ATO Interpretative Decision

ATO ID 2004/32

Goods and Services Tax

GST and decreasing adjustments for settlements of compulsory third party insurance claims following transfer of registration
FOI status: may be released
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Issue

Does the entity, a compulsory third party (CTP) insurer, use the input tax credit percentage entitlement notified by the original holder of a CTP insurance policy to calculate its decreasing adjustment using the formula in section 78-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when, after transfer of motor vehicle registration, the entity settles a claim made by the new holder of the CTP insurance policy?

Decision

Yes, the entity does use the input tax credit percentage entitlement notified by the original holder of a CTP insurance policy to calculate its decreasing adjustment using the formula in section 78-15 of the GST Act when, after the transfer of the motor vehicle registration, the entity settles a claim made by the new holder of the CTP insurance policy.

Facts

The entity is a CTP insurer. The entity supplied CTP insurance to an owner of a motor vehicle. The supply of the CTP insurance policy was a taxable supply under section 9-5 of the GST Act. The owner of the motor vehicle notified the entity of the extent of their entitlement to claim input tax credits on its acquisition of the CTP insurance (its input tax credit percentage entitlement).

The owner of the motor vehicle sold the vehicle part way though the CTP insurance policy period. Under the relevant state legislation, when a motor vehicle is sold, the motor vehicle registration is transferred to the new owner of the vehicle and the CTP insurance policy is also effectively transferred along with the registration. That is, the original insurance policy issued by the CTP insurer remains in force and is not cancelled. In certain circumstances, additional premium may be charged and collected from the new owner by the CTP insurer.

The new owner of the motor vehicle made a claim under the CTP insurance policy. The entity settled the new owner's claim. The settlement of the claim satisfied the requirements in section 78-10 of the GST Act requiring the entity to make a decreasing adjustment.

The entity is registered for goods and services tax (GST).

Reasons for Decision

Section 78-15 of the GST Act sets out the formula for determining the amount of an insurer's decreasing adjustment required to be made as a result of an insurer settling a claim under an insurance policy (section 78-10 of the GST Act). Section 78-15 of the GST Act provides:

•
if there was no entitlement to an input tax credit for the premium paid in relation to the period during which the event giving rise to the claim happened, the amount of the decreasing adjustment is 1/11 of the settlement amount (subsection 78-15(1) of the GST Act).
•
if there was an entitlement to such an input tax credit, the amount of decreasing adjustment is as follows:

(1 / 11) × Settlement amount × (1 - Extent of input tax credit)

where:
extent of input tax credit is the amount of the input tax credit expressed as a fraction of the GST payable for the supply of the insurance policy for the period to which the premium relates (subsection 75-15(2) of the GST Act).

Therefore, in calculating decreasing adjustments for settlements of insurance claims, the insurer must determine the extent of input tax credit entitlement for the supply of the insurance policy for the period to which the premium related.

The entity has settled the claim made by the new owner of the motor vehicle. However, the relevant legislation provides that transfer of the CTP insurance policy does not constitute a new supply under the respective CTP insurance schemes. Therefore, it is the input tax credit entitlement at the time the policy was underwritten that will be applied to calculate the insurer's decreasing adjustment.

The entity, in calculating their decreasing adjustment using the formula in section 78-15 of the GST Act, uses the input tax credit percentage entitlement notified by the original holder of a CTP insurance policy when it settles an insurance claim made by the new owner of the motor vehicle.

Note: Any additional premium that may be payable by the new owner, in respect of the CTP insurance policy, would constitute a change in the consideration of the original supply of CTP insurance and pursuant to section 19-10 of the GST Act, is an adjustment event. Therefore, the new owner would have an adjustment where the requirements in section 19-70 of the GST Act are satisfied.

Date of decision:  16 April 2002

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 9-5
   section 19-10
   section 19-70
   section 78-10
   section 78-15
   subsection 78-15(1)
   subsection 78-15(2)

Related ATO Interpretative Decisions
ATO ID 2004/31
ATO ID 2004/33

Keywords
Goods and services tax
GST insurance
Decreasing adjustment

Siebel/TDMS Reference Number:  1265325

Business Line:  Indirect Tax

Date of publication:  16 January 2004

ISSN: 1445-2782

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