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Edited version of your written advice
Authorisation Number: 1051242724259
Date of advice: 30 June 2017
Ruling
Subject: Decreasing adjustment
Question 1
Does section 78-100 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply to the insurance scheme in respect of any claim payments?
Answer
Yes
Question 2
Where section 78-100 of the GST Act applies, does section 78-10 apply to provide the operator of the scheme with an entitlement to decreasing adjustments in the following claim scenarios:
a. insurance settlements paid to the insured not registered for GST as compensation for the loss suffered (cash settlements);
b. insurance settlements paid to the insured not registered for GST as reimbursement of expenses incurred by the insured, ('reimbursements)?
Answer
Yes
Question 3
Where section 78-100 of the GST Act applies, does section 78-10 apply to provide the operator of the scheme with an entitlement to decreasing adjustments for claim fulfilment services and related goods provided to the insured not registered for GST as compensation for the loss suffered?
Answer
Yes
Question 4
Where section 78-100 of the GST Act applies, does section 78-10 apply to provide the operator of the scheme with an entitlement to decreasing adjustments where the insurance relates to works undertaken at a shared location?
Answer
Yes
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 insurance scheme is established by an Australian law. The scheme provides for compensation to be payable for particular kinds of loss or damage. It is specified in the A New System (Goods and Services Tax) Regulations 1999 (GST Regulations) and is not a compulsory third party scheme.
The operator of the scheme settles a claim by:
● making a payment as compensation for the loss (cash settlement); or
● reimbursing the insured for the expenses incurred (reimbursement); or
● providing claim fulfilment services and goods (works).
The rectification works are provided through either of the following methods:
● The operator of the scheme engages and pays the supplier to undertake the works in accordance with the scope of works approved by the operator of the scheme;
● The operator of the scheme pays the supplier to undertake the works and supply the related goods in accordance with the scope of works approved by the operator of the scheme; however, the supplier is engaged by the insured.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 11-5
A New Tax System (Goods and Services Tax) Act 1999 section 78-10
A New Tax System (Goods and Services Tax) Act 1999 section 78-100
A New Tax System (Goods and Services Tax) Act 1999 section 78-105
Reasons for decisions
1. Subsection 78-100(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that subsection 38-60(1) and Division 78 apply in relation to a payment or supply made in settlement of a claim for compensation under statutory compensation scheme in the same way that they apply to a payment or supply made in settlement of a claim under an insurance policy.
The insurance scheme is established by an Australian law. The scheme provides for compensation to be payable for particular kinds of loss or damage. It is specified in the A New System (Goods and Services Tax) Regulations 1999 (GST Regulations) and is not a compulsory third party scheme. Therefore, the insurance scheme is a statutory compensation scheme.
Accordingly, section 78-100 of the GST Act applies to the insurance scheme in respect of any claim payments made.
2. Section 78-10 of the GST Act provides that an insurer has a decreasing adjustment if, in settlement of a claim under an insurance policy, the insurer:
a. makes a payment of money; or
b. makes a supply; or
c. makes both a payment of money and a supply.
Section 78-10 of the GST Act applies only if:
(a) the supply of the insurance policy by the insurer was solely or partly a taxable supply; and
(b) either:
a. there was no entitlement to an input tax credit for the premium paid in relation to the period during which the event giving rise to the claim happened; or
b. there was an entitlement to such an input tax credit, but the amount of the input tax credit was less than the GST payable by the insurer for the taxable supply; and
(c) the insurer settles the claim for a creditable purpose; and
(d) the insurer is registered or required to be registered; and
(e) the settlement does not relate solely to one or more non-creditable insurance events.
You submitted that the supply of insurance under the insurance scheme is a taxable supply. The operator of the scheme is registered for GST and the settlement of the claim is for a creditable purpose. Furthermore, the settlement does not relate to non-creditable insurance events.
Therefore, section 78-10 of the GST Act applies to the operator of the scheme when it makes a cash settlement payment or a reimbursement in settling a claim. Accordingly, the operator of the scheme is entitled to a decreasing adjustment when the insured is not registered for GST
3. Division 11 of the GST Act applies if an insurer makes a creditable acquisition from a supplier in settlement of a claim. A supply must be made to the insurer for the insurer to have a creditable acquisition satisfying the requirements of Division 11.
An insurer may arrange with a supplier to provide goods, services or anything else to the insured or a third party. We consider that the supplier is making a supply to the insurer if the 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.
There is a strong indication that a binding obligation exists between the supplier and the insurer 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.
You advised that the operator of the scheme selects, instructs and authorises the supplier to undertake works. The operator of the scheme also controls payments for work performed as payment is only released by the operator of the scheme once the relevant works have been performed adequately and in accordance with the scope of work previously approved by the operator of the scheme. However, the relevant contract for the works is between the insured and the supplier under which the insured is liable to pay for the works.
Therefore, we consider that the operator of the scheme does not make an acquisition for the purpose of Division 11 of the GST Act and thus, is not entitled to an input tax credit for the works. However, the operator of the scheme has a decreasing adjustment under section 78-10 of the GST Act when it makes a payment for the works.
4. You advised that there are claims in relation to works performed on shared locations; and where the owner of a share engages the supplier to undertake the works, the owner is the insured.
Provided the insured has no entitlement to input tax credits, section 78-10 of the GST Act applies when the operator of the scheme settles the claim by making a cash settlement payment to the insured, or reimbursing the insured for the cost of the works, or making a payment to the supplier for the works. Accordingly, the operator of the scheme would be entitled to make a decreasing adjustment.
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