     

    =

    1/11

    ×

    $24,750

    ×

    0.4

     

     

    =

    $900

     

     

     

     

     

     

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

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

    Insured not entitled to input tax credit - no excess

    Cash settlement - taxable supply

    Flowchart - Cash settlement - taxable supply

    The insured purchased a contents insurance policy from a general insurer for $1,057. The policy premium consisted of:

    Base premium

    $950

    GST on policy

    $95

    Stamp duty on policy

    $12

    Total cost of policy

    $1,057

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

    The insured makes a claim and the insurer is advised that the cost to repair the damaged contents is $6,325 (GST-inclusive). The insurer pays the insured $6,325 in full settlement of the claim.

    Table: How the insurer would treat this situation on their activity statement

    Description of payment

    Amount shown on activity statement

    Activity statement label

    Reason

    Base premium inclusive of GST.

    $1,045

    G1

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

    GST on policy.

    $95

    1A

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

    Stamp duty on policy ($12).

    Nil

    Not applicable

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

    Payment to insured ($6,325).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to settlement payment.

    $575
    (see calculation below)

    1B

    Amount of decreasing adjustment.

    Decreasing adjustment (DA) calculation - no entitlement to input tax credits

    The section 78-15 decreasing adjustment is calculated as follows:

    DA = 1/11th × Settlement amount × (1 -× extent of input tax credit)

    The settlement amount is calculated as follows:

    • Step 1: The sum of the payments of money made in settlement of the claim
    • plus
    • Step 2: The GST-inclusive market value of the supplies (if any) made by the insurer in settlement of the claim (other than supplies that would have been taxable supplies but for section 78-25)
    • minus
    • Step 3: The sum of any payments of excess made to the insurer under the insurance policy in question (except to the extent that they are payments of excess to which section 78-18 applies)
    • multiplied by

    Step 4

    11/(11-extent of ITC)

     Table: Example of calculating the settlement amount

     

    Step 1

     

    Step 2

     

    Step 3

     

    Step 4

    Settlement amount =

    $6,325

    +

    0

    0

    ×

    11÷(11−0)

    =

    $6,325

    +

    0

    0

    ×

    11/11

    =

    $6,325

     

     

     

     

     

     

    DA =

    1/11

    ×

    $6,325

    ×

    (1 − 0)

     

     

    =

    1/11

    ×

    $6,325

    ×

    1

     

     

    =

    $575

     

     

     

     

     

     

    Amount to be shown at 1B on the activity statement is $575.

    Cash settlement - GST-free supply

    Flowchart - Cash settlement - GST-free supply

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

    Base premium

    $1,870

    GST on policy

    $170

    Stamp duty on policy

    $24

    Total cost of policy

    $2,064

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

    The insured makes a claim and the insurer is advised that the cost to replace the damaged stock is $3,498 (GST-free). The insurer pays the insured $3,498 in full settlement of the claim.

    Table: How the insurer would treat this situation on their activity statement

    Description of payment

    Amount shown on activity statement

    Activity statement label

    Reason

    Base premium inclusive of GST.

    $2,040

    G1

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

    GST on policy.

    $170

    1A

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

    Stamp duty on policy ($24).

    Nil

    Not applicable

    Stamp duty is not included on the activity statement.

    Payment to insured ($3,498).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to settlement payment.

    $318
    (see calculation below)

    1B

    Amount of decreasing adjustment.

    Decreasing adjustment (DA) calculation - no entitlement to input tax credits

    The section 78-15 decreasing adjustment is calculated as follows:

    DA = 1/11th × Settlement amount × (1 − extent of input tax credit)

    The settlement amount is calculated as follows:

    • Step 1: The sum of the payments of money made in settlement of the claim
    • plus
    • Step 2: The GST-inclusive market value of the supplies (if any) made by the insurer in settlement of the claim (other than supplies that would have been taxable supplies but for section 78-25)
    • minus
    • Step 3: The sum of any payments of excess made to the insurer under the insurance policy in question (except to the extent that they are payments of excess to which section 78-18 applies)
    • multiplied by

    Step 4

    11/(11-extent of ITC)

     Table: Example of calculating the settlement amount

     

    Step 1

     

    Step 2

     

    Step 3

     

    Step 4

    Settlement amount =

    $3,498

    +

    0

    0

    ×

    11÷(11−0)

    =

    $3,498

    +

    0

    0

    ×

    11÷11

    =

    $3,498

     

     

     

     

     

     

    DA =

    1/11

    ×

    $3,498

    ×

    (1 − 0)

     

     

    =

    1/11

    ×

    $3,498

    ×

    1

     

     

    =

    $318

     

     

     

     

     

     

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

    See also:

      Last modified: 25 May 2017QC 16293