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Edited version of private ruling
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Ruling
Subject: GST and reduced input tax credit on lenders mortgage insurance
Question
Is the acquisition of the 'stop loss reinsurance' by entity A a reduced credit acquisition under item 12 listed in subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) for the entity B GST group?
Advice/Answers
Yes, the acquisition of the 'stop loss reinsurance' by entity A is a reduced credit acquisition under item 12 listed in subregulation 70-5.02(2) of the GST Regulations for the entity B GST group.
Relevant facts
Entity B provides loans secured by mortgages to third party borrowers.
Entity A is the captive lenders mortgage insurer in the entity B group, and entity A insures entity B against losses that may arise from defaults under the loans secured by mortgages.
Entity A is part of the same GST group as entity B, of which entity B is the representative member.
Entity A acquires stop loss reinsurance from offshore reinsurers, and entity A is the insured under the relevant 'stop loss reinsurance' contracts.
Broadly, under the relevant stop loss reinsurance contracts, entity A cedes to the reinsurer a specified level or proportion of risk in the lenders mortgage insurance underwritten by entity A, where entity B is protected against an aggregate amount of losses over a period in excess of a specified limit of claims annually. That is, a minimum level of claims must first be reached before the 'stop loss reinsurance' becomes effective. Entity A sets the applicable claims limit at the upper end to minimise excessive losses and manage relevant capital requirements. The regulator requires entity A to measure the probability of maximum losses and this type of reinsurance covers that spectrum of risk at the catastrophe end.
Entity B does not charge a separate fee to the borrowers for the lenders mortgage insurance, but the lenders mortgage insurance is part of the applicable input taxed loan fees charged by entity B to the borrowers.
The entity B GST group exceeds the financial acquisitions threshold, under Division 189 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).
To date, the entity B GST group has not recovered, to any extent, the 'reverse charge' GST incurred on acquiring the 'stop loss reinsurance'.
This ruling is sought jointly by entity B as the representative member of the entity B GST group and entity A, a member of the entity B GST group.
You have subsequently provided two separate contracts of stop loss reinsurance acquired by entity A from two offshore reinsurance suppliers.
Reasons for decision
Subsections 48-45(1) and (2) of the GST Act relevantly provide:
(1) If a member of a GST group makes a creditable acquisition or creditable importation:
(a) the representative member is entitled to the input tax credit on the acquisition; and
(b) the member making the acquisition or importation is not entitled to the input tax credit on the acquisition or importation (unless the member is the representative member).
(2) In deciding, for the purposes of subsection (1), whether an acquisition by a member of a GST group is a creditable acquisition, the acquisition is treated as being solely or partly for a creditable purpose if, and only if, it would be so treated if:
(a) the GST group were treated as a single entity; and
(b) the GST group were not treated as a number of entities corresponding to
the members of the GST group.
In addition, section 48-55 of the GST Act also provides that a GST group is treated as a single entity and not as a number of entities corresponding to the members of the group when calculating entitlement to input tax credits. Therefore, pursuant to subsection 48-45(2) and section 48-55 of the GST Act, it is the connection between the thing acquired and the group's enterprise as a whole which determines whether or not an acquisition is made for a creditable purpose.
In this case, the acquisition by entity A of the stop loss reinsurance cover from each of the reinsurers is a financial acquisition as the enterprise of the group as a whole is to use the acquisition in relation to the making of financial supplies consisting of loans secured by mortgages to non-members of the GST group. Consequently, by virtue of subsection 11-15(2) of the GST Act, there is no entitlement to input tax credits in respect of this acquisition. However, there is a relevant exception to this general exclusion where the acquisition is listed as a reduced credit acquisition in regulation 70-5.02 of the GST Regulations.
Item 12 listed in subregulation 70-5.02(2) (item 12) of the GST Regulations states 'lenders mortgage and title insurance' as one of the reduced credit acquisitions which can give rise to a reduced input tax credit entitlement. The Commissioner, in Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions at paragraph 365, outlines the scope of item 12 which states:
365. Where a lender self-insures (for example, through a group company) its mortgage or title risk, it may divest itself of some of the risk by acquiring reinsurance supplies. We consider that where this happens, 'insurance' (in the context of item 12) may be taken to include 'reinsurance' provided to lenders on their mortgage or title risk. In these circumstances, the acquisition of 'reinsurance' is a reduced credit acquisition under item 12.
We consider that the circumstances fall within those described in paragraph 365 of GSTR 2004/1. That is the entity B GST group as a whole, being the 'lender' which self-insures through entity A (a group company) its mortgage risks, is divesting itself of some of those risks by acquiring stop loss reinsurance supplies (through entity A) from those reinsurers.
Therefore, provided that entity B as representative member of the entity B GST group pays the reverse charge GST payable by entity A as recipient of the stop loss reinsurance supplied by overseas reinsurers under Division 84 of the GST Act, it is entitled to the reduced input tax credit under item 12 listed in subregulation 70-5.02(2) of the GST Regulations.
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