Purchase of insurance policy and cash settlement to the insured

Insured entitled to full input tax credit - no excess

Cash settlement - taxable supply (goods)

The insured purchased business contents insurance from a general 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. Under the terms and conditions of the policy, the insurer can adjust settlement amounts paid under the policy to reflect the insured's possible input tax credit entitlement on use of the settlement funds. There is no excess on this policy.

The insured had a break-in at their business premises. The insurer is advised that the cost to repair the damaged contents is $8,800 (GST-inclusive). The insurer pays the insured $8,000 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.	$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 insured ($8,000).	Nil	Not applicable	Not an acquisition. A decreasing adjustment does not apply to this transaction as the insured was entitled to a full input tax credit on the premium.

Cash settlement - taxable supply (services)

The insured renewed their motor vehicle policy with a motor vehicle insurer for $1,330. The vehicle was insured for $22,000 and 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. Under the terms and conditions of the policy, the insurer can adjust settlement amounts paid under the policy to reflect the insured's possible input tax credit entitlement on the purchase of a replacement vehicle. There is no excess on this policy.

The motor vehicle is damaged in an accident and the insurer is advised that the GST-inclusive cost of repairs is more than the vehicle is worth. The insurer pays out $20,000. That is, the full face value of the policy less the input tax credit entitlement of the insured if it spent $22,000 on a new vehicle. On pay-out, the insurer acquires the wreck from the insured and then sells it to a motor vehicle wrecker for $660.

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 insured ($20,000).	Nil	Not applicable	Not an acquisition. A decreasing adjustment does not apply to this transaction.
Sale to motor wrecker inclusive of GST.	$660	G1	Payment for a sale made in the course of the insurance business.
GST on motor wrecker sale.	$60	1A	GST in respect of the sale made in the course of the insurance business.

Cash settlement - GST-free supply

The insured takes out a workers' compensation insurance policy with a workers' compensation insurer for $1,665. The policy premium consisted of:

Base premium	$1,500
GST on policy	$150
Stamp duty on policy	$15
Total cost of policy	$1,665

The insured is registered for GST and has notified the insurer of their entitlement to a full 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 possible input tax credit entitlement on use of the settlement funds. There is no excess on this policy.

An employee of the insured is injured at work and is treated at the local hospital. The employee has paid the medical expenses and is now seeking compensation from the insured. The insurer is advised of the claim and makes a cash settlement to the employee of $15,500.

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.	$1,650	G1	Payment for a sale made in the course of the insurance business.
GST on policy.	$150	1A	GST in respect of the sale made in the course of the insurance business.
Stamp duty on policy ($15).	Nil	Not applicable	Stamp duty on insurance is not included on the activity statement.
Payment to employee ($15,500).	Nil	Not applicable	Not an acquisition. A decreasing adjustment does not apply to this transaction as the insured was entitled to a full input tax credit on the premium.

Insured entitled to full input tax credit - excess

The insured renewed a business contents policy with a general insurer for $2,435. The business and contents were insured for $550 000 and the policy premium consisted of:

Base premium	$2,200
GST on policy	$220
Stamp duty on policy	$15
Total cost of policy	$2,435

The insured is registered for GST and has notified the insurer of their entitlement to a full 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 possible input tax credit entitlement on use of the settlement funds. There is a $5,000 excess on this policy.

The business and all its contents were destroyed by fire, leaving nothing able to be salvaged. The insurer agrees to pay the insured, the full face value of the policy less the insured's possible ITC entitlement on use of the funds and excess, that is, $495,000.

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.	$2,420	G1	Payment for a sale made in the course of the insurance business.
GST on policy.	$220	1A	GST in respect of the sale made in the course of the insurance business.
Stamp duty on policy ($15).	Nil	Not applicable	Stamp duty on insurance is not included on the activity statement.
Payment to insured ($495,000).	Nil	Not applicable	Not an acquisition. A decreasing adjustment does not apply to this transaction as the insured was entitled to a full input tax credit on the premium.

Insured entitled to partial input tax credit - no excess

Cash settlement - taxable supply

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 possible input tax credit entitlement on use of the settlement funds. 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 insured is still entitled to a 70% input tax credit so if they spend $11,000 on acquisitions they will be entitled to a $700 input tax credit. The insurer forwards a cheque to the insured for $10,300.

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.	$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. A decreasing adjustment will apply to this transaction as the insured was entitled to a partial input tax credit on the premium.
Decreasing adjustment applicable to settlement payment.	$300 (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 =	$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.

Cash settlement - GST-free supply

The insured purchased building and contents insurance from a general insurer at a cost of $6,726. The policy premium consisted of:

Base premium (including fire service levy)	$6,000
GST on policy	$600
Stamp duty on policy	$126
Total cost of policy	$6,726

The insured is registered for GST and has notified the insurer of their entitlement to a 60% 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 possible input tax credit entitlement on use of the settlement funds. There is no excess on this policy.

The insured makes a claim against the policy in relation to GST-free contents and the insurer assesses the damages as being $8,632 (GST-free). The insurer forwards a cheque for $8,632 to the insured.

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.	$6,600	G1	Payment for a sale made in the course of the insurance business.
GST on policy.	$600	1A	GST in respect of the sale made in the course of the insurance business.
Stamp duty on policy ($126).	Nil	Not applicable	Stamp duty on insurance is not included on the activity statement.
Payment to insured ($8,632).	Nil	Not applicable	Not an acquisition. A decreasing adjustment will apply to this transaction as the insured was entitled to a partial input tax credit on the premium.
Decreasing adjustment applicable to settlement payment.	$332 (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 =	$8,632	+	0	−	0	×	11÷(11−0.6)
=	$8,632	+	0	−	0	×	11÷10.4
=	$9,130
DA =	1/11	×	$9,130	×	(1 − 0.6)
=	1/11	×	$9,130	×	0.4
=	$332

Amount to be shown at 1B on the activity statement is $332.

