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  • Purchase of input taxed insurance policy and cash settlement to the insured

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    Life insurance

    Flowchart - Purchase of input taxed insurance policy and cash settlement to the insured

    The insured purchased a life insurance policy from a life company at a cost of $635. The policy has a face value of $500 000. The policy premium consisted of:

    Base premium

    $620

    Stamp duty on policy

    $15

    Total cost of policy

    $635

    The insured dies and the insurer pays out the $500,000 to the insured's estate.

    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.

    $620

    G1

    Payment for a sale made in the course of the insurance business. Nothing is shown at label 1A as the sale is for an input taxed policy.

    Stamp duty on policy ($15).

    Nil

    Not applicable

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

    Payment to trustee ($500,000).

    Nil

    Not applicable

    A decreasing adjustment does not apply to this transaction.

    Insured making mixed supplies

    Flowchart - Insured making mixed supplies

    The insured purchased an insurance policy for $18,665. The policy consists of 15% domestic travel insurance, 35% building insurance and 50% life insurance. The policy premium consisted of:

    Base premium

    $17,600

    GST on policy

    $880

    Stamp duty on policy

    $185

    Total cost of policy

    $18,665

    The insured is registered for GST and has notified the insurer of their entitlement to an 80% input tax credit on the taxable portion of the premium. Under the terms and conditions of the policy, the insurer can adjust settlement amounts paid under the policy to reflect the insured's input tax credit entitlement. There is no excess on this policy.

    The building is damaged and the insurer is advised that the cost to repair the building is $59,976 (GST-inclusive). The insured is still entitled to an 80% input tax credit. The insurer pays the $55,614 to the insured 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.

    $18,480

    G1

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

    GST on policy.

    $880

    1A

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

    Stamp duty on policy ($185).

    Nil

    Not applicable

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

    Payment to insured ($55,614).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to payment.

    $1,090
    (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 =

    $55,614

    +

    0

    0

    ×

    11÷(11−0.8)

    =

    $55,614

    +

    0

    0

    ×

    11÷10.2

    =

    $59,976

     

     

     

     

     

     

    DA =

    1/11

    ×

    $59,976

    ×

    (1 − 0.8)

     

     

    =

    1/11

    ×

    $59,976

    ×

    0.2

     

     

    =

    $1090

     

     

     

     

     

     

    Amount to be shown at 1B on the activity statement is $1,090.

    See also:

      Last modified: 25 May 2017QC 16293