Draft Goods and Services Tax Ruling

GSTR 2000/D19

Goods and services tax: insurance settlements by making supplies of goods or services

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  This document has been finalised.

FOI status:

draft only - for comment

Preamble

What this Ruling is about

1. This Ruling discusses whether Division 11 or Division 78 of A New Tax System (Goods and Services Tax) Act 1999 (the Act) applies to a supply of goods or services made by an insurer in the course of settling a claim under an insurance policy.

2. This Ruling applies to insurers that provide, or are liable to provide, consideration for a supply in settlement of an insurance claim.

3. Certain terms used in this ruling are defined or explained in the Definitions section of the Ruling. These terms, when first mentioned elsewhere in the Ruling, appear in bold type . Unless otherwise stated, all legislative references in this Ruling are to the Act.

Date of effect

4. This Ruling, when finalised, applies on and from 8 July 1999 (the date of Royal Assent to the Goods and Services Tax ('GST')) legislation and may be relied on immediately.

Ruling

5. If an insurer pays a supplier for providing goods or services in settling a claim under an insurance policy, then the manner in which the insurer arranges for the acquisition or payment for those goods or services will determine whether Division 11 or Division 78 applies.

6. An insurer provides or is liable to provide consideration for the supply under Division 11 by paying one entity to make a supply to a third entity if it:

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chooses the supplier;

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instructs the supplier about the supply; and

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enters into a contractual relationship with the supplier.

7. Also, if the insurer purchases new replacement items and acquires title in the goods before supplying the goods to the insured , then Division 11 applies and the insurer may be entitled to an input tax credit.

8. Where the insurer merely facilitates the payments as part of a settlement (and the requirements of paragraph 6 are not met), Division 78 may apply to allow a decreasing adjustment. However, where the insurer supplies a voucher with a monetary value stated on the voucher to an insured as settlement for a claim, that supply is not a taxable supply according to section 78-25. The insurer is not entitled to a decreasing adjustment on the supply of the voucher in settlement of the claim. Also, if an insurer reimburses the insured for costs incurred, or to be incurred, then Division 78 may apply to allow a decreasing adjustment.

Background

Settlement of claims

9. Generally, there are a number of options available to an insurer in settling a claim under a general insurance policy. For example, if an item is damaged, lost or stolen an insurer may:

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replace or repair it,

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reimburse the insured with an agreed monetary value for replacing or repairing it,

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pay a supplier to repair it or supply a replacement item, or

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provide the insured with a voucher to replace the item.

10. Therefore, in the case of a motor vehicle accident claim, the insurer may pay to the insured an agreed amount, agree to pay the repairer for the cost of repairs or provide the insured with a replacement vehicle.

11. Also, if an employee is injured at work and makes a workers' compensation claim against the employer (and the employer's insurer accepts liability for the workplace injury), then the insurer may pay the employee some benefits. The benefits paid for by the insurer may include payments for:

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medical costs for treatment of the injury (the injured worker may be referred to a medical specialist by his/her doctor for treatment),

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time off work,

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permanent impairment benefits,

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referral to the workers' compensation insurer's nominated medical provider for a report on his/her condition (including any travel costs),

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other health services (including physiotherapy, acupuncture listed in section 38-10),

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costs associated with reconsideration and review of entitlements (including legal costs for the insurer),

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aids and appliances, home help, and attendant care,

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travel and associated costs (such as accommodation), and

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participation in workplace rehabilitation programs.

Division 11

12. Under Division 11, registered entities are entitled to input tax credits that arise on creditable acquisitions. The amount of the input tax credit is equal to the amount of the GST included in the price paid for the acquisition. However, the amount of input tax credit is reduced if the acquisition is only partly for a creditable purpose or the entity only provides part of the consideration for the acquisition.

Division 78

13. Section 78-20 provides that the payment of money, and/or the making of a supply, by an insurer in settlement of a claim is not treated as consideration for an acquisition by the insurer. Accordingly, the insurer is not entitled to an input tax credit for the creditable acquisition that arises otherwise under section 11-5 for the payment and/or the supply.

14. Furthermore, section 78-45 provides that the payment of money, and/or the making of a supply by an insurer in settlement of a claim, is not consideration for a supply by the entity insured or any other entity that was entitled to an input tax credit on the premium for the policy. That is, the insured does not have a GST liability for the consideration payable on the settlement.