Insured entitled to partial input tax credit - excess

Cash settlement - taxable supply

The insured purchased stock insurance from a general insurer at a cost of $5,525. The policy premium consisted of:

Base premium (including fire service levy)	$5,000
GST on policy	$500
Stamp duty on policy	$25
Total cost of policy	$5,525

The insured is registered for GST and has notified the insurer of their entitlement to a 90% 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 possible input tax credit entitlement on use of the settlement funds. The excess on this policy is $1,200.

The insured makes a claim against the policy and the insurer assesses the loss as being $19,289 (GST-inclusive). The insurer forwards a cheque to the insured for $16,160 in full settlement of the claim. No excess is actually paid to the insurer as the insurer merely provides the settlement exclusive of the amount of the excess.

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.	$5,500	G1	Payment for a sale made in the course of the insurance business.
GST on policy.	$500	1A	GST in respect of the sale made in the course of the insurance business.
Stamp duty on policy ($25).	Nil	Not applicable	Stamp duty on insurance is not included on the activity statement.
Payment to insured ($16,160).	Nil	Not applicable	Not an acquisition. A decreasing adjustment will apply to this transaction as the insured was entitled to a partial input tax credit on the premium.
Decreasing adjustment applicable to settlement payment.	$160 (see calculation below)	1B	Amount of decreasing adjustment.

Decreasing adjustment (DA) calculation - no/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 =	$16,160	+	0	−	0	×	11÷(11−0.9)
=	$16,160	+	0	−	0	−	11÷10.1
=	$17,600
DA =	1/11	×	$17,600	×	(1 − 0.9)
=	1/11	×	$17,600	×	0.1
=	$160

Amount to be shown at 1B on the activity statement is $160.

Note: There is no section 78-18 increasing adjustment applicable to the excess from the insured. The insurer has not made creditable acquisitions directly for the purposes of settling the claim.

Cash settlement - GST-free supply

The insured purchased stock insurance from a general insurer at a cost of $8,197. The policy premium consisted of:

Base premium (including fire service levy)	$7,480
GST on policy	$680
Stamp duty on policy	$37
Total cost of policy	$8,197

The insured is registered for GST and has notified the insurer of their entitlement to a 60% 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 possible input tax credit entitlement on use of the settlement funds. The excess on this policy is $1,400.

The insured makes a claim against the policy and the insurer assesses the loss as being $24,800 (GST-free). The insurer forwards a cheque to the insured for $23,400 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.	$8,160	G1	Payment for a sale made in the course of the insurance business.
GST on policy.	$680	1A	GST in respect of the sale made in the course of the insurance business.
Stamp duty on policy ($37).	Nil	Not applicable	Stamp duty on insurance is not included on the activity statement.
Payment to insured ($23,400).	Nil	Not applicable	Not an acquisition. A decreasing adjustment will apply to this transaction as the insured was entitled to a partial input tax credit on the premium.
Decreasing adjustment applicable to settlement payment.	$900 (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 =	$23,400	+	0	−	0	×	11÷(11−0.6)
=	$23,400	+	0	−	0	×	11÷10.4
=	$24,750
DA =	1/11	×	$24,750	×	(1 − 0.6)
=	1/11	×	$24,750	×	0.4
=	$900

Amount to be shown at 1B on the activity statement is $900.

Note: There is no section 78-18 increasing adjustment applicable to the excess from the insured. The insurer has not made creditable acquisitions directly for the purposes of settling the claim.

Insured not entitled to input tax credit - no excess

Cash settlement - taxable supply

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.

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. A decreasing adjustment will apply to this transaction as the insured was not entitled to an input tax credit on the premium.
Decreasing adjustment applicable to settlement payment.	$575 (see calculation below)	1B	Amount of decreasing 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.

Cash settlement - GST-free supply

The insured purchased a stock insurance policy from a general insurer for $2,064. The policy premium consisted of:

Base premium	$1,870
GST on policy	$170
Stamp duty on policy	$24
Total cost of policy	$2,064

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 replace the damaged stock is $3,498 (GST-free). The insurer pays the insured $3,498 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.	$2,040	G1	Payment for a sale made in the course of the insurance business.
GST on policy.	$170	1A	GST in respect of the sale made in the course of the insurance business.
Stamp duty on policy ($24).	Nil	Not applicable	Stamp duty is not included on the activity statement.
Payment to insured ($3,498).	Nil	Not applicable	Not an acquisition. A decreasing adjustment will apply to this transaction as the insured was not entitled to an input tax credit on the premium.
Decreasing adjustment applicable to settlement payment.	$318 (see calculation below)	1B	Amount of decreasing 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 =	$3,498	+	0	−	0	×	11÷(11−0)
=	$3,498	+	0	−	0	×	11÷11
=	$3,498
DA =	1/11	×	$3,498	×	(1 − 0)
=	1/11	×	$3,498	×	1
=	$318

Amount to be shown at 1B on the activity statement is $318.

See also:

• Purchase of insurance policy and reinstatement to the insured
• Purchase of insurance policy and reinstatement to third party
• Purchase of GST-free insurance policy and reinstatement to the insured
• Purchase of GST-free insurance policy and cash settlement to the insured
• Purchase of input taxed insurance policy and cash settlement to the insured
• Subrogation