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Edited version of private ruling

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Ruling

Subject: GST and insurance settlement payment

Question

Is the payment made to you by an insurer in settlement of a claim under an insurance policy under which you are not the insured consideration for a supply?

Answer

No, the payment made to you by an insurer in settlement of a claim under an insurance policy under which you are not the insured is not consideration for a supply.

Relevant facts and circumstances

You operate a smash repair shop.

You are registered for goods and services tax (GST).

You repair damaged cars whose owners (your clients) are not at fault.

You and your clients enter into a Deed of Assignment where your clients assign all their rights and interests in respect to their claims against the owners of the other vehicles involved in the collision.

You prepare a quotation for repairs which is independently assessed.

You received payments from the insurers of the owners of the vehicles who were at fault.

The insurers do not 'pay the GST amount charged on the repairs'.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 78-65.

Reasons for decision

According to section 78-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the making of any payment by an insurer to an entity is not treated as consideration for a supply to the insurer by the entity, to the extent that:

Section 78-65 of the GST Act applies to the situation where the insured has a liability to a third party. This could be because of damage caused by the insured to the third party, and the settlement from the insurer is made to enable that liability to be discharged.

In your case, you receive a payment from the insurer of an owner of the other vehicle who has a liability to your client because of the damage they have caused. The payment is made in settlement of a claim under the insurance policy under which you are not the insured. The payment is made to discharge the liability to your client which is transferred to you when your client assigns their rights and interests in the claim by entering into the Deed of Assignment.

Therefore, section 78-65 of the GST Act applies. The payment made to you by an insurer in settlement of a claim under an insurance policy under which you are not the insured is not consideration for a supply that you make to the insurer.

Consideration for a taxable supply

The supply that you make to a client in repairing their motor vehicle is a taxable supply because the conditions in section 9-5 of the GST Act are satisfied. That is:

'Consideration' includes any payment, or any act or forbearance in connection with a supply of anything and any payment, or any act or forbearance in response to or for the inducement of a supply of anything. It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

As discussed above, the payment that you receive from an insurer in settlement of a claim is not consideration for a supply that you make to the insurer. However, it will be consideration for the supply that you make to your client in repairing their motor vehicle if you and your client agree by entering into a Deed of Assignment to apply the settlement payment as consideration that your client is liable to pay for your supply to them. Accordingly, you are liable to remit 1/11th of the total payments you receive for your supply whether or not the payment was made by your client.

Settlement amount

The calculation and determination of the insurance settlement payment is governed by the terms of the insurance policy and not by any taxation legislation. However, we understand that when an insurer makes a payment in settlement of a claim, it is common practice to reduce the payment by 1/11th if the insured is entitled to full input tax credit. The rationale for doing so would appear to be that the insurer believes that they are only required to indemnify the insured for the actual loss incurred.


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