Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 8 - Insurance
Outline of Chapter
8.1 This Chapter explains amendments to the GST Act and the GST Transition Act in relation to:
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- insuring international transport;
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- notification to insurers of entitlement to input tax credits on insurance premiums;
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- calculating the decreasing adjustment on settlements;
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- statutory compensation schemes; and
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- tax invoices for supplies under CTP schemes.
Context of Reform
8.2 The amendments:
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- ensure that the insurance of certain domestic components of international transport is GST-free;
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- allow the notification policy holders make to their insurers of the extent of their input tax credit entitlement on the premium for a policy to be made at any time at or before the relevant claim is made;
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- correct the calculation of a decreasing adjustment on settlement;
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- ensure that the correct entitlement to input tax credits is taken into account in calculating the decreasing adjustment for claims under statutory compensation schemes where the premium an entity was liable to pay has not been paid; and
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- provide that tax invoices do not have to be issued for CTP schemes to which section 23 of the GST Transition Act applies.
Detailed explanation of new law
Insurance of international transport
8.3 Item 6 of the table in section 38-355 provides that the supply of insurance of international transport of goods is GST-free.
8.4 If goods are exported in a freight container, international transport is GST-free from where the container is packed. So too is the insurance under the current provisions.
8.5 If goods are imported, the international transport is GST-free to the place of consignment. The place of consignment is the port or airport of final destination shown on the transportation documents, as defined. Generally, for marine freight, this will be the port where a container is unloaded from the ship. However, the insurance generally covers the goods until they are unpacked from the container. Often, the container makes a further domestic journey after unloading from the ship. This means that, under the current provisions, the insurance would be taxable to the extent it covered the domestic part of the transport.
8.6 This causes several difficulties. If goods are damaged, it is generally unknown at what point the damage occurred. For example, goods were intact when they were packed into the container in an overseas port. They travel several thousand kilometres to an Australian port. The container is unloaded from the ship and placed on a truck which takes it to a warehouse a few kilometres away. The container is unpacked and the goods are found to be damaged. As it is unknown where the damage occurred, it is difficult to calculate the risk of the goods being damaged during the domestic component of the transport. It is therefore difficult to determine to what extent the policy relates to the domestic component, and hence to what extent it should be taxed.
8.7 Item 1 amends item 6 of the table in section 38-355 to provide that the insurance of the international transport of goods from their place of export to a destination outside Australia will be GST-free.
8.8 Item 6 is also amended to provide that the insurance of the transport of goods from outside Australia to their place of consignment is GST-free as is the insurance of any subsequent transport within Australia if it is an integral part of the transport from outside Australia. For example, if the insurance covered goods transported in a container from the point they were packed to the point they were unpacked, the transporting of those goods in the container before it is unpacked would be an integral part of the transport from outside Australia. But the transport of the goods once they have been unpacked from the container would no longer be integral to the transport from outside Australia.
Notification of entitlement to input tax credits
8.9 Section 78-50 of the GST Act currently requires insured entities to notify the insurer of the extent to which they are entitled to input tax credits on the premium for an insurance policy. The insured is required to notify the insurer at or before the time it takes out the policy. This timing of the notification was developed in consultation with the insurance industry to enable this information to be taken into account in setting premiums. Subsequent consultation has shown that this requirement does not meet the commercial needs of all insurers. Some insurers are not interested in receiving this information unless and until the time a claim is made.
8.10 Item 3 amends section 78-50 to provide that the notification must be made at or before the time a claim is made.
Calculating the decreasing adjustment
8.11 The decreasing adjustment on settlements available under Division 78 is calculated under the rules in section 78-15. Subsection 78-15(4) provides a method statement for working out part of the calculation. That method statement is intended to provide the correct amount on which the decreasing adjustment is calculated. To provide the correct amount, the uplift factor in step 1 should be applied after taking into account the value of certain supplies as described in step 2 and any excess actually paid to the insurer as in step 3 of the current provisions.
8.12 Item 2 amends section 78-15 to provide a method statement where the uplift factor is applied after taking into account the value of those supplies and such excesses.
Statutory compensation schemes
8.13 Section 78-100 provides that Division 78 applies in relation to statutory compensation schemes. Statutory compensation schemes are those prescribed in the GST Regulations. This enables those workers' compensation schemes, amongst others, that are not considered to be insurance at law to be brought within the operation of Division 78.
8.14 With some workers' compensation schemes, an insured worker can receive compensation even if the employer has not paid the premiums into the scheme it was liable to pay. For this reason, subparagraph 78-100(2)(c)(ii) has the effect that the employer is treated as the entity insured if it was liable to pay the premiums, levy or contribution into the scheme.
8.15 The insurer's entitlement to a decreasing adjustment on the settlement depends on the insured entity's input tax credit entitlement on the premium - see sections 78-10 and 78-15. If the employer is 100% creditable and pays the premium it is required to pay into the scheme, it will be entitled to 100% of the input tax credit on the premium. The insurer will not be entitled to any decreasing adjustment on a settlement. If the employer does not pay the premium it is liable to pay, it will not, under Division 11, be entitled to any input tax credits on the premium. Its entitlement to input tax credits on the premium is 0%. This means that the insurer will be entitled to 100% of the decreasing adjustment on the settlement when it should not be entitled to any decreasing adjustment.
8.16 Items 4 and 5 amend section 78-100 to provide that it is the input tax credit entitlement that the insured entity would have had if it had paid the premium it was liable to pay that is taken into account in determining the insurer's decreasing adjustment on settlement.
Transitional provisions
Tax invoices and CTP insurance
8.17 Section 23 of the GST Transition Act provides a special transitional treatment for CTP schemes - there is no entitlement to input tax credits on payments made into prescribed CTP schemes for the first 3 years of GST. As there is no input tax credit, there is no need for a tax invoice.
8.18 Item 6 amends section 23 of the GST Transition Act to provide that section 29-70 of the GST Act does not apply in these circumstances. This has the effect that the supplier under the CTP scheme is not required to issue tax invoices in relation to such supplies.
8.19 The notification requirement in section 78-50 of the GST Act was inserted in December 1999. There are insurance policies that were supplied before that requirement existed which extend beyond 1 July 2000. Notification was not possible at or before the time the policy was supplied. Section 23A of the GST Transition Act currently requires insured entities to notify the insurer of their input tax credit entitlement on insurance policies supplied before 1 July 2000 by that day.
8.20 As the section 78-50 notification requirement is to be amended to require notification at or before a claim is made, and decreasing adjustments can only arise where a claim is made on or after 1 July 2000 (due to the effect of section 22 of the GST Transition Act), there is no need for section 23A. Item 7 repeals section 23A.