Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 2 - Insurance
2.1 This Chapter discusses the amendments that are made in relation to the treatment of insurance for GST purposes. Amendments are made to the GST Act in relation to:
- State stamp duties;
- statutory compensation schemes;
- court orders and judgments;
- the exclusion of certain insurance schemes from Division 78;
- treatment of workers compensation and compulsory third party insurance;
- supplies by insurers in settling claims;
- insurance brokers and tax invoices; and
- insureds GST liability on settlements.
2.2 An amendment to the GST Transition Act is made in relation to the CTP insurance and the transition to GST.
2.3 The amendments ensure that State stamp duties on insurance premiums are not subject to GST.
2.4 The amendments allow prescribed statutory compensation schemes to be brought within the operation of Division 78.
2.5 The amendments ensure that there is no difference for the purposes of Division 78 in the treatment of a settlement if it is made under a court order or judgment.
2.6 The amendments allow certain government insurance schemes to be excluded from Division 78 through regulation.
2.7 Amendments are made in relation to workers compensation and compulsory third party insurance to reduce compliance costs that would otherwise arise.
2.8 The amendments provide that certain supplies by insurers made as settlement of a claim are not taxable supplies.
2.9 Amendments are made to the provisions dealing with the payment of excesses to ensure consistency of treatment for GST purposes.
2.10 Amendments are made in relation to the treatment of settlements made when an insurer is making a claim in exercise of its rights of subrogation.
2.11 The amendments ensure that insurance brokers can issue tax invoices on behalf of insurers.
2.12 The amendments ensure that the insured entitys GST liability on a settlement is proportional to its input tax credit entitlement on the premium.
2.13 The amendment has the effect that there is no input tax credits on premiums paid for compulsory third party insurance, and hence no GST liability on any related settlements, for the first 3 years of GST.
2.14 State stamp duty legislation imposes a stamp duty liability on insurers in relation to insurance policies they sell. The stamp duty legislation is generally framed such that duty is calculated on the GST inclusive premium. The GST law is framed such that GST is calculated on the premium inclusive of an amount for the stamp duty the insurer has had to pay and is recovering from the insured as part of the premium. This makes it somewhat difficult to calculate the correct amount of stamp duty and the correct amount of GST.
2.15 Item 31 inserts new section 78-3 to address this issue. The effect of the new section is that GST is calculated on the stamp duty exclusive value of the premium. This is achieved by excluding the amount of any stamp duty payable under a State law or Territory law in respect of the premium.
2.16 Some statutory compensation schemes do not fall within the definition of insurance in subsection 78-5(4) and therefore are not covered by Division 78. Other statutory compensation schemes are insurance and are covered by Division 78. For example, some workers compensation schemes are within the definition of insurance and others are not. The Governments intention is to treat such statutory compensation schemes similarly.
2.17 New Subdivision 78-F is inserted by item 42 to deal with statutory compensation schemes.
2.18 New section 78-130 ensures that any payments towards or under a statutory compensation scheme and any settlement of a claim for compensation under such a scheme are treated in the same manner as payments for an insurance policy and a settlement of a claim under an insurance policy. Statutory compensation scheme is defined in new section 78-135 . Note that the scheme has to be specified in the regulations or of the type specified in the regulations to be brought within the operation of Division78.
2.19 In some situations a settlement under a compensation scheme can arise even where an entity that was responsible for making payments to the scheme did not do so. For example, under some workers compensation schemes an employee can be entitled to compensation even if the employer did not make the payments into the scheme it was liable to make. New subparagraph 78-130(2)(c)(ii) ensures that the compensation is treated the same whether or not the employer met its liability to make payments into the scheme. It does so by providing that even if an entity did not make payments into a statutory compensation scheme but it was liable to do so, it is treated as the entity insured for the purposes of Division 78. New section 78-125 ensures that GST is calculated on the stamp duty exclusive value of the premium of a statutory scheme. This is achieved by excluding the amount of any stamp duty payable under a State law
2.21 In some circumstances when there is a court ordered settlement there will be a different treatment for GST purposes than if the settlement had been reached without the intervention of the court. Item 42 inserts new section 78-150 to ensure that if there is a judgment or order of the court in relation to an insurance claim the outcome for GST purposes is the same as if the settlement had been made without the intervention of the court.
2.22 New section 78-150 also applies in relation to claims made by insurers in exercising their rights of subrogation (see 2.36 for a discussion of subrogation). That is, if the outcome of such a claim is determined by a judgment or order of the court it will be treated in the same way as if the outcome had been reached through an out of court settlement.
2.23 There may be certain government schemes of insurance or statutory compensation schemes to which it is not appropriate to apply Division 78. For this reason, new section 78-155 is inserted to provide that Division 78 does not apply to types of insurance or statutory compensation scheme specified in the regulations. The insurance or compensation scheme has to be one established by a law of the Commonwealth, State or Territory. For example, it may not be appropriate to treat a loss making statutory insurance scheme as insurance under Division 78.
