ATO Interpretative Decision

ATO ID 2001/121

Goods and Services Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the entity, an insurance company that supplies a policy that spans 1 July 2000, calculating the amount of goods and services tax (GST) payable in accordance with the GST legislation, where the formula it uses to calculate the amount of GST payable on the supply of that policy is inconsistent with GST Bulletin GSTB 2000/4?

Decision

No, the entity is not calculating the amount of GST payable in accordance with the GST legislation.

The formula in GSTB 2000/4 outlines the method for calculating the amount of GST payable on a progressive or periodic supply that spans 1 July 2000. The formula reflects the Australian Taxation Office's (ATO) interpretation of sections 7 and 12 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Transition Act) and sections 9-70 and 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and thus, should be followed.

Facts

The entity is an insurance company that is registered for GST. The entity supplies an insurance policy that spans 1 July 2000. The entity determines that the premium for this policy is $1000 and that 25 per cent of the supply occurs after 1 July 2000. The supply of the policy is a taxable supply under section 9-5 of the GST Act. The entity does not take GST into account when determining the premium (price of the supply).

The entity proposes to calculate the amount of GST payable on the supply of this policy in accordance with the following formula:

The entity relies on sections 9-70 and 9-75 of the GST Act to derive this formula.

This formula is inconsistent with the formula expressed in GSTB 2000/4.

Reasons For Decision

The Transition Act governs the treatment of supplies made during the GST transitional period. Section 7 of the Transition Act provides the basic rule that GST is only payable on a supply to the extent that it is made on or after 1 July 2000.

Section 6 of the Transition Act provides the general rules about when supplies are made. Section 12 of the Transition Act modifies the general rule in section 6 of the Transition Act for certain supplies. For supplies that are made for a period or progressively over a period, such as insurance, and the period spans 1 July 2000, the supply is taken to be made continuously and uniformly throughout the period. As the supply is taken to be made continuously and uniformly, it is to be apportioned between that part that is made before 1 July 2000 and that part that is made on or after 1 July 2000 purely on a time basis. In this case, the entity has determined 25% of the supply is made on or after 1 July 2000. Therefore, under section 7 of the Transition Act, the GST which is payable will be 25% of what would have been payable if the whole supply is taxable.

The GST Act does not provide that GST is 1/11th of the price of a supply. Section 9-75 of the GST Act provides the rules for determining the 'value' of a taxable supply. It does not provide the rules for how to work out the amount of GST, or the GST payable.

Section 9-70 of the GST Act provides that the amount of GST on a taxable supply is 10% of the value of the taxable supply. This is the amount of GST payable under section 9-40 of the GST Act. The expression 'GST is only payable...' in section 7 of the Transition Act refers to the 'amount of GST' as determined under section 9-70 of the GST Act which is payable under section 9-40 of the GST Act. This means that any reference to GST being payable to an extent under section 7 of the Transition Act means that the 'extent' test is applied in relation to section 9-40 of the GST Act because that is the section that tells you what GST is payable.

Therefore, if the supply is made on or after 1 July 2000 to the extent of 25%, GST is payable, as concluded above, to the extent of 25%. Section 9-40 of the GST Act provides that the GST payable is 10% of the GST exclusive value. If GST is only payable to the extent of 25%, the GST payable will be 25% of 10% of the GST exclusive value.

The consideration for the supply of the insurance policy was for a GST inclusive price. Therefore, it is necessary to determine the GST exclusive value of the supply before applying section 9-40 of the GST Act and the extent test. In this case, the GST payable is calculated as follows:

This is what the second formula in GSTB 2000/4 achieves. This formula applies where: the entity makes a progressive or periodic supply that spans 1 July 2000; the entity did not take the GST into account when determining the price; and any part of the supply is a taxable supply.

The second formula in GSTB 2000/4 provides that the consideration which relates to the period on or after 1 July 2000 is calculated as:

Consideration for the taxable supply = (price * number of days on or after 1 July 2000 * 11) / ((10 * total days in the period) + days on or after 1 July 2000)
= 1000 * 91.5 * 11 / (10 * 366) + 91.5 = 268.29
GST payable = 1/11 * $268.29 = $24.39


[NOTE: 25% of supply on or after 1 July 2000 = 91.5 days on or after 1 July 2000]

The formula in GSTB 2000/4 can be reconciled with the calculations expressed in example one.

Consideration for the taxable supply = 11 * GST payable
= 11 * 2.5% GST exclusive value
= 11 * 2.5% x 1000/1.025
= 11 * 91.5/366 x 1/10 x 1000 ((91.5/366 x1/10) + 1)
= 11 * 91.5 x 1000 / (366 x 10) (91.5/(366 x10) + 1)
= 11 * 91.5 x 1000 / (366 x 10) + 91.5
=$268.29


As shown, the calculation at example 1 is consistent with the formula published in GSTB 2000/4, the Transition Act and the GST Act, as outlined above. The difference between the formula proposed by the entity and the formula in GSTB 2000/4 is that the entity has not applied the GST exclusive amount of the premium continuously and uniformly throughout the period of the insurance cover. In this case, the calculation proposed by the entity is inconsistent with the formula in GSTB 2000/4. Therefore, the calculation proposed by the entity is not in accordance with the GST law.

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 9-40
   section 9-70
   section 9-75

Related Public Rulings (including Determinations)
GSTB 2000/4

Keywords
Goods and Services Tax
GST special rules
GST insurance
Insured
Insurers
GST transitional issues

Siebel/TDMS Reference Number:  CRS 44778

Business Line:  Indirect Tax

Date of publication:  13 July 2001

ISSN: 1445-2782