Decreasing adjustment on settlements

15. Division 78 also provides for a decreasing adjustment for insurers in respect of such payments or supplies made in settlement of a claim. Certain conditions that are stated in section 78-10 have to be met for a decreasing adjustment to be available.

16. If there is no entitlement to claim a full input tax credit for premiums paid on the insurance policy, the insurer is entitled to a decreasing adjustment of 1/11th of the settlement amount under subsection 78-15(1). On the other hand, if there is an entitlement to a full input tax credit for premiums paid, the insurer is not entitled to a decreasing adjustment under subsection 78-10.

17. If there is entitlement to only a partial input tax credit, the decreasing adjustment is less than 1/11th of the settlement amount. The amount of the decreasing adjustment is determined by the extent of the entitlement to claim an input tax credit on the premiums under subsection 78-15(2).

Explanations

18. The Commissioner's views about when 'you provide or are liable to provide, consideration for the supply' under paragraph 11-5(c), is supported by cases decided in another jurisdiction. The revenue consequences of one entity paying a second entity to make a supply to a third entity was considered by the House of Lords in the United Kingdom case of Customs and Excise Commissioners v. Redrow Group plc [1999] 2 All ER 1; [1999] STC 161; [1999] 1 WLR 408 (Redrow case).

19. Redrow Group plc (Redrow) operated a sales incentive scheme that expedited sales of its homes to prospective purchasers. To expedite the sale, Redrow selected the estate agent, instructed the agent to value the existing home, handled the sale and monitored progress in the marketing of the property to maintain pressure on the agent to achieve a sale. As an incentive to the prospective purchaser, Redrow entered into an agreement with both the agent and the prospective purchaser that it pay the estate agent's fee plus VAT if the prospective purchaser completed the purchase of a home from Redrow. The instructions to the agent could not be changed without Redrow's agreement. The agent was advised by Redrow on being recruited into the scheme, to enter into a separate agreement in the normal terms with the prospective purchaser.

20. Lord Millett stated at All ER page11; STC page 171; WLR page 418 that:

'The solution lies in two features of the tax to which I have already referred. The first is that anything done for a consideration which is not a supply of goods constitutes a supply of services. This makes it unnecessary to define the services in question. The second is that unless the services are rendered for a consideration they cannot constitute the subject matter of a supply. In fact, of course, there can be no question of deducting input tax unless Redrow has incurred a liability to pay it as part of the consideration payable by him for a supply of goods or services.

In my opinion, these two factors compel the conclusion that one should start with the taxpayer's claim to deduct tax. He must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to deduction. Once the taxpayer has identified the payment the question to be asked is: did he obtain anything - anything at all - used or to be used for the purposes of his business in return for that payment? This will normally consist of the supply of goods or services to the taxpayer. But it may equally well consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services.'

21. Lord Millett continued and provided the following tests:

'In the present case, Redrow did not merely derive a benefit from the services which the agents supplied to the householders and for which it paid. It chose the agents and instructed them. In return for the payment of their fees it obtained a contractual right to have the householders' homes valued and marketed, to monitor the agents' performance and maintain pressure for a quick sale, and to override any alteration in the agents' instructions which the householders might be minded to give. Everything which the agents did was done at Redrow's request and in accordance with its instructions and, in the events which happened, at its expense. The doing of those acts constituted a supply of services to Redrow.

22. The key facts from the case are that Redrow chose the estate agents, instructed them and had a contractual relationship with them. These factors meant that Redrow was supplied a right to have a another entity supplied a service.

23. The issue of one entity paying a second entity to make a supply to a third entity was also considered in the United Kingdom case of British Airways plc v. Customs and Excise Commissioners (London Tribunal Centre, 8 December 1999. Unreported; http://www.courtservice.gov.uk/tribunals/comtax/decisions/bairways_081299.htm (British Airways). In a second decision of the VAT Tribunal (after the matter was heard by the High Court and referred back to the VAT Tribunal), it decided that the input tax should be allowed to British Airways who payed a second entity to supply its passengers with food and drink.