2.24 Under workers compensation and CTP schemes it is common for there to be settlements that take place over a long period of time. For example, under workers compensation, income replacement payments may be made fortnightly for 30 to 40 years.
2.25 The current application of Division 78 leaves the insured with a GST liability on the settlement to a third party for the period of settlement. For workers compensation income replacement payments this would mean that an employer could have a GST liability arising fortnightly for up to 30 to 40 years for the payment to the injured employee. This would be administratively burdensome for both the insured and the insurer as the insurer would have to keep the insured informed about the payments and the insured would have to account for them.
2.26 New Subdivision 78E will remove the insurers credit entitlement and the insureds GST liability for workers compensation and CTP schemes. It will instead allow the insurer a decreasing adjustment [new section 78-105] . The decreasing adjustment would be equal to the difference between:
- what would have been the insurers credit entitlement on the settlement; and
- what would have been the insureds GST liability on the settlement. [New subsection 78-105(3)]
2.27 This has the same revenue effect as allowing the credit and imposing the liability while removing the administrative and compliance burden from both the insurer and the insured.
Example 2.1 Bronte injures her hand at work and makes a claim for compensation against her employer, XYZ Limited. XYZ Limited has a workers compensation policy with ABC Insurance Company and pays $11,000 per annum for the cover. The supply of the policy is a taxable supply by ABC Insurance Company.XYZ Limited is registered for GST purposes. It only makes taxable supplies. It is entitled to an input tax credit on the premium payment of $1,000.Under the terms of the compensation arrangement, ABC Insurance Company agrees to pay Bronte $550 per week for the next 260 weeks (i.e. 5 years).The GST liability XYZ Limited would have had on the payments is 1/11 of each payment ($50) as it was entitled to a full input tax credit on the premium. The credit that ABC Insurance Company would have been entitled to is 1/11 of each payment ($50) as the policy was fully taxed. ABC Insurance Company has a decreasing adjustment rather than a credit on the payments. XYZ Limited has no GST liability on the payments. The amount of the decreasing adjustment is the $50 input tax credit less the $50 GST liability, which is zero.If, on the other hand, XYZ Limited also made input taxed supplies and was therefore only entitled to part of the credit on the premium, the amount of the decreasing adjustment would be different. If XYZ Limited was entitled to 60% of the input tax credit on the premium, its GST liability would have been 60% of 1/11 of each payment ($30). The amount of the decreasing adjustment that ABC Insurance Company is entitled to would be $50 less $30, which is $20.
2.28 Workers compensation scheme and compulsory third party scheme are defined in new section 78-110 .
2.29 Items 32 and 38 make minor amendments consequential upon treating workers compensation and CTP schemes differently from the rest of Division 78.
2.30 It is common in certain types of insurance for the insurer to acquire goods, services or anything else and supply it to the insured in settlement of a claim. For example, if an entitys business premises burn down, it is common for the insurer to pay the builder directly for the cost of rebuilding. If the insurer has acquired the services of the builder under a contract for the builder to supply building services to the insurer, it would be a creditable acquisition in the hands of the insurer. The insurer would be entitled to an input tax credit under Division 11 for that acquisition. If it then supplies those services to the insured in settlement of the claim, that supply by the insurer could be a taxable supply under Division9. If the claim had been settled in money it would not be a taxable supply. The treatment of the claim settlement should be no different if it is a supply of goods, services or anything else. For this reason, item 35 inserts new section 78-12 to provide that a supply an insurer makes in settling a claim is not a taxable supply.
2.31 Item 33 repeals paragraph 78-10(1)(b) and replaces it with a provision to take account of the effect of new section 78-12 .
2.32 If an excess is paid to an insurer, it is necessary to ensure that the insurer has the correct entitlement to input tax credits and the insured has the correct GST liability on the settlement.
Example 2.2 Michael has an accident in his business vehicle. Michael had been entitled to a full input tax credit on the premium. The cost of the repairs is $5,555. The insurer pays $5,555 directly to the repairer. Michael pays an excess of $55 to the insurer. The insurer has in effect only paid out $5,500 in settlement of the claim. The input tax credit the insurer is entitled to on the settlement should therefore not be 1/11 of $5,555, but 1/11 of $5,500 ($500). Paragraph 78-10(1)(c), as amended by item 34 , ensures that this occurs. Continuing the example, Michaels liability to GST on the settlement would be 1/11 of $5,500 ($500). This is the effect of subsection 78-40(1) as amended by item40 .
2.33 If an insured entity makes a payment of an excess to an insurer, the general rules of the GST Act under Division 9 could apply such that that payment would be consideration for a taxable supply made by the insurer. In Example 2.2 the insurer pays the repairer $5,555 and receives an excess of $55 from Michael. It is entitled to an input tax credit of 1/11 of $5,500 ($500). If the payment of the excess was consideration for a taxable supply, the insurer would also be liable to GST of 1/11 of the $55 excess payment. This would mean that the insurers net position in relation to that settlement was a net credit of $500 less $5, or $495. Its net position should be $500.
