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Ruling

Subject: GST and Reduced Input Tax Credits for a Life Insurer

Question 1

Is the entity making reduced credit acquisitions when it acquires the services under the first agreement?

Answer

Yes, the entity is making reduced credit acquisitions when it acquires the services under the first agreement.

Question 2

Is the entity making reduced credit acquisitions when it acquires the additional services under the second agreement?

Answer

The entity is making a mixed acquisition which is partly a reduced credit acquisition when it acquires the additional services under the second agreement.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The entity conducts an insurance business by issuing insurance policies to customers.

Prior to issuing an insurance policy, an assessment of the prospective customer must be made to determine the level of cover offered and the risk associated with that cover. The assessment may necessarily require an assessment by a medical practitioner.

The First Agreement

The entity entered into a contract (the First Agreement). The introduction of the contract provides that the entity wishes to acquire new business processing services in respect of applications for risk insurance products and that the supplier has the resources and skills to perform those services.

The First Agreement explains that the supplier will provide services and provide licences and access to computer software in return for payment of the service fee.

The services that the supplier provides under the First Agreement are defined in a schedule to the First Agreement.

Schedule 1 to the First Agreement provides that the supplier will also provide equipment as specified. The hardware requirements of the system and the software running on that hardware are specified. Essentially, the system allows applications for insurance to be made via the internet and for the automation of the assessment of those applications.

The First Agreement includes service level standards for the supplier including penalties for not reaching those standards. These include:

· hardware and software availability;

· helpdesk services;

· billing;

· reports;

· other items.

The First Agreement explains that the supplier is responsible for entering the prospective customer's information into the system.

The First Agreement provides a right for the supplier to use the prospective customer's information in the course of providing the services although the entity owns the data relating to the prospective customers.

A tax invoice provided by the supplier provides a description of the services provided by reference to the number of transactions processed.

The Second Agreement

The entity entered into a contract with the supplier (the Second Agreement). Although a continuation of the First Agreement, the Second Agreement changed significantly.

In addition to the services provided under the Second Agreement, the supplier also provides medical assessment services.

A schedule to the Second Agreement provides a comprehensive list of the services to be provided by the supplier.

The supplier is required to provide all necessary computer hardware and software, including operating system software and updates and will provide services related to the ongoing operation of the computer system which allows the assessment of prospective customer's (including any medical assessments). Furthermore, the supplier is required to provide helpdesk services.

A range of specific fees in respect to the medical assessment reports are itemised in a schedule to the Second Agreement.

Although the Second Agreement states that the supplier is required to provide the entity with the medical assessment, another clause of the Second Agreement clarifies that the supplier is not responsible for the content of the reports and that they are provided by third party medical practitioners.

A tax invoice provided by the supplier to the entity itemises a range of medical services in respect of prospective customers over a period.

The system provided by the supplier under both the first and second contracts allows potential insurance customers to complete an online application via the internet. Once completed, the system then automatically determines, based on the rules set by the entity, whether that potential customer should be offered an insurance policy or if further investigation (such as a medical assessment) is required. The potential customer's information and evaluation is then provided by the supplier through the system to the entity which then issues the policy to the customer.

Reasons for decision

Question 1

Subsection 70-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that certain acquisitions which are specified in the regulations may give rise to a reduced input tax credit when they are made in relation to making financial supplies. These acquisitions are reduced credit acquisitions

Subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) provides a list of reduced credit acquisitions. Item 26 of the table in subregulation 70-5.02(2) provides a list of services which, when provided to a an insurer, are reduced credit acquisitions:

The following an insurance administration services provided for an insurer:

· maintaining policyholder records and associated accounting;

· processing of premiums and benefits;

· processing and assessing claims under policies;

· production and distribution of reports, statements and forms to policyholders, including statement processing and bulk handling;

· handling of inquiries and complaints made by policyholders;

· archives storage, retrieval and destruction services;

· processing and assessing applications;

· compliance with industry regulatory requirements, excluding taxation and auditing services;

· managing reinsurance requirements

Paragraph (g) of Item 26 in the table in subregulation 70-5.02(2) of the GST Regulations provides that acquisitions of administrative services of 'processing and assessing applications' by an insurer are reduced credit acquisitions. Therefore, if the services provided under the First Agreement are correctly categorised as 'assessing' or 'processing' services (or both), then the acquisitions by the entity under the First Agreement will be reduced credit acquisitions.

