Settlements
The settlement amount paid on an insurance claim is based on the terms of your contract with the insurer, not on GST legislation. However, in general, the insurer will only compensate you for the actual loss incurred. For example, if you are entitled to claim 100% of the GST credits, the insurer will reduce that GST credit amount from the payment made to you on a settlement.
Example: GST credits and insurance settlements
Repairs to Marilyn's business premises cost $5,500, including GST. Marilyn is registered for GST. When she pays for the repairs, she is entitled to claim 100% of the GST credits. She claims a GST credit of $500, which is 1/11th of the payment she made to the repairer. The insurer takes that into account and pays her $5,000.
The insurer may provide Marilyn a settlement statement showing the net settlement as $5,000 (the cost of repairs $5,500 less the GST credit amount of $500 Marilyn is entitled to claim).
End of exampleNotifying an insurer of your GST registration
You must notify your insurer of your entitlement to GST credits on your insurance premium when, or before, any claim is made. You will not have a GST liability on a settlement from an insurance claim if you have done this.
If you have not told your insurer your GST status and the proportion of GST credits relating to your business that you can claim, you may have to pay GST when your claim is settled.
You will have to pay GST on any settlement amount you receive if you have understated, to your insurer, the GST credit you can claim on the premium.
Paying GST on part of the settlement
If you don't tell your insurer you can claim the GST credit, you must:
- work out the percentage of GST you could claim on the premium
- pay GST on that percentage of the settlement amount.
If you understate the GST you can claim on the premium, you must:
- work out the percentage of GST you told your insurer you could claim for the purchase
- work out the percentage of GST you can actually claim
- work out the difference between these percentages
- pay GST on that percentage of the settlement amount.
You can't claim any GST credit if you make a payment of money, digital currency or goods to a third party in settlement of their claim against you where that payment is covered by the settlement of a claim you have made against your insurer.
Car insurance settlements
Claiming GST credits in car insurance settlements depends on who the insurer pays and whether the insurer has a contract with the repairer to repair cars it has provided policies for.
Generally, you cannot claim a GST credit for payments your insurer makes to a service provider if the insurer:
- has a contract with a supplier to provide a service to you, and
- pays the settlement directly to the service provider.
You can, however, claim a GST credit for payments your insurer makes to the service provider on your behalf.
The following examples illustrate four situations:
- Example 1: Betty: insurer has no contract with the repairer
- Example 2: Sarah: insurer has no contractual arrangement with the repairer, but pays the repair account directly on behalf of the driver
- Example 3: Tom: insurer has a contractual arrangement with the repairer to repair cars the insurer's policies cover (a so-called 'preferred supplier')
- Example 4: Bill: the insured person is not registered for GST.
Example 1: Betty
Betty is registered for GST and holds a car insurance policy with ABC Insurance. She tells ABC she can claim a 100% GST credit for the GST included in the policy price.
Betty has a car accident and ABC insurance agrees the damage to her car will cost $5,500 (including GST) to fix. Betty pays repair costs of $5,500.
ABC Insurance pays Betty $5,000 in full settlement of her claim. Betty claims a GST credit of $500 ($5,500 × 1/11th) when she lodges her next activity statement.
Betty's out -of-pocket expense is zero (that is, $5,000 from the insurer plus $500 GST credit).
Because Betty told ABC she could claim a GST credit for her insurance premium, she does not have a GST liability on the payment received from ABC in settlement of her claim.
End of exampleExample 2: Sarah
Sarah holds an insurance policy with XYZ Insurance. She uses her car 100% for business purposes and can claim 100% GST credits on the premium. When she damages her car, XYZ Insurance:
- agrees the damage will cost $5,500 (including GST) to fix
- instructs a repairer to repair the vehicle.
XYZ has no contract with the repairer.
Sarah asks XYZ Insurance to pay the repairer directly the amount less GST ($5,000). Sarah pays the remaining $500.
As XYZ Insurance paid the repairer on behalf of Sarah when she asked them to (as a simplified payment arrangement), Sarah is considered to have paid $5,500 for the repairs. Sarah can claim a GST credit of $500 (1/11th of $5,500).
End of exampleExample 3: Tom
Tom holds an insurance policy with Sure Insurance. He uses his car for business purposes and can claim 100% GST credits on the premium. When he damages the car, Sure Insurance:
- agrees that the car can be repaired at a cost of $5,500 (including GST)
- pays a repairer to make the repairs.
Sure Insurance has a contract with the repairer to repair vehicles for Sure Insurance policy holders.
Sure Insurance pays the repairer the full $5,500 and claims a GST credit of $500. Tom does not make any payment to the repairer and cannot claim a GST credit.
End of exampleExample 4: Bill
Bill has a car accident and repairs cost $5,500. Bill is not registered for GST, so he cannot claim a GST credit for GST included in the cost of the repairs.
Bill makes a claim under his insurance policy. He is covered for the full, GST-inclusive cost of the repairs and the insurer pays Bill $5,500.
End of example