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Ruling

Subject: GST and insurance claims

Question 1

When there are two general insurers (first entity and a second entity) who are members of the same GST group and that second entity - the 'not at fault' insurer exercises its rights of subrogation and seeks a payment in settlement of a claim from the first entity - the 'at fault' insurer, does section 78-10 of the New Tax System (Goods and Services Tax) Act 1999 (GST Act), enable first entity to claim a decreasing adjustment if the requirements of subsection 78 -10(2) of the GST Act are met?

Answer 1

Yes, when there are two general insurers (first entity and a second entity) who are members of the same GST group and that second entity - the 'not at fault' insurer exercises its rights of subrogation and seeks a payment in settlement of a claim from first entity - the 'at fault' insurer, section 78-10 of the GST Act enables first entity to claim a decreasing adjustment if the requirements of subsection 78-10(2) of the GST Act are met. However, such adjustments must be made in the group representative's activity statement.

Question 2

When there are two general insurers (first entity and a second entity), who are members of the same GST group and that second entity - the 'not at fault' insurer exercises its rights of subrogation and seeks a payment in settlement of a claim from first entity - the 'at fault' insurer, does section 78-40 of the GST Act require that second entity - the 'not at fault' insurer, to process an increasing adjustment where it has previously claimed a decreasing adjustment?

Answer 2

Yes, when there are two general insurers (first entity and a second entity), who are members of the same GST group and that second entity - the 'not at fault' insurer exercises its rights of subrogation and seeks a payment in settlement of a claim from first entity - the 'at fault' insurer, section 78-40 of the GST Act requires the 'not at fault' insurer to process an increasing adjustment where it has previously claimed a decreasing adjustment. Such adjustments must be made in the group representative's activity statement.

Relevant facts and circumstances:

The first entity is a member of a GST group.

There is a collision involving two parties, which are insured by the first entity and another general insurer in that same GST group. Both entities are registered for goods and services tax (GST).

The following are examples of two scenarios provided in relation to a collision:

Example one:

A car insured with first entity collides with a car insured with a second entity. The party insured with first entity is identified to be 'at fault' and has no entitlement to an input tax credit for the GST on the premium.

The party insured with the second entity is identified to be 'not at fault' and has a full (100%) entitlement to an input tax credit for the GST on the premium and a full entitlement to claim GST on repairs and other services relating to the vehicle.

The party insured with the second entity enters into a binding obligation with the repairer and pays $1,100 to repair the vehicle and $220 to tow the insured vehicle.

The second entity cash settles with the insured in the amount of $1,200 (the GST exclusive cost of the claim). It does so, because its insured has a full entitlement to claim GST on the settlement amount by 1/11^th in these circumstances.

As both the repair and towing payments are recoverable under rights of subrogation, the second entity would exercise those rights and seek a payment of $1,200 from the first entity. The second entity would seek to recover the $1,200 when exercising its right of subrogation as it is the practice of the general insurance industry to collect the gross amount of the payment where the original claim payment was made under Division 78 of the GST Act.

Example two:

There is an incident of a collision where a car insured with the first entity collides with a car insured with the second entity. The party insured with the first entity is identified to be 'at fault' and has a full (100%) entitlement to an input tax credit for the GST on the premium. The party insured with the second entity is identified to be 'not at fault' and has no entitlement to an input tax credit for the GST on the premium.

The party insured with the second entity enters into a binding obligation with the repairer and pays $1,100 to repair the vehicle and $220 to tow the insured vehicle. The second entity cash settles with the insured in the amount of $1,320.

As both the repair and towing payments are recoverable under rights of subrogation, the second entity would exercise those rights and seek a payment of $1,320 from first entity. The second entity would seek to recover the GST inclusive cost of the claim when exercising its rights of subrogation.

At present, both entities ignore the implications of GST where payments are made by the 'at fault' insurer to the 'not at fault' insurer.

Reasons for decision

Question 1

Example one - Decreasing adjustment

Subsection 78-10(1) of the GST Act states:

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

· makes a payment of money; or

· makes a supply; or

· makes both a payment of money and a supply.

Subsection 78-10(2) of the GST Act states:

However, the above section only applies if:

· the supply of the insurance policy by the insurer was solely or partly a taxable supply; and

· either:

- 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

- 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

· the insurer is registered, or required to be registered; and

· the settlement does not relate solely to one or more non-creditable insurance events.

You have a situation where the requirements of subsection 78-10(2) of the GST Act are satisfied.

Generally, under the scenario in example one, first entity will have a decreasing adjustment under section 78-10 of the GST Act, when the payment of $1200 is paid to the second entity (where the insurers are not in a GST group). This is because, the first entity (being an insurer), makes a payment of money to the second entity in a settlement claim under an insurance policy. In this situation, we are of the view that the payment of $1200 is made because of the two insurance policies that the two insured clients have with their respective insurers. The payment is not a payment of money from the first entity to the second entity for any insurance policies that they have with each other. Rather, it is a subrogation payment that the second entity has received for the exercise of its subrogation right (against the 'at fault' insured party), to recover the money that it paid to the 'not at fault' insured party.

