Edited version of the private ruling

Authorisation Number: 1011650668071

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Ruling

Subject: GST and insurance claims

Question

Effective from Date A, which entity is entitled to claim the input tax credits under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), for the services acquired from the contractors for settlement of the insurance claims?

Decision

Effective from Date A, Entity A is the entity entitled to claim the input tax credits on the services acquired from the contractors for settlement of the insurance claims..

Relevant facts and circumstances

You are an insurance broking agency. You issue insurance policies to owners of commercial buildings located in Australia under your own name. The policies are underwritten by an insurance underwriter (underwriter) based in a foreign country. You collect the premiums payable and issue tax invoices to the policy holders. The premiums paid by the policy holders are GST inclusive and you account for your GST liability on your BAS. You remit the premiums less withholding tax (net premiums) to the underwriter.

Prior to Date A, the underwriter provided you with a pool of money (claims pool) to settle any insurance claims. Whenever you received an insurance claim, you referred it to the underwriter for processing and approval. After processing and approval of the claim, it was referred to you for carrying out the necessary services. You engaged contractors to carry out the necessary services to the buildings. The contractors submitted their tax invoices to you for the services performed. You settled their invoices using the claims pool provided by the underwriter.

The tax invoices contained your name as the recipient of the services supplied by the contractors. You claimed the relevant input tax credit on your BAS and refunded it to the claims pool.

Effective from Date A, your agreement with the underwriter has been amended so that an Australian registered company, Entity A, will settle all the insurance claims. However, you continue to issue the policies under your name. Entity A does not issue any policies. You have submitted a copy of the procedure for the handling and settlement of claims effective from Date A.

Entity A has signed an agreement with the underwriter for the settlement of the insurance claims. You do not have access to that agreement. You have not signed any agreement with Entity A, which has a claims pool directly funded by the underwriter.

From Date A, the policy holders continue to submit their claims to you, as the policies were issued by you. The underwriter does not provide you a claims pool. You submit the claims to the underwriter and they process the claims and submit them to Entity A for settlement.

Entity A engages contractors to carry out services on the buildings in order to settle the insurance claims. The contractors submit their tax invoices to Entity A and they settle the invoices with the claims pool provided by the underwriter. As per the tax invoices, Entity A is the recipient of the services.

Entity A provides you a summary of GST paid to contractors for the services acquired. Effective from Date A, you cannot claim the input tax credits on the tax invoices, as the invoices quote Entity A as the recipient of the services. However, Entity A expects that you will claim the relevant input tax credits and refund it to their claims pool to compensate for any GST paid by them. You are concerned that If you claim the relevant input tax credits based on a summary provided by Entity A, in case of a tax audit, you could be found guilty for claiming input tax credits without holding valid tax invoices.

The underwriter is not registered for GST.

You are registered for GST. Your main business activity is insurance broking.

Entity A is registered for GST. Their main business activity is claims management services.

Reasons for the decision

Section 11-20 of the GST Act states:

you are entitled to the input tax credit for any *creditable acquisition that you make.

* denotes a term defined in section 195-1.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

a) you acquire anything solely or partly 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.

Section 9-5 of the GST Act states:

You make a taxable supply if:

a) you make the supply for *consideration; and

b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

c) the supply is *connected with Australia; and

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

e) However, the supply is not a *taxable supply to the extent that it is *GST free or *input taxed.

Section 153-15 of the GST Act refers to tax invoices and states:

1) If you make a *taxable supply through an agent, an obligation to issue a *tax invoice relating to the supply:

a) arises whether the *recipient makes a request for a tax invoice to you or the agent; and

b) is complied with if either you or the agent gives the recipient a tax invoice within 28 days after the request.

2) However, you and the agent must not both issue separate *tax invoices relating to the supply.

……….

Section 153-25 of the GST Act refers to insurance supplied through insurance brokers and states:

1) If an insurer supplies an *insurance policy through an *insurance broker acting on behalf of the *recipient of the supply, this Subdivision has effect as if the supply were made through the insurance broker as an agent of the insurer.

2) This section does not affect the application of this Subdivision in relation to the acquisition of the *insurance policy through the insurance broker as an agent of the *recipient.

Goods and Services Tax Ruling GSTR 2006/10 (GSTR 2006/10) refers to insurance settlements and entitlement to input tax credits. Paragraph 36 and 37 of GSTR 2006/10 states:

36. Insurance settlements may involve arrangements between the insurer, the supplier of goods, services or anything else and the insured. Arrangements involving three or more parties are commonly referred to as tripartite arrangements. Under a tripartite arrangement, it is possible that a supply is made to one entity under the terms of an agreement, but the supply is provided to another entity. For example, an insurer arranges with a supplier (or repairer) to repair the insured's motor vehicle. It is also possible under a tripartite arrangement for two or more supplies to result from a single set of activities by a supplier.

37. Tripartite arrangements can relate to any of the matters referred to in section 9-10 of the GST Act, which discusses the meaning of supply. The issue to be determined is how to identify the supply or supplies made in these arrangements and by whom and to whom a supply is made.

