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  • Purchase of GST-free insurance policy and reinstatement to the insured

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    Insured not registered for GST

    Flowchart - Insured not registered for GST

    The insured, who is not registered for GST, purchases health insurance from a health fund and pays an annual contribution of $1080. The insured requires a prosthesis costing $1,500. Under the terms of the policy, the insured must pay a 15% excess to the insurer. The insurer acquires the GST-free prosthesis, on supplies it to the insured, and is paid $225 by 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.

    $1,080

    G1

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

    GST-free base premium.

    $1,080

    G3

    This is a GST-free supply made in the course of the insurance business.

    Payment for GST-free prosthesis ($1,500).

    $1,500

    G11

    The acquisition is a non-capital purchase. For reporting purposes, GST-free purchases are included at label G11. As there is no GST associated with this purchase, it will not form part of the label 1B amount. A decreasing adjustment does not apply to this transaction.

    Excess payment from insured ($225).

    Nil

    Not applicable

    Payment is not for a supply, therefore it is not included on the activity statement.

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

    For accuracy and statistical purposes it is necessary to show the amounts at G1 and G3.

    Insured registered for GST

    The example in 4.1 will yield the same activity statement result regardless of whether the insured is registered for GST or not.

    Insured not registered for GST - the policy is directly connected with goods or real property located offshore

    Flowchart - Insured not registered for GST - the policy is directly connected with goods or real property located offshore

    The insured is a non-resident and purchases a building and contents policy for $1,697 from a general insurer located in Australia. The insured's building and contents are located overseas. The policy premium consisted of:

    Base premium

    $1,682

    Stamp duty on policy

    $15

    Total cost of policy

    $1,697

    There is a $220 excess on this policy.

    One of the contents of the building is damaged and the insurer contracts with a supplier in Australia to provide a replacement to the insured. The goods are delivered to the insurer who then forwards them overseas. The cost of replacement is $4,400. The insured pays the $220 excess directly to the insurer.

    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.

    $1,682

    G1

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

    GST-free base premium.

    $1,682

    G3

    This is a GST-free supply 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 supplier for replacement part ($4,400).

    Nil

    Not applicable

    A decreasing adjustment does not apply to this transaction.

    .

     

     

     

    Excess payment from insured ($220).

    Nil

    Not applicable

    Payment is not for a supply, therefore it is not included on the activity statement.

    For accuracy and statistical purposes it is necessary to show the amounts at G1 and G3.

    There is no section 78-18 increasing adjustment applicable to the excess payment from the insured. Section 78-30 applies and as the supply of insurance policy is GST-free, the acquisition is not a creditable acquisition.

    Insured registered for GST - the policy is directly connected with goods or real property located offshore

    Flowchart - Insured registered for GST - the policy is directly connected with goods or real property located offshore

    The insured purchases a building and contents policy for $2,771 from a general insurer located in Australia. The insured's building and contents are located 60% locally and 40% overseas. The policy premium consisted of:

    Base premium

    $2,600

    GST on local content of policy

    $156

    Stamp duty on policy

    $15

    Total cost of policy

    $2,771

    The insured has notified the insurer that they have a 30% entitlement to input tax credits on the local portion of the policy premium. A $200 excess is payable directly to the insurer for each claim made under the policy. Under the terms of the policy, the insurer in determining the payout amount can take into account the input tax credits the insured might be entitled to when it uses the settlement proceeds. The insured makes two separate claims:

    1. The contents of one of the overseas buildings is damaged. The damage is assessed as $A4, 202. The insurer forwards a cheque for A$4, 202 in full settlement of the claim to the insured.
    2. One of the local buildings is damaged. The damage is assessed as A$9, 983. The insurer forwards a cheque for A$9, 783 in full settlement of the claim 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.

    $2,756

    G1

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

    GST on local portion of policy.

    $156

    1A

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

    GST-free portion of policy.

    $1,040

    G3

    This is a GST-free supply 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 ($4,202)
    (in respect of offshore claim).

    Nil

    Not applicable

    A decreasing adjustment does not apply to this transaction.

    Excess payment from insured ($200).

    Nil

    Not applicable

    Payment is not for a supply, therefore it is not included on the activity statement.

    Payment to insured in full settlement of the local claim ($9,783).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to settlement payment ($9,783).

    $640
    (see calculation below)

    1B

    Amount of decreasing adjustment.

    Excess payment from insured ($200).

    Nil

    Not applicable

    Payment is not for a supply, therefore it is not included on the activity statement.

    Overseas related payout

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

    Locally related payout

    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 =

    $9,783

    +

    0

    0

    ×

    11÷(11−0.3)

    =

    $9,783

    +

    0

    0

    ×

    11÷10.7

    =

    $10,057

     

     

     

     

     

     

    DA =

    1/11

    ×

    $10,057

    ×

    (1 − 0.3)

     

     

    =

    1/11

    ×

    $10,057

    ×

    0.7

     

     

    =

    $640

     

     

     

     

     

     

    Amount to be shown at 1B on the activity statement is $640.

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

    For accuracy and statistical purposes it is necessary to show the amounts at G1 and G3.

    See also:

      Last modified: 25 May 2017QC 16293