There are no provisions in Division 78 of the GST Act, which states how decreasing adjustments that arise under subsection 78-10(1) of the GST Act should be treated for GST purposes where the two insurers (such as first entity and the second entity in this case) are in a GST group.

Therefore where an insurer, who is a member of a GST group has a decreasing adjustment under subsection 78-10(1) of the GST Act as in your example one, it is necessary to consider how such an adjustment should be treated under the group provisions under the GST Act.

Group provisions

Section 48-50 of the GST Act states the following in relation to adjustments of a group member:

Section 48-50 Adjustments

(1) Any *adjustment that an entity has and that is attributable to a tax period during which the entity is a *member of a *GST group is to be treated as if:

(a) the entity did not have the adjustment (unless the entity is the *representative member); and

(b) the representative member had the adjustment.

(2) This section has effect despite section 17-10 (which is about the effect of adjustments on net amounts).

The issue that needs to be determined is whether the decreasing adjustment under section 78-10 of the GST Act is an adjustment referred to in under subsection 48-50 of the GST Act when it states 'Any *adjustment….'.

An adjustment is defined in section 195-1 of the GST Act as follows:

adjustment means an *increasing adjustment or a *decreasing adjustment.

Decreasing adjustment is defined in section 195-1 of the GST Act as an amount arising under one of the provisions listed in a table directly below the definition.

Item 4A in that table lists section 78-10 of the GST Act as one such provision. Accordingly, a decreasing adjustment that arises under section 78-10 of the GST Act is to be included under section 48-50 of the GST Act.

That is, for the purposes of section 48-50 of the GST Act, the decreasing adjustment that arises under section 78-10 of the GST Act should be recorded in the representative member's GST return.

Therefore, it is our opinion that where first entity and the second entity are two general insurers in the same GST group and the second entity, being the 'not at fault' insurer exercises its rights of subrogation and seeks a payment in settlement of a claim from the first entity, being the 'at fault' insurer, section 78-10 of the GST Act provides for the first entity to claim a decreasing adjustment where the requirements of subsection 78-10(2) of the GST Act are met.

Under the given scenario in example one, Division 48 of the GST Act does not modify the operation of Div 78 of the GST Act because first entity and the second entity do not make a supply of insurance policy to one another.

Accordingly, the decreasing adjustment that first entity is entitled to under the above circumstances must be transferred to the representative member of the GST group by virtue of section 48-50 of the GST Act.

Question 2

Example two - Increasing adjustments

Under the given scenario in example two, where the second entity cash settles with the insured in the amount of $1,320, that entity is entitled to claim a decreasing adjustment (if the insurers were not in a GST group) under section 78-10 of the GST Act, where the requirements of subsection 78-10(2) of the GST Act are satisfied.

Where the second entity exercises rights of subrogation and recovers the amount of $1,320 from first entity, that entity is obligated to make an increasing adjustment by virtue of subsection 78-40(1) of the GST Act which states the following:

(1) Division 19 applies in relation to a *decreasing adjustment that an insurer has under this Division as if:

(a) the adjustment were an input tax credit; and

(b) the settlement of the claim to which the adjustment relates were a *creditable acquisition that the insurer made; and

(c) any payment or supply made by another entity, in settlement of a claim made by an insurer in the insurer's exercising of rights of subrogation in respect of the *insurance policy in question, were a reduction in the *consideration for the acquisition.

The Explanatory memorandum to subsection 78-40(1) of the GST Act states:

settling claims made in exercise of rights of subrogation will be treated as an adjustment event [New paragraph 78-40(c)]

As Division 19 of the GST Act applies to the scenario in example two, the effect of paragraph 78-40(1)(c) of the GST Act, is that an increasing adjustment arises where a 'not at fault' insurer has previously claimed a decreasing adjustment. This is because Division 19 of the GST Act applies to that scenario.

The next issue that needs to be determined is whether this adjustment falls within the group provisions where the two insurers are in the same GST group. As discussed under question 1 above, we are of the view that this increasing adjustment is an adjustment that falls within the definition of an 'increasing adjustment' under section 195-1 of the GST Act.

Accordingly, the increasing adjustment that arises under section 78-40 of the GST Act is an adjustment that requires to be taken into account for the purpose of section 48-50 of the GST Act.

In the given circumstances, Division 48 of the GST Act does not modify the operation of Division 78 of the GST Act because the first entity and the second entity do not make a supply of insurance policy to each another.

This means that, when the two general insurers, the first entity and the second entity are both members of the same GST group and the second entity - the 'not at fault' insurer exercises its rights of subrogation and seeks a payment in settlement of a claim from the first entity - the 'at fault' insurer, section 78-40 of the GST Act requires the second entity - the 'not at fault' insurer to process an increasing adjustment where it has previously claimed a decreasing adjustment.

Therefore, the increasing adjustment that the second entity is obligated to make under the above circumstances must be included in the representative member of the GST group by virtue of section 48-50 of the GST Act.

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