24. British Airways had an arrangement whereby airside food outlets provided food to passengers of delayed flights. British Airways did not itself provide anything other than in-flight catering. When there was a delay an announcement was made to passengers that vouchers of a specified amount were available and could be used at airside restaurants. Vouchers were not always available, in which case passengers could use their boarding pass in place of a voucher.

25. As part of the arrangement, there was a memorandum between British Airways and the restaurants. Passengers were able to pay more than the amount allowed by the voucher - they could use their own money for any amounts over the value of the voucher.

26. When the VAT Tribunal in British Airways reconsidered the facts of the case in light of the Redrow decision, it posed itself the following question at paragraph 9 of its decision:

'Did the Appellant in the instant case obtain anything - anything at all? Yes - it obtained the right to have its delayed passengers fed at its expense - and that was clearly for the purpose of its business. That is enough to enable it to succeed.'

27. Also, at paragraph 11 of the decision, the Tribunal stated:

'It is not every third party payment which can give rise to an input deduction as a result of Redrow. There must have been a prior agreement that the goods or services should be supplied to a third party, and that agreement - those supplies - must be for the purpose of the payer's business. Once those conditions have been satisfied, it is entirely in accordance with the basic principles of VAT - in fact, fiscal neutrality demands - that the input tax should be allowed.'

28. From the cases above, it can be seen that one entity can supply to a second entity the right to have goods (such as the food and drink in the British Airways case) or services (such as real estate services as in the Redrow case) supplied to a third entity.

29. For this to occur, the second entity must have

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chosen the supplier,

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instructed the supplier about the supply of the goods, services or anything else to the third entity, and

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entered into a contractual relationship with the supplier.

30. Therefore, if an insurer chooses a supplier to provide goods to a policy holder as a result of a claim under the insurance policy, has a contractual obligation with the supplier of the goods to supply those goods and instructs the supplier about the supply, then the insurer makes an acquisition to which Division 11 applies. Accordingly, an input tax credit may be available to registered entities on this acquisition.

Repairers

31. The insured may take a damaged car to a motor vehicle repairer and leave the claim form with the repairer for it to be provided to the insurer. Alternatively, the claim form may have been submitted directly to the insurer.

32. The repairer will provide and submit to the insurer a quotation for the repairs. The quotation will be assessed by the insurer and adjustments made in respect of the items to be repaired (e.g., excluding damage not caused during the relevant motor accident). Also, there may be changes to the price and, in some cases, the method and approach to complete the repair.

33. The insurer may then authorise the repairer to undertake the repairs. In the case of third party claims, where the claim is made directly to the insurer of the at-fault vehicle, the authority of the third party will also be obtained.

34. On the completion of the repairs, the insured may pay to the repairer the excess and any amount referrable to damage not covered under the policy. The repairer may then release the vehicle to the insured and submit an invoice to the insurer. In some cases, the insured will pay the excess to the insurer rather than the repairer. Accordingly, the repairer, after receiving an authority from the insurer, will repair the motor vehicle for a third party for a consideration to be paid by the insurer.

35. In our view, the transaction between the repairer and the insurer is no different than that between Redrow and the real estate agents, and that between British Airways and the food outlets. It is relevant to look at whether something is being done for the insurer for which the insurer has paid a consideration that has been subject to GST. The fact that someone else (the insured) has also received a supply of the repair services is not relevant. However, there must have been a prior agreement between the insurer and the repairer that the repair services should be supplied to the insured.

36. Therefore, an insurer may be entitled to an input tax credit (under Division 11 of the Act) for payments made to a repairer in respect of the repairs made to the motor vehicle for the insured if the insurer:

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chooses the repairer;

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instructs the repairer;

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has a contractual relationship with the repairer; and

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holds a tax invoice for the amount payable.

Approved repairers

37. An insurer is regarded as having chosen the repairer if the insured has to take the vehicle to a repairer that is selected from a list of repairers the insurer provides to the insured. The insurer is also considered to have chosen the repairer where, although the insured initially chooses the repairer, the insurer has the ability to determine whether that repairer will or will not be used.

38. The insurer is considered to have instructed the repairer if the insurer has to authorise the repairs before they can be made. As discussed above, insurers generally are able to assess the repairer's quote and make adjustments in respect of the quote, and in some cases the method and approach to the repair.