Assessing applications for a an insurer involves receiving a potential customer's application and evaluating it against certain specified criteria in order to make a conclusion about the an insurance cover to be offered to that person. The administrative service of assessing applications includes receiving the applications, manipulating the data and determining whether that application meets the pre-determined criteria set out by the insurer. The output of an assessing administrative service is a potential customer and a recommendation about the level of cover to be offered as well as other any other accompanying information which would then allow the insurer to offer the insurance to the potential customer.

The processing of applications involves the necessary administrative procedures required to receive the completed application of a potential customer (including recording them in some way, checking to see that the applications contain all necessary information), and then issuing of a policy to that person. This includes receiving payment for the policy (or finalising the payment terms and arrangements), issuing the finalised documents to the person and completing any necessary recording on the insurers data base.

A schedule to the First Agreement explains what the supplier is to provide to the entity including:

· providing access to the system and support and maintenance services for the system;

· providing the necessary software, hardware and services required to operate the system;

· providing the entity with access to a specific software program;

· the supplier obtaining the hosting of the system by a third party and ensuring that there is sufficient capacity to meet the service levels;

· providing certain people with secure access to the system in order to complete an application for insurance in an electronic format accessed via the internet;

· transmitting completed applications electronically on completion of each transaction;

· assisting the entity in customising the underwriting rules;

· customising a specific software program to accommodate the entity's underwriting rules and business rules;

· updating the rules installed in the system as required by the entity;

The First Agreement provides that the supplier will provide the equipment specified. The equipment is the software and hardware required to allow applications for insurance to be entered into the system via the internet and for the system to then assess those applications and allow the entity to then process those applications accordingly. The entity is responsible for maintenance of the system including software licensing, installation and updates.

The system allows potential an insurance customer to complete an online application via the internet. Once completed, the system then automatically determines, based on the rules set by the entity, whether that potential customer should be offered an insurance policy or if further investigation (such as a medical assessment) is required. The potential customer's information and evaluation is then provided to the entity which then issues the policy to the customer.

Given the meaning of what is 'processing of applications' for the purpose of paragraph (g) of item 26 as stated above, we are of the view that the system provided by the supplier does not process the applications. Whilst it may contribute to the initial processing of the information when the data is entered into the system, the supplier does not process the application from start to finish. For example, the supplier does not process the actual issuing of the insurance policy to a customer, nor does it receive any payment from the customer. The system provides the entity with a list of assessed prospective customers and the entity then completes the processing of the application by issuing any relevant documents, determining premiums, receiving payment, etc. Therefore, because the system does not provide certain elements of the processing of an application, we are of the view that what the entity has acquired is not processing services.

In essence, the supplies made by the supplier under the First Agreement are either services of assessing potential customers or the provision of a computer system which allows the entity to assess potential customers.

In the context of a contract for the provision of processing services in relation to account information for account providers, Goods and Services Tax Ruling, Goods and services tax: reduced credit acquisitions (GSTR 2004/1) provides guidance on when an information technology (IT) contract may be considered the provision of 'IT processing services' or merely 'IT capacity' which allows the acquirer to perform the processing. Paragraph 101 of GSTR 2004/1 states:

The distinction between an acquisition of computing time or capacity and an acquisition of processing services is one of fact and degree. To assist entities to make the distinction, the table below sets out the essential features commonly found in the two types of arrangements. The table is not intended to be used to determine whether any particular function in isolation is, or is not, a reduced credit acquisition for the purposes of item 2. It is necessary to consider all of the features of an arrangement in relation to the functions listed in the table to discern its true character. The presence or absence of a single feature is not necessarily conclusive.

The table following paragraph 101 of GSTR 2004/1 provides a list of common features which is useful in determining whether supplies are of IT capacity or of a processing service. A similar approach applied to the acquisitions by the entity under the First Agreement may assist in articulating what is provided by the supplier.

Although there are many factors which would be consistent with the provision of a computer system, when considering the nature of what has been supplied and on balance, we are of the view that the services provided by the supplier under the agreement amount to the supply of assessing services to the entity rather than merely the provision of a computer system which allows the assessment of the prospective customers.

