• Insured entitled to partial input tax credit - excess paid to third party

    Reinstatement - taxable supply

    Flowchart - Reinstatement - taxable supply

    The insured purchased domestic travel insurance from a general insurer at a cost of $1,054. The policy premium consisted of:

    Base premium

    $950

    GST on policy

    $95

    Stamp duty on policy

    $9

    Total cost of policy

    $1,054

    The insured is registered for GST and has notified the insurer of their entitlement to an 85% input tax credit on the policy premium. The excess on this policy is $165 and is paid directly to a third party.

    The insured makes a claim under the policy and the insurer assesses the loss as being $913 (GST-inclusive). The insurer contracts with a retailer to replace the damaged item and pays $748 directly to the retailer. The insured pays the balance (excess) of $165 directly to the retailer.

    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.

    $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 ($9).

    Nil

    Not applicable

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

    Payment to retailer.

    $748

    G11

    Acquisition is a non-capital purchase.

    ITC for retailer payment.

    $68

    1B

    GST on purchase.

    Reinstatement - GST-free supply

    Flowchart - Reinstatement - GST Free supply

    The insured runs a seafood cafe and purchased contents insurance from a general insurer for $2062. The policy premium consisted of:

    Base premium

    $1,850

    GST on policy

    $185

    Stamp duty on policy

    $27

    Total cost of policy

    $2,062

    The insured is registered for GST and has notified the insurer of their entitlement to a 60% input tax credit on the policy premium. There is a $100 excess on this policy payable directly to the insurer.

    The insured's cafe was broken into and some of the seafood stolen. The insurer assesses the loss of the seafood as being $2,388 (GST-free). The insured contracts with a seafood supplier to replace the seafood stock, and the insurer pays the supplier $2,388. There is no contractual relationship between the insurer and the supplier.

    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.

    $2,035

    G1

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

    GST on policy.

    $185

    1A

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

    Stamp duty on policy ($27).

    Nil

    Not applicable

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

    Payment to supplier at direction of insured ($2,288).

    Nil

    Not applicable

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

    Decreasing adjustment applicable to payment ($2,288).

    $88
    (see calculation below)

    1B

    Amount of decreasing adjustment.

    Excess payment from insured ($100).

    Nil

    Not applicable

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

    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 =

    $2,388

    +

    0

    -

    $100

    x

    11/(11-0.6)

    =

    $2,388

    +

    0

    -

    $100

    x

    11/10.4

    =

    $2,420

     

     

     

     

     

     

    DA =

    1/11

    x

    $2,420

    x

    (1 - 0.6)

     

     

    =

    1/11

    x

    $2,420

    x

    0.4

     

     

    =

    $88

     

     

     

     

     

     

    Amount to be shown at 1B on the activity statement is $88.

    Attention

    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.

    End of attention
      Last modified: 30 May 2014QC 16293