39. Whether or not there is a contractual relationship between the insurer and the repairer depends on the particular circumstances of each case.

40. If the insured pays an excess to the repairer, the insured is also entitled to an input tax credit, providing it is registered for GST purposes and it has acquired those repair services for a purpose of their enterprise (for example, the vehicle in question is a business vehicle). The excess is consideration for the supply of the repair services to the insured. This is distinct from the payment by the insurer, which is consideration for the supply to the insurer of the right to have the repair services supplied to the insured.

Example 1

41. Ivano has a motor vehicle policy with XYZ Insurance Co. The cost of the repairs, as agreed by Sekul's Smash Repairs and XYZ Insurance Co, is $5 500. This is the GST inclusive price.

42. Under the insurance policy, XYZ Insurance Co is required to pay for the cost of the repairs net of any excess amount payable by the insured. The excess is $110. Therefore, XYZ Insurance Co pays Sekul's Smash Repairs $5390 ($5500 less $110). Sekul's Smash Repairs must also issue a tax invoice to Ivano, if requested, for the amount of excess of $110 paid by him.

43. Providing the requirements under Division 11 are met, both XYZ Insurance Co and Ivano will be entitled to an input tax credit to the extent they each pay for a supply from Sekul Smash Repairs.

Reinstatement

Vouchers

44. As part of a settlement, an insurer may provide an insured with a voucher for the supply of replacement items. For example, the insurer may provide the insured with a voucher to replace a stolen video cassette recorder. The supply of the voucher by a retailer to the insurer is not a taxable supply if on redemption the holder of the voucher is entitled to supplies up to a monetary value stated on the voucher (see paragraph 100-5(1)(a)). Also, the consideration provided for the voucher must not exceed that monetary value (see paragraph 100-5(1)(b)).

45. Instead, GST is payable when the insured redeems the voucher for the replacement video cassette recorder. Therefore, the insurer is not entitled to an input tax credit as the supply of the voucher is not a taxable supply.

46. When the insurer supplies the voucher to an insured as settlement for the claim, that supply is not a taxable supply according to section 78-25. The insurer will not be entitled to a decreasing adjustment on the supply of the voucher in settlement of the claim.

47. This result occurs as the method statement in subsection 78-15(4) sets out how to work out the settlement amount. It states that the GST inclusive market value of supplies made in settlement of a claim, to which section 78-25 applies, are not included in working out the decreasing adjustment.

Example 2

48. Mark's house is damaged by fire. XYZ Insurance Co buys a $1 500 voucher from Ivano's Department Store and supplies that voucher to Mark. The voucher can be used to buy up to $1 500 worth of goods that are sold by Ivano's Department Store.

49. GST is not payable when the voucher is purchased from Ivano's Department Store. GST is payable by Ivano's Department Store when the voucher is redeemed. XYZ Insurance Co is not entitled to an input tax credit or a decreasing adjustment.

50. Where an insurer provides a voucher to an insured as part of a settlement of an insurance claim and the voucher is for goods or services (rather than for monetary value), then the supply of the voucher to the insurer is a taxable supply. The insurer is entitled to an input tax credit on the acquisition of the voucher. As discussed above at paragraphs 44 to 47, the insurer is entitled to a decreasing adjustment on the supply of the voucher to the insured in settlement of the claim.

Example 3

51. XYZ Insurance Co purchases a voucher for a new video cassette recorder from Ivano's Department Store. XYZ Insurance Co pays $1 500 for the voucher. There is no monetary amount shown on the voucher. XYZ Insurance is entitled to an input tax credit on the purchase of the voucher.

Acquisition of goods

52. Under a general insurance policy, goods that have been damaged or stolen may be replaced. Where the goods are replaced, the insurer may purchase the goods (so that title passes to the insurer) and then may supply them to the insured. The insurer acquires the goods and Division 11 will apply to the supply. Therefore, the insurer may be entitled to an input tax credit.

Example 4

53. Michael has his video cassette recorder stolen. Michael is not registered for GST. His insurance company buys a new video cassette recorder for $550 and supplies it to Michael in settlement of the claim. The insurance company is entitled to an input tax credit on the purchase of the video recorder of 1/11th of the price, that is $50.