Paragraphs 46, 47 and 54 of GSTR 2006/10 state:

46. ……We consider that a principle that can be derived from UK cases such as Customs and Excise Commissioner v Redrow Group plc (Redrow) is that the entity that contracts for a supply from a supplier is the recipient of that supply, even if the supply is provided to another entity.

47. In the context of an insurance settlement, an insurer may arrange with a supplier to provide goods, services or anything else to the insured or a third party. We consider that, if an insurer enters into a binding obligation with a supplier to provide goods, perform services or do something else for the insured or a third party in settlement of an insurance claim and is liable to pay for that supply, the supplier is making a supply to the insurer, even though the supply may be provided to another entity, the insured or a third party.

54. We consider that there needs to be a binding obligation between the insurer and the repairer or other supplier of the type discussed below for there to be supplies acquired by the insurer from the repairer or other supplier in respect of which the insurer can claim input tax credits.

Identifying binding obligations

Paragraphs 55 and 57-59 of GSTR 2006/10 state:

55. When identifying to whom a supply is made, it is necessary to look at the whole arrangement, including the contractual and other agreements made between the parties. In WHA Limited and Viscount Reinsurance Company Limited v HM Commissioners of Customs and Excise (WHA Ltd), Lord Justice Neuberger said that 'one must look at the way the parties have actually structured, and indeed expressed their transaction or transactions. He also agreed with the observation by Justice Lloyd that the contractual position is not conclusive as to what taxable supplies are made to whom, but it must be the starting point.

57. We consider that a repairer or other supplier will be making a supply to an insurer, where there is a binding obligation (either written or oral) between the insurer and the repairer or other supplier to provide goods, services or anything else to the insured or a third party.

58. The existence of a binding obligation between the insurer and a supplier may be evidenced by prior practice or by documentation that passes between the insurer and the supplier. In many situations, insurers will have agreements with approved repairers or other suppliers, which specify that repair, services or other supplies are to be provided to the insured entities or third parties and that the insurer is liable to pay for these supplies. Where an examination of the total fact situation shows that there is a binding obligation between the insurer and the supplier for goods or services to be provided to an insured or a third party, the supply is made by the supplier to the insurer, but the supply is provided to the insured or the third party.

59. In the context of an insurance claim for repairs to goods or for replacement goods, we consider that, if the insurer:

assesses the loss or damage to goods and instructs the supplier about the repairs to be done or the goods to be replaced;

agrees to the price for the agreed work or replacement goods with the supplier;

is liable for and pays for the agreed work or replacement goods (whether or not the claimant may also be liable if the insurer does not pay); and

satisfies itself that the repairs have been done or the replacement goods have been supplied in accordance with the agreed terms and price,

there is a strong indication that a binding obligation exists between the insurer and the supplier. Such a binding obligation, whether evidenced by written or oral agreement, will establish that the payment made by the insurer is consideration for an acquisition made by the insurer for a supply that is provided to the insured or a third party.

Payment by third party entities

Paragraphs 65 and 66 of GSTR 2006/10 state:

65. If the insurer meets an insured's liability to the supplier without the supplier taking on any other binding obligation to the insurer, the payment by the insurer is simply a payment by a third party entity, that is the insurer. This payment arrangement does not change the fact that the supplier makes the supply to the insured and not to the insurer. The insurer is not making an acquisition under Division 11 of the GST Act and is not entitled to input tax credits for payments made to the supplier. It does not matter that the insurer and the supplier actually have arrangements in place before the event (whether under an agreement or not) to pay for the goods or services supplied to the insured or a third party, whether invoices are sent directly to the insurer or whether costs are directly debited to the insurer.

66. A feature of these arrangements is that the agreement for the supply of the goods or services is between the supplier and the insured and that an obligation to pay remains with the insured. The fact that the insurer meets the insured's liability does not alter this. There is no binding obligation between the supplier and the insurer for the supply of goods or services to the insured. The arrangement between the supplier and the insurer remains that of a payment arrangement.

Agency

Paragraphs 69 and 70 of GSTR 2006/10 state:

69. For commercial law purposes, an agent is a person who is authorised, either expressly or impliedly, by a principal to act for that principal so as to create or affect legal relations between the principal and third parties. The principal is bound by the acts of an agent as a result of the authority given to the agent.

70. In the context of an insurance claim, an insurance policy may allow the insured to arrange or authorise repairs on behalf of the insurer. It will be a question of fact as to whether the insured is acting as agent for the insurer in arranging or authorising the repairs.

