• Insured entitled to partial input tax credit - third party not registered

    Flowchart - Insured entitled to partial input tax credit - third party not registered

    The insured takes out a workers' compensation insurance policy with a workers' compensation insurer for $12,352. The policy premium consisted of:

    Base premium

    $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 advised the insurer of their entitlement to a 70% input tax credit on the policy premium. There is no excess on this policy.

    The insured makes a claim under the policy and the insurer assesses the injury. The insurer agrees to pay the employee $8,790 in full settlement of the claim. The insurer forwards a cheque to the employee for the agreed amount.

    The insurer would treat this situation on their activity statement as follows.

    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 employee ($8,790).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to employee payment ($8,790).

    $256
    (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 x Settlement amount x (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)

     

     

    Step 1

     

    Step 2

     

    Step 3

     

    Step 4

    Settlement amount =

    $8,790

    +

    0

    -

    0

    x

    11/(11-0.7)

    =

    $8,790

    +

    0

    -

    0

    x

    11/10.3

    =

    $9,387

     

     

     

     

     

     

    DA =

    1/11

    x

    $9,387

    x

    (1 - 0.7)

     

     

    =

    1/11

    x

    $9,387

    x

    0.3

     

     

    =

    $256

     

     

     

     

     

     

    Amount to be shown at 1B on the activity statement is $256.

      Last modified: 30 May 2014QC 16293