When it supplies the video cassette recorder to Michael it is not a taxable supply and, therefore, is not subject to GST. The insurance company is not entitled to any decreasing adjustment.

Acquisition of right to supply

54. There may be instances where an insurer will not acquire the goods, but simply acquires a right for goods to be supplied to the insured party. The insurer pays the supplier for certain goods to be supplied to the insured.

55. Providing the conditions stated in paragraph 6 are satisfied, this is an acquisition under Division 11 by the insurer and it may be entitled to an input tax credit.

Example 5

56. From the above example in paragraph 53, if the insurer does not purchase the video cassette recorder, but pays $550 to the supplier for it to supply the video cassette recorder to the insured, the insurer may be entitled to an input tax credit for the payment made to the supplier of 1/11th of the price (that is $50), if the insurer chooses the supplier, instructs the supplier and has a contractual relationship with the supplier in relation to that supply (see paragraph 6).

Cash settlements

57. If, in the above example, the insurer pays Michael $550 in money rather than by a voucher to purchase the video cassette recorder, it is also not entitled to an input tax credit. However, because Michael is not registered and has no input tax credits on the premiums of the policy, the insurer is entitled to a decreasing adjustment of 1/11th of the settlement amount, that is $50.

Workers compensation

58. Payments towards or under a workers compensation scheme (and any settlement under a workers compensation scheme) are treated in the same manner as payments for an insurance policy (and a settlement of a claim under an insurance policy) if the cover offered by the scheme is within the definition of 'insurance policy' in section 195-1 or listed in Schedule 10 of A New Tax System (Goods and Services Tax) Regulations 1999 as a 'statutory compensation scheme'.

59. If an employee is injured at work, makes a compensation claim against the employer and the employer's workers' compensation insurer accepts liability for the workplace injury, then the insurer may pay for certain goods and services to be provided to the employee. The same issues in relation to the payment of such benefits as for other general insurance settlements arise, ie, whether the payment is subject to Division 11 or Division 78. Accordingly, the same tests as discussed at paragraphs 6 apply. Various examples are discussed below.

Example 6 - Medical costs

60. Sam's employee Nick is injured at work. Sam is registered for GST and claims a full input tax credit for his workers' compensation insurance premium. Nick receives treatment at the local doctor's surgery for his injury and forwards the bill to Sam's insurance company. After receiving the claim (and accepting liability), the insurance company reimburses Nick for the doctor's bill of $145.

The insurer did not choose the doctor, instruct the doctor or have a contractual relationship with the doctor in relation to the supply of medical services to Nick. Therefore, the insurer has not made an aquisition. The payment is made as a reimbursement. The insurance company is also not entitled to a decreasing adjustment under Division 78 as Sam is entitled to a full input tax credit on the premium.

Example 7 - Travel costs

61. In attending the local doctor's surgery, Nick incurred $45 in travel fares. The $45 is GST inclusive. Nick seeks and receives reimbursement from the worker's compensation insurer for Sam for the travel fares. The payment is in settlement of a claim.

62. Division 78 applies. However, Division 11 does not apply to the reimbursement made to Nick if the insurer does not choose the supplier (taxi, train or bus etc), does not instruct the supplier and does not have a contractual relationship with the supplier. Therefore, the reimbursement is in settlement of a claim and is treated under Division 78.

63. The insurer would not be entitled to a decreasing adjustment because Nick's employer is entitled to a full input tax credit for his workers' compensation insurance premium.

Example 8 - Other medical services

64. Nick is referred to a physiotherapist for treatment by his local doctor. The workers' compensation insurer informs Nick that it will pay for the physiotherapy if Nick attends a medical service provider mentioned on the insurer's list of physiotherapists. Under a contractual arrangement that the insurer has with those physiotherapists, there are standing instructions to physiotherapists to provide whatever treatment is necessary for workers' compensation patients. As the conditions of paragraph 6 are met, the physiotherapists are supplying to the insurer the right to have physiotherapy supplies made to the workers' compensation patients whom the insurer sends to them. The physiotherapist issues to the insurance company an invoice for the treatment given to Nick.

