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  • Subrogation

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    Insured entitled to full input tax credit

    Flowchart - Insured entitled to full input tax credit

    The insured purchased a comprehensive motor vehicle insurance policy from a motor vehicle 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. There is no excess on this policy.

    The motor vehicle is damaged in an accident and taken to a panel beater for repairs. The insurer is advised that the cost to repair the vehicle is $5,500 (GST-inclusive). The insurer contracts with the panel beater and pays $5,500 for the repairs.

    The insurer exercises their right of subrogation and recovers $3,000 from the party found at fault. The subrogation payment is received in a subsequent tax period.

    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 repairer.

    $5,500

    G11

    Acquisition is a non-capital purchase.

    GST portion of repairer's payment.

    $500

    1B

    GST on purchase.

    Subrogation payment on later activity statement ($3,000).

    Nil

    Not applicable

    A Division 19 increasing adjustment does not apply to this transaction as the insurer had no decreasing adjustment under Division 78.

    Insured entitled to partial input tax credit

    Flowchart - Insured entitled to partial input tax credit

    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 input tax credit entitlement. 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 insurer forwards a cheque to the insured for $10,300 as the insured would be entitled to an input tax credit of $700 if it spent the money on an acquisition for which it was entitled to 70% input tax credits. The $700 is 70% of the GST included in an $11,000 GST-inclusive acquisition. The insurer exercises its right of subrogation and recovers $8,034 from the party found at fault. The subrogation payment is received in a subsequent tax period.

    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 fire service levy and 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. Decreasing adjustment will apply to this payment.

    Decreasing adjustment applicable to payment ($10,300).

    $300
    (see calculation (i) below)

    1B

    Amount of decreasing adjustment.

    Subrogation payment on later activity statement ($8,034).

    Nil

    Not applicable

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

    Increasing adjustment applicable to subrogation payment ($8,034).

    $234
    (see calculation (ii) below)

    1A

    Amount of increasing 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.

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

    The exercise of the insurer's right of subrogation effectively overstates the original decreasing adjustment. Division 19 requires a correcting calculation to be performed. The correction is the difference between what was originally claimed and what should have been claimed, that is, the difference between the DA using $10,300 and a DA using $2266 ($10,300 less $8,034).

    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 =

    $2,266

    +

    0

    0

    ×

    11÷(11−0.7)

    =

    $2,266

    +

    0

    0

    ×

    11÷10.3

    =

    $2,420

     

     

     

     

     

     

    DA =

    1/11

    ×

    $2,420

    ×

    (1 − 0.7)

     

     

    =

    1/11

    ×

    $2,420

    ×

    0.3

     

     

    =

    $66

     

     

     

     

     

     

     

    Subrogation Adjustment =

    Original DA

    -

    Corrected DA

    =

    $300

    -

    $66

    =

    $234

     

     

    Amount to be shown at 1A on the activity statement as an increasing adjustment is $234.

    Insured not entitled to input tax credit

    Flowchart - Insured not entitled to input tax credit

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

    Base premium

    $950

    GST on policy

    $95

    Stamp duty on policy

    $12

    Total cost of policy

    $1,057

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

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

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

    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. Decreasing adjustment will apply to this payment.

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

    $575
    (see calculation (i) below)

    1B

    Amount of decreasing adjustment.

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

    Nil

    Not applicable

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

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

    $300
    (see calculation (ii) below)

    1A

    Amount of Increasing adjustment.

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

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

    DA = 1/11th × 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.

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

    The exercise of the insurer's right of subrogation effectively overstates the original decreasing adjustment. Division 19 requires a correcting calculation to be performed. The correction is the difference between what was originally claimed and what should have been claimed, that is, the difference between the DA using $6,325 and a DA using $3,025 ($6,325 less $3,300).

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

    DA = 1/11th × 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 =

    $3,025

    +

    0

    0

    ×

    11÷(11−0)

    =

    $3,025

    +

    0

    0

    ×

    11÷11

    =

    $3,025

     

     

     

     

     

     

    DA =

    1/11

    ×

    $3,025

    ×

    (1 − 0)

     

     

    =

    1/11

    ×

    $3,025

    ×

    1

     

     

    =

    $275

     

     

     

     

     

     

     

    Subrogation Adjustment =

    Original DA

    -

    Corrected DA

    =

    $575

    -

    $275

    =

    $300

     

     

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

    See also:

      Last modified: 25 May 2017QC 16293