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Authorisation Number: 1011511660259

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Ruling

Subject: GST input tax credit for luxury car acquisitions

Are you entitled to decreasing adjustments since you are not entitled to full input tax credits in respect of your acquisitions of luxury cars (cars that exceed the luxury car tax threshold)?

No.

You are not entitled to decreasing adjustments in respect of the non-recoverable portion of GST you paid on acquisitions of luxury cars.

Relevant facts and circumstances

You are a motor vehicle insurance company.

Your Product Disclosure Statement (PDS) governs the provision of your motor vehicle insurance to its policy holders. The PDS allows you to settle the policyholder's claim in the following alternative manners:

· Payment of a cash settlement amount equivalent to the market value or agreed value of the insured car to the policyholder; or

· Replacement of the policyholder's car by provision of an identical car. In particular, in the case of a "new car replacement" where the car is assessed by you as a total loss within the first twelve months from when it was first registered, you will (in certain circumstances) replace the car with an identical car.

In relation to the provision of replacement cars, you acquire the relevant car from authorised car dealers and supply the car to the insured in settlement of a claim under the relevant insurance policy. In relation to your acquisition of luxury cars, you are entitled to reduced input tax credits in relation to the GST payable on the acquisitions of these cars to the extent of 1/11^th of the luxury car tax (LCT) threshold.

There are exceptions where in certain circumstances an entity can claim an input tax credit for the full amount of the GST included in the purchase price of a car even if the car costs more than the car limit. However, you state that none of the exceptions applies in your case.

Reasons for decision

We have considered your following contentions:

In settlement of a claim under a taxable insurance policy, you should be entitled to decreasing adjustments in respect of that part of the value of the supplied car which is over the LCT threshold and for which you are not entitled to input tax credits. You state that if you are not entitled to the above, this is at odds to the logical GST outcome which is that a tax neutral position should be achieved irrespective of the method of settlement of an insurance claim.

There is a discrepancy between your entitlement for an input tax credit and for a decreasing adjustment if the replacement car is a luxury car due to the reduced entitlement to input tax credits in respect of the non-recoverable portion of GST payable on the acquisition of a luxury car.

Under section 11-20 of the New Tax System (Goods and Services Tax) Act 1999 (GST Act) you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act provides that:

You make a creditable acquisition if:

(a) you acquire anything solely for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered or *required to be *registered.

You are entitled to input tax credits because you make a creditable acquisition when you acquire the luxury cars from car dealers under Division 11 of the GST Act. You acquire the motor vehicles solely for a creditable purpose as no part of the acquisitions are of a private or domestic nature or relate to making input taxed supplies. The supplies of the motor vehicles to you from the car dealers are taxable supplies, you provide and are liable to provide consideration for the supplies and are registered for GST. The acquisitions of the motor vehicles therefore are creditable acquisitions as you meet all the requirements of section 11-5 of the GST Act.

However, subsection 69-10(1) of the GST Act limits the amount of the input tax credits available for creditable acquisitions of certain cars. Subsection 69-10(1) of the GST Act states:

If:

(a) you are entitled to an input tax credit for a *creditable acquisition or *creditable importation of a *car; and

(b) you are not, for the purposes of the A New Tax System (Luxury Car Tax) Act 1999, entitled to quote an *ABN in relation to the supply to which the creditable acquisition relates, or in relation to the importation, as the case requires; and

(c) the *GST inclusive market value of the car exceeds the *car limit for the *financial year in which you first used the car for any purpose;

the amount of the input tax credit on the acquisition or importation is the amount of GST payable on the supply or importation of the car up to 1/11 of that limit.

A 'car' is defined in section 195-1 of the GST Act to have the same meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 995-1 of the ITAA 1997 provides that a car means, a motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than one tonne and fewer than nine passengers.

Section 995-1 of the ITAA 1997 provides that a motor vehicle means any motor-powered road vehicle (including a four wheel drive vehicle). You advised that the motor vehicles that you purchased are designed to carry a load of less than one tonne and seven passengers (including the driver). The purchase price of each of the motor vehicles exceeds $57,180.

Based on the information provided, the motor vehicles are considered to be cars for the purposes of the GST Act as they are designed to carry a load of less than one tonne and fewer than nine passengers. Accordingly, the requirement of paragraph 69-10(1)(a) of the GST Act is satisfied.