65. Under section 38-10, the treatment by the physiotherapist to Nick is GST-free if it satisfies the requirements of that section. Subsection 9-30(1) provides that the supply of a right to receive a supply that is GST-free is also a GST-free supply. Therefore, the supply by the physiotherapist to the insurer is GST-free and there is no input tax credit available to the insurer. Nor is there a decreasing adjustment as the insurer makes no payment or supply to the insured in settlement of the claim.

Example 9 - Medical specialist costs

66. Due to the time Nick has had off work, he is referred to the workers' compensation insurer's nominated medical specialist for a report on his condition. As the insurer chose the medical specialist, gave instructions to the medical specialist for a report on his condition' and had a contractual relationship with the specialist, the insurer is entitled to an input tax credit in respect of any fees paid to the specialist.

67. The report by the specialist is not GST-free under section 38-7. Therefore, the supply to the insurer of the report is not a GST-free supply. In respect of the travel expenses incurred by Nick to attend for the report, see the example at paragraphs 64 to 67.

Example 10 - Rehabilitation

68. As part of Nick's therapy he is required to attend a fitness centre. The workers' compensation insurer provides Nick with a list of fitness centres that he can attend. The insurer has an agreement with the fitness centres. Therefore, any payments made to the fitness centres on behalf of Nick is considered under Division 11.

69. The workers' compensation insurer is entitled to an input tax credit in respect of payments made to the fitness centre.

70. If Nick was given the option to attend any fitness centre of his choice and the insurer did not have a contractual agreement with the fitness centre, then any payment by the insurer to the fitness centre is a payment in settlement of a claim and is considered under Division 78.

Example 11 - Legal costs

71. Following on from the above example, any legal expenses incurred by the workers' compensation insurer (its own legal costs), is considered under Division 11 of the Act, as the insurer chooses its legal representatives and has entered into a contractual arrangement.

72. However, if as part of the settlement with Nick, the workers' compensation insurer was ordered or agreed to pay for his legal costs, then the legal costs are part of the settlement and would be considered under Division 78. The insurer would not be entitled to a decreasing adjustment as Nick's employer is entitled to a full input tax credit for his workers' compensation insurance premium.

Definitions

Indemnity

73. An undertaking to compensate for loss, damage or expense, as in the protection provided by insurance. The measure for the payment is the measure of loss sustained, and the insured cannot recover more than the actual loss.

Insured

74. The party receiving insurance protection (against the risk of loss of an asset or the incurrence of a liability to a third party as a result of negligence or accident).

Insurer

75. The party providing insurance protection (against the risk of loss of an asset by an insured party or the incurrence of a liability by the insured party to a third party as result of negligence or accident).

Insurance

76. The contractual relationship of indemnity that exists between insurer and insured.

Workers Compensation

77. Compulsory insurance cover to be taken out by all employers, except for self-insured workers, according to legislative schemes to cover compensation to employees suffering injury or disease in the course of or arising out of employment.

Detailed contents list

78. Below is a detailed content list for this draft Ruling:

Your comments

79. If you wish to comment on this draft ruling, please send your comments promptly by 11 August 2000 to:

Commissioner of Taxation
30 June 2000

This Draft Ruling has been finalised by GSTR 2000/36

References

ATO references:
NO 2000/10973

Subject References:
settlement of claim
acquisition of goods
decreasing adjustment
insurer
insured
workers compensation
repairers
vouchers

Legislative References:
ANTS(GST)A99 Div 11
ANTS(GST)A99 Div 78
ANTS(GST)A99 78-10
ANTS(GST)A99 78-15
ANTS(GST)A99 78-20
ANTS(GST)A99 78-25
ANTS(GST)A99 78-30
ANTS(GST)A99 78-55
ANTS(GST)A99 9-30(1)
ANTS(GST)A99 11-5
ANTS(GST)A99 38-7
ANTS(GST)A99 38-10
ANTS(GST)A99 78-15(1)
ANTS(GST)A99 78-15(2)
ANTS(GST)A99 78-15(4)
ANTS(GST)A99 78-45
ANTS(GST)A99 195-1
ANTS(GST)R99 Sch 10

Case References:
Customs and Excise Commissioners v Redrow Group plc House of Lords
[1999] 2 All ER 13
[1999] STC 161
[1999] 1 WLR 408

British Airways plc v. Customs and Excise Commissioners (London Tribunal Centre)
8 December 1999. Unreported