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Edited version of your written advice
Authorisation Number: 1012782348567
Ruling
Subject: GST and payment of worker's compensation
Question
Should workers compensation payments to a sub-contractor include goods and services tax (GST)?
Answer
No. Workers compensation payments to a sub-contractor should not include GST.
This ruling applies for the following periods:
Not applicable
The scheme commences on:
Not applicable
Relevant facts and circumstances
• You are registered for goods and services tax (GST) and carry on an enterprise of farming.
• You hired a sub-contractor who provided a fortnightly tax invoice including GST for the services rendered to you.
• The sub-contractor had an accident that has been deemed by your insurer to be covered by workers compensation.
• The insurer is reimbursing you with the gross amount excluding GST that would have been earned by the sub-contractor had he not had the accident.
• The workers compensation will be paid to the sub-contractor for 12 months for loss of weekly income due to the accident he had while proving the services to you.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 - Section 9-5, 9-10
Reasons for decision
Section 9-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines the meaning of a supply. A supply is any form of supply whatsoever, but specially includes:
(a) a supply of goods;
(b) a supply of services;
(c) a provision of advice or information;
(d) a grant, assignment or surrender of real property;
(e) a creation, grant, transfer, assignment or surrender of any right;
(f) a financial supply;
(g) an entry into, or release from an obligation:
(i) to do anything
(ii) to refrain from an act: or
(iii) to tolerate an act or situation;
(h) any combination of any 2 or more of the matters referred to in paragraph (a) to (g)
Generally, an injured worker has rights to damages under workers compensation laws in the event that they suffer an injury arising from, or in the nature of, their employment. A workers compensation payment is to recompense the injured worker for these damages. An entity on receipt of a workers compensation payment is giving up the right to damages. Accordingly there is a supply under the GST legislation.
GST is payable on taxable supplies. An entity makes a taxable supply if it makes the supply for consideration; the supply is made in the course or furtherance of an enterprise that the entity carries on; the supply is connected with Australia; and the entity is registered or required to be registered.
However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
Under the GST law, payments to a third party by an insured entity are not treated as consideration for a supply to the extent that the payment is to discharge a liability of the insured entity to the third party and the payment is for settlement of a claim under an insurance policy.
As the payments made to the sub-contractor are to compensate the sub-contractor for not working due to his injury and are covered under an insurance policy, the workers compensation payments are not treated as consideration for a supply. Therefore, there are no GST implications in respect of the payments made to the sub-contractor under the workers compensation insurance.
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