The requirement of paragraph 69-10(1)(c) of the GST Act is satisfied as the GST inclusive market value of each of the motor vehicles exceeds $57,180 being the car limit for the 2009/2010 financial year.

Under section 9-5 of the A New Tax System (Luxury Car Tax) Act 1999 (LCT Act), an entity can quote its ABN for the purchase or importation of a luxury car if the entity is registered for GST and at the time of quoting it has the intention of using the car for one of the following purposes, and for no other purpose:

· trading stock other than holding it for hire or lease

· carrying out research and development for the manufacturer of the car, or

· exporting the car if the export is GST-free under the GST Act.

Section 27-1 of the LCT Act defines a luxury car as a car with a GST-inclusive value above the luxury car tax threshold. The luxury car tax threshold is equal to the car limit.

You purchase the motor vehicles for the purpose of replacement of the policyholder's car by provision of an identical car. Therefore, you are not entitled to quote an ABN under the LCT Act when you purchase the motor vehicles. For this reason the requirement of paragraph 69-10(1)(b) of the GST Act is also met.

Consequently, all the requirements of subsection 69-10(1) of the GST Act are met.

There are exceptions in section 69-10 of the GST Act where in certain circumstances an entity can claim an input tax credit for the full amount of the GST included in the purchase price of a car even if the car costs more than the car limit. However, you state that none of the exceptions applies in your case.

Accordingly, the maximum amount of the input tax credit that you can claim in respect of each motor vehicle is limited to 1/11^th of $57,180 (that is $5,198.18).

In addition, due to section 78-10 of the GST Act you are not entitled to decreasing adjustment in respect of the non-recoverable portion of GST payable on the acquisition of a luxury car.

Subsection 78-10 of the GST Act provides that

78-10 Decreasing adjustments for settlements of insurance claims

(1) An insurer has a decreasing adjustment if, in settlement of a claim under an *insurance policy, the insurer:

(a) makes a payment of *money; or

(b) makes a supply; or

(c) makes both a payment of money and a supply.

(2) However, this section only applies if:

(a) the supply of the *insurance policy by the insurer was solely or partly a *taxable supply; and

(b) either:

(i) 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; or

(ii) there was an entitlement to such an input tax credit, but the amount of the input tax credit was less than the GST payable by the insurer for the taxable supply; and

(c) the insurer settles the claim for a *creditable purpose; and

(d) the insurer is *registered, or *required to be registered; and

(e) the settlement does not relate solely to one or more *non-creditable insurance events.

(2A) In working out the amount of an input tax credit for the purposes of subparagraph (2)(b)(ii), disregard sections 131-40 and 131-50 (which are about amounts of input tax credits under the annual apportionment rules).

History

S 78-10(2A) inserted by No 134 of 2004, s 3 and Sch 2 item 10, applicable in relation to net amounts for tax periods starting, or that started, on or after:

a) for entities that, on 1 October 2004, had quarterly tax periods applying to them - 1 October 2004; or

b) for other entities - 1 November 2004.

(3) An event is a non-creditable insurance event if the supply of an *insurance policy would not be a *taxable supply if it were only an insurance policy against loss, damage, injury or risk that relates to that event happening.

You meet all the above requirements of section 78-10 of the GST Act and you are entitled to decreasing adjustment of 1/11^th of the settlement amount in respect of your cash settlements under section 78-15 of the GST Act. However, you are not entitled to decreasing adjustment in respect of settlements where a replacement car is provided per the method statement in subsection 78-15(4) of the GST Act.

Section 78-15 of the GST Act states as follows:

78-15 How to work out the decreasing adjustments

No input tax credit for the premium

(1) 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.

Partial input tax credit for the premium

(2) If there was an entitlement to such an input tax credit, the amount of the decreasing adjustment is as follows:

1/11 X *Settlement amount X (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.

Note:

There is no decreasing adjustment if there is a full input tax credit for the premium paid: see paragraph 78-10(2)(b).

Non-creditable insurance events

(3) The amount of the decreasing adjustment under subsection (1) or (2) is reduced to the extent (if any) that the settlement relates to one or more *non-creditable insurance events.

Settlement amounts

(4) The settlement amount is worked out using this method statement.

