Edited version of your written advice

Authorisation Number: 1051333806108

Date of advice: 1 February 2018

Ruling

Subject: Insurance - adjustments - other

Question 1

Is the payment of the insurance refund either to the Authority or direct to eligible policyholders a change in consideration for the supply of the insurance?

Answer

Yes, the payment of the refunds either through the Authority or direct to eligible policyholders represents a change in consideration for the supply of the insurance.

Question 2

Does the change in consideration result in the insurer being entitled to a decreasing adjustment?

Answer

Yes, the change in consideration results in the insurer being entitled to a decreasing adjustment.

Question 3

Is the insurer’s decreasing adjustment attributable to the tax period in which the insurer becomes aware of the adjustment?

Answer

No, if the insurer’s decreasing adjustment is more than $75, it is attributable to the tax period in which the insurer becomes aware of the adjustment and holds an adjustment note. Please see the response to Question 4.

If the insurer’s decreasing adjustment does not exceed $75, it is attributable to the tax period in which the insurer becomes aware of the adjustment.

Question 4

Can the Commissioner issue a written determination that the insurer is not required to hold adjustment notes and exercise his discretion to treat the documents issued by the Authority to the insured as adjustment notes?

Answer

No, we consider the circumstances described would not warrant issuing such a determination. However, the Commissioner may consider treating as an adjustment note a particular document that is not an adjustment note.

For the Commissioner to use his discretion to treat the documents issued by the Authority as adjustment note, the documents should show details of the insurer. The Authority is merely acting as a conduit for channelling the payment to the policy holders.

Question 5

Does the insurer make a creditable acquisition of administration services from the Authority for which the insurer is entitled to an input tax credit?

Answer

Yes, the insurer makes a creditable acquisition of administration services from the Authority for which the insurer is entitled to an input tax credit.

Question 6

If the answer to Question 5 is yes, can the insurer attribute an input tax credit for the administration services to the tax period in which the insurer holds a tax invoice for these services?

Answer

Yes, the insurer can attribute an input tax credit for the administration services to the tax period in which the insurer holds a tax invoice for these services.

Question 7

Will the amounts under $XX and the unclaimed money not refunded to eligible policyholders give rise to a further change of consideration for the supply of insurance which give rise to an increasing adjustment for the insurers when the insurer becomes aware of the adjustment (the tax period in which the Authority notifies the insurer)?

Answer

Yes, the insurer has an increasing adjustment on becoming aware of the amounts under $xx and the unclaimed money not refunded to eligible policyholders as this results in a change in consideration for the supply of insurance.

Relevant facts and circumstances

Details of the arrangements that give rise to the insurance refund to the extent that they are relevant to the GST position.

● The Bill XXXX was passed on the year XXXX. The purpose of the Bill was to reform the insurance scheme. The new scheme commenced on xxxx and will result in lower premiums.

● The relevant Act provides that “the Guidelines are to make provision for the adjustment of premiums to ensure that unearned premium surplus attributable to policies in force immediately before the start of the transition period is refunded to the eligible policyholders or is applied for the purposes of an appropriate reduction in premiums payable for policies issued during the transition period”. The effect of which is to refund, to the policyholder, part of the premium on insurance taken out in the 12 months prior to XXXX.

● The arrangement for administration of the refunds are set out in the Guidelines and include the following:

● The Insurer will correctly identify all eligible policyholders (Eligible Policyholders) and calculate the Gross Refunds.

● The Insurer will forward the total Net Refunds to the Authority in two tranches. One on XXXX that covers most of the refunds and a further payment on XXXX to cover refunds to eligible policyholders who as at the reporting date had not paid their insurance premium.

● From the time that the Net Refund is forwarded to the Authority the Eligible Policyholder has a right or entitlement to the funds which are held by the Authority for disbursement to the Eligible Policyholder. The insurer has no right or entitlement to the funds from the time that payment is made to the Authority.

● The Authority will use the services of another entity to administer the refunds to Eligible Policyholders.

● The other entity (on behalf of the Authority), will deduct an administrative cost (including GST) from each policy for the administrative costs of corresponding with policyholders, postage, answering enquiries, developing systems for the administration of the refunds, establishing accounts and processing the refunds.

● After administrative costs are deducted, the other entity will apply the minimum refund entitlement threshold of $xx (including GST) costs. No premium refund will be payable to an Eligible Policyholder where the amount of