2.34 However, if the insured entity pays the excess to a third party, such as a repairer, that payment forms part of the consideration for the supply of repair services the repairer is making. In this situation it should continue to be consideration for a supply.
2.35 This was the intended operation of section 78-35. However, it was not limited to payments of excesses to insurers. Item 39 amends subsection 78-35(1) to ensure that only where the excess is paid to the insurer that it is not treated as consideration for a supply.
2.36 A subrogation payment is a payment made by a third party to an insurer in respect of a liability owed by the third party to the insured. For example, an insurer makes a settlement to an insured. It takes over the insureds right to recover from the third party who caused the damages to the insured. The insurer then seeks to make recovery from the third party. As a result of that action, the third party makes a payment to the insurer. The payment is the subrogation payment. The payment should be treated as consideration for a supply made by the insurer, that is, the insurer is making a supply of giving up the right to recover from the third party.
2.37 Item 36 adds new section 78-20 which has the effect that if an insurer has made a claim in exercising its rights of subrogation and a third party makes a payment, a supply or both in settlement of that claim, it is consideration for a supply made by the insurer. This is the case even if the payment or supply is not made to the insurer.
2.38 Item 41 adds new section 78-75 to provide that if an insurer has made a claim in exercising its rights of subrogation and a third party makes a payment, a supply or both in settlement of that claim, it is consideration for an acquisition made by the third party. It is consideration for a creditable acquisition if:
- the third party is registered or required to be registered;
- has made the settlement for a creditable purpose; and
- the settlement was consideration for a taxable supply made by the insurer as discussed at paragraph 2.37.
This follows the general rules about creditable acquisitions in Division 11.
2.39 Under Division 153 of the GST Act, tax invoices can be issued by an agent of an entity that makes a taxable supply. As insurance brokers are generally not acting as agents of the insurer when they arrange an insurance policy, they are not able to issue tax invoices in relation to the supply of that policy. This has the result that whilst the broker generally issues all other documents to the insured in relation to that policy, they cannot issue the tax invoice.
2.40 Item 50 amends Division 153 to permit insurance brokers to issue tax invoices on behalf of the insurer. This will be the case even though the broker is not acting as agent of the insurer [new section 153-25] . Item 49 amends the guide and item 48 the heading to Division 153 to reflect the amendment and item 62 amends the Dictionary to the GST Act. Items 7, 12 and 13 make consequential cross referencing amendments.
2.41 New subsection 153-25(2) ensures that the insured can still claim input tax credits if it does not hold a tax invoice but its insurance broker as its agent holds the tax invoice.
Example 2.3 Wilfred employs the services of Owen, an insurance broker, to arrange insurance for his poetry publishing business. Both are registered for GST. Owen arranges for Wilfred to be covered by Donne and Browning Insurance Co. Owen is agent of Wilfred in arranging the cover. Donne and Browning Insurance Co issues all the insurance documentation to Owen and he deals with Wilfred. The amendments allow Owen to issue the tax invoice for the supply of the insurance policy from Donne and Browning Insurance Co to Wilfred even though he is not its agent.If, along with all the other policy related documentation Donne and Browning Insurance Co sent to Owen, it also sent a tax invoice for its supply of insurance to Wilfred, Wilfred would be able to claim his input tax credit on the policy if Owen holds the tax invoice rather than himself. This is because Owen is Wilfreds agent.
2.42 Under section 78-30, insured entities can have a GST liability on an insurance settlement. That liability should be proportional to the input tax credit they were entitled to on the premiums paid for the policy the settlement is made under. For example, if an insured entity acquired a policy 60% for a creditable purpose and 40% for a private purpose, it would be entitled to an input tax credit equal to 60% of 1/11 of the price of the policy. If it has a settlement under that policy it should only be liable to GST of 60% of 1/11 of the GST inclusive value of the settlement.
2.43 Item 37 amends subsection 78-30(2) so that the insureds GST liability on a settlement is proportional to the input tax credit it was entitled to on the premium.
2.44 Items 55, 69, 74, and 77 make amendments to the definitions in section 195-1 consequential upon the amendments discussed above.
2.45 CTP insurance is usually paid as part of vehicle registration. There is often only a statement on the registration renewal documentation that a certain amount of the registration fee was for CTP. There are also other difficulties faced by CTP insurers in relation to repricing CTP cover. For example, there are difficulties in distinguishing between consumers and businesses that are taking out CTP.
2.46 Item 10 makes an amendment to section 23 of GST Transition Actto provide that there be no input tax credit for the acquisition of CTP cover for the first 3 years of GST. That is, if you pay a premium, or make a similar payment, for CTP before 1 July 2003, you are not entitled to an input tax credit on that payment. This applies whether or not the CTP cover is insurance or a statutory compensation scheme.
2.47 As there is no input tax credit, there is no GST liability on any CTP settlement for events occurring in the first 3 years of GST. This provides time for CTP to be repriced to take account of GST.