Method statement Step 1. Add together: a) the sum of the payments of *money (if any) made in settlement of the claim; and b) the *GST inclusive market value of the supplies (if any) made by the insurer in settlement of the claim (other than supplies that would have been *taxable supplies but for section 78-25). Step 2. If any payments of excess were made to the insurer under the *insurance policy in question, subtract from the step 1 amount the sum of all those payments (except to the extent that they are payments of excess to which section 78-18 applies). Step 3. Multiply the step 1 amount, or (if step 2 applies) the step 2 amount, by the following:            11            11 - Extent of input tax credit where: extent of input tax credit has the meaning given by subsection (2).

Your supply of the replacement car in respect of settlements is not a taxable supply according to section 78-25 of the GST Act. Therefore, when you provide a replacement car in respect of settlements and do not pay any money to the insured, the settlement amount is nil, and you will not be entitled to decreasing adjustments according to the above method statement.

We refer to paragraphs 19 to 21 of Goods and Services Tax Ruling GSTR 2006/10, which state as follows:

Division 78 - Special rules

Decreasing adjustments

19. The insurance provisions in Division 78 are designed to ensure that an insurer will only pay GST on the value of services provided by the insurer. The legislation measures the value of the insurance services by imposing GST on the full amount of the premiums collected by the insurer and then reducing the insurer's GST by way of a decreasing adjustment under section 78-10.

20. The insurer is entitled to a decreasing adjustment if the insured is not entitled to an input tax credit on the premium it pays under the insurance policy. The amount of the decreasing adjustment is equal to 1/11^th of the settlement amount.

21. The insurer is also entitled to a decreasing adjustment if the insured is entitled to an input tax credit on the premium it pays under the insurance policy, but that input tax credit is less than the GST payable on the premium. The amount of the insurer's decreasing adjustment is reduced if the insured has a partial entitlement to input tax credits on premiums paid. This would occur where the insurance policy was acquired only for a partly creditable purpose. The amount of the decreasing adjustment is also reduced to the extent (if any) the settlement relates to a non-creditable insurance event.

For an insurer to claim a decreasing adjustment under section 78-10 in respect of a settlement of a claim under an insurance policy, the insurer must make a payment of money or a supply or both. Also, there must be not be an entitlement to an input tax credit under Division 11 of the GST Act on the GST on the premium paid or that such entitlement be less than GST payable by the insurer and that the supply of insurance policy must be wholly or partly a taxable supply.

We also refer to paragraphs 30 and 33 of Goods and Services Tax Ruling GSTR 2006/10, which state as follows:

30. It has been argued that an insurer may be eligible to both an input tax credit and a decreasing adjustment when settling a claim. Division 78 reflects the legislative purpose to give insurers decreasing adjustments on settlements to ensure that GST is only levied on the margin between insurance premiums and settlements. Consistent with that intention, the Commissioner considers that there is no entitlement to a decreasing adjustment where an insurance settlement gives rise to an input tax credit for the insurer.

33. If an insurer settles an insurance claim by way of payment of money to the insured or a third party, or reimburses the insured or a third party for costs incurred, or to be incurred, then the insurer may be entitled to a decreasing adjustment.

Paragraph 30 of GSTR 2006/10 makes it clear that an insurer cannot claim both an input tax credit and a decreasing adjustment. Paragraph 33 of GSTR 2006/10 explains the circumstances in which a decreasing adjustment may arise, that is, when an insurer settles an insurance claim by way of payment of money.

Accordingly, you are not entitled to decreasing adjustments in respect of the non-recoverable portion of GST you paid on acquisition of a luxury car.

If the replacement car is not a luxury car, under Division 78 of the GST Act, you would have the same GST treatment regardless of the method used to settle the claim. If the replacement car is a luxury car, the different methods of settling a claim can have different GST consequences.

In relation to luxury cars, the income tax legislation restricts depreciation deductions in respect of cars that cost more than a defined car depreciation limit. This restriction was originally adopted because it was assumed the cost of a car in excess of this limit was primarily yielding non-taxable personal benefits for the person provided with the car. The limit was retained even after the benefit became subject to fringe benefits taxation. Section 69-10 of the GST Act parallels the operation of section 69-5 of the GST Act and effectively treats the acquisition of a car as a private acquisition to the extent that the consideration for acquisition exceeds the car limit.

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