As the system assesses the information against the criteria set by the entity, we are of the view that the supplier is providing the entity a service of assessing applications for the purpose of paragraph (g) of item 26. Accordingly, the entity is entitled to reduced input tax credits for its acquisitions under the First Agreement.

Question 2

As noted above, if the services provided under the Second Agreement are correctly categorised as 'assessing' or 'processing' services (or both), then the acquisitions by the entity under the Second Agreement will be reduced credit acquisitions under paragraph (g) of Item 26 in the table in subregulation 70-5.02(2) of the GST Regulations.

The services provided by the supplier under the Second Agreement are similar to those provided under the First Agreement with the addition of the supplier also providing medical assessments where required. As with the First Agreement, the supplier provides assessing services which are ordinarily, reduced credit acquisitions for the entity under paragraph (g) of Item 26 in the table in subregulation 70-5.02(2) of the GST Regulations.

However, consideration needs to be given to whether the additional medical assessment services provided under the Second Agreement alter the character of the supplies. Paragraph 639 of GSTR 2004/1 states that the supply of medical assessment services is not a reduced credit acquisition. However, where those services are provided in a total processing and assessing service and the medical services are not distinguished, the total service may still be a reduced credit acquisition. Example 75 in GSTR 2004/1 states:

Example 75 - application processing services

Medi-call offers Rocksteady an application assessment and processing package. The service includes:

· receipt of applications;

· scrutinising applications and making recommendations for health-checks;

· organising health checks with clients;

· engaging medical staff to carry out the checks;

· assessing and recording results;

· processing the applications; and

· passing the new client details to Rocksteady to issue policy documents.

These services are carried out for a negotiated monthly fee, which is the same regardless of the volume or type of applications received.

As Medi-call offers a single service of assessing and processing applications to Rocksteady, and does not differentiate professional medical services from administration, nor provides professional services directly to Rocksteady, the acquisition of the service is a reduced credit acquisition.

The medical assessment services provided by the supplier under the Second Agreement are not part of the total supply of assessing services provided to the entity. The medical assessment services are a separate and distinct service even though they are provided under the one contract. Paragraph 640 of GSTR 2004/1 makes a clear point of stating that the inclusion of medical services in a total assessing and processing service will be a reduced credit acquisition where the medical services are not 'differentiated' from the assessing and processing services. The provision of medical services under the Second Agreement are separately identified and itemised in the tax invoices and charged for separately.

Goods and Services Tax Ruling, Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) discusses the processes scenario where a reduced credit acquisition is acquired together with something that is not a reduced credit acquisition. Paragraph 228 of GSTR 2002/2 states:

228. If something that is listed as a reduced credit acquisition is acquired together with something that is not listed as a reduced credit acquisition then you may need to treat those parts separately. This will depend on whether the acquisition is a 'mixed acquisition' or a 'composite acquisition'. These terms are intended to be similar to the concepts of a mixed supply and a composite supply and to adopt similar principles. The difference is that these terms are used to describe an acquisition that contains parts that are reduced credit acquisitions and parts that are not.

A composite acquisition may contain subordinate parts which complement and accompany the dominant part of the acquisition and the acquisition is essentially, a single acquisition. Paragraph 250 of GSTR 2002/2 states:

250. No single factor by itself will provide the sole test as to whether a part of an acquisition is integral, ancillary or incidental to the dominant part of the acquisition. Having regard to all the circumstances, indicators that a part may be integral, ancillary or incidental include where:

· it represents a marginal proportion of the total value of the package compared to the dominant part;

· it is necessary or contributes to acquisition as a whole, but cannot be identified as the dominant part of the acquisition;

· it contributes to the proper performance of the contract to acquire the dominant part; or

· an acquirer would reasonably conclude that it does not constitute for customers an aim in itself, but is a means of better enjoying the dominant thing acquired.

The acquisition of medical assessment services is a separately identifiable and significant part of the acquisitions under the Second Agreement. These acquisitions are not integral, ancillary or incidental to the provision of the assessing services provided by the supplier.

Consequently, the acquisitions made by the entity under the Second Agreement are mixed acquisitions of assessing services (which are reduced credit acquisitions) and medical assessment services (which are not reduced credit acquisitions).

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 70-5(1) and

A New Tax System (Goods and Services Tax) Regulations 1999 70-5.02(2)

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