Goods and Services Tax Ruling GSTR 2000/37 (GSTR 2000/37) refers to agency relationships and the application of the law. Paragraphs 28 and 29 of GSTR 2000/37 refer to factors that indicate an agency relationship and state:

28. In most cases, any relevant documentation about the business relationships, the description used by the parties and the conduct of the parties establish the existence of an agency relationship. Therefore, the following factors may show that you are an agent under an agency relationship, although no single factor (by itself) is determinative:

· any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party;

· any exercise of the authority that you are given to enter into legal relations with a third party;

· whether you bear any significant commercial risk;

· whether you act in your own name;

· whether you are remunerated for your services by way of commissions and whether you are entitled to keep any part of your remuneration secret from another party; and

· whether you decide the price of things that you might sell to third parties.

29. In some situations, these factors may be difficult to establish. For example, situations may arise where:

· the existence of a principal is disclosed but not named; or

· the existence of a principal is not disclosed to third parties.

However, documents used by the parties and the conduct of the parties may still indicate the existence of an agency relationship.

Agents of the underwriter

We have not seen the agreements signed between you and the underwriter. However, the given facts indicate that you operate in Australia as an authorised agent of the underwriter for the purpose of issuing commercial insurance policies. As the policies are issued in your name, you enter into legally binding contracts with the policy holders. You had a legal obligation to collect the premiums, account for the GST and withholding tax liability and remit the net premiums to the underwriter. In addition, you had a legal obligation to settle the insurance claims with a claims pool provided by the underwriter.

Effective from Date A, your agreement with the underwriter has been amended so that you are only responsible for issuing the policies, collecting the premiums, accounting for the GST and withholding tax liability and remitting the net premiums to the underwriter.

From Date A, Entity A has been appointed as the authorised agent for settling all the insurance claims using a claims pool provided by the underwriter. Entity A has been authorised to enter into legally binding agreements with contractors to provide the necessary services to the buildings. We have not seen the agreements signed between Entity A and the underwriter.

We consider that effective from Date A, you and Entity A are functioning as two independent authorised agents of the underwriter, performing different functions related to the insurance policies issued by you.

Taxable supplies of commercial insurance policies

From Date A, you continue to issue insurance policies covering commercial buildings under your name. Although these policies are underwritten by the underwriter, we consider that each time you issue such a policy, there is a legally binding insurance contract between you and the relevant policy holder. Under section 9-5 of the GST Act, you make a taxable supply of a commercial insurance policy and the policy holder pays premiums to you, which are inclusive of GST. You incur a corresponding GST liability.

Creditable acquisitions by Entity A

As mentioned above, the insurance claims are originally submitted to you, as you issued the policies under your name. As per your agreement with the underwriter, you submit the insurance claims to the underwriter for processing and approval. Effective from Date A, the underwriter submits the approved claims to Entity A for settlement.

Entity A enters into legally binding agreements with contractors to carry out services on the buildings. Therefore, Entity A acquires the services of the contractors for a creditable purpose of settling commercial insurance claims. Therefore, paragraph 11-5(a) of the GST Act is satisfied.

The contractors supply their services for consideration. They supply the services in the course or furtherance of an enterprise carried on by them. Their supply is connected with Australia and they are either registered or required to be registered for GST. Their services are not GST-free or input taxed supplies. Therefore, where all the conditions under section 9-5 of the GST Act are satisfied, the services provided by the contractors will satisfy section 9-5 of the GST Act as taxable supplies provided to Entity A. Accordingly, paragraph 11-5(b) of the GST Act is satisfied by Entity A.

Entity A provides consideration for these services and therefore, paragraph 11-5(c) of the GST Act is satisfied. Entity A is registered for GST and therefore, paragraph 11-5(d) of the GST Act is satisfied. Consequently, when Entity A acquires services of the contractors to settle insurance claims, Entity A satisfies all the requirements of section 11-5 of the GST Act. Accordingly, the services acquired by Entity A from the contractors are creditable acquisitions. Under section 11-20 of the GST Act, Entity A is entitled to claim the relevant input tax credits.

Conclusions

As per the above analysis:

· Insurance claims funded by the underwriter through their claims pool and managed by an Australian resident entity give rise to an entitlement to input tax credits to the resident entity. It is the resident entity that enters into a legally binding contract to acquire the services. Funding of the claims by the underwriter is an internal arrangement.

· Insurance claims settled by Entity A on policies issued by you do not give rise to an entitlement to input tax credits to you.

· As Entity A is entitled to claim the relevant input tax credits, there is no need for Entity A to provide a summary to you detailing the GST paid to contractors.

· From Date A, Entity A should claim the input tax credits on insurance settlements, notwithstanding that the policies were issued by you.

· It is relevant that, effective from Date A, the invoices for the services are in the name of Entity A. Before Entity A could claim an input tax credit, Entity A should hold a valid tax invoice for the relevant acquisition.

· We cannot comment on whether you should have a formal agreement with Entity A on any issue relating to these matters.

ATO view documents

GSTR 2006/10

GSTR 2000/37

Other references (non ATO view, such as court cases)

Does Part IVA, or any other anti-avoidance provision, apply to this ruling?

No

Other relevant comments

Keywords

Taxable supplies

Creditable acquisitions

Input tax credits

Repair services

Contractors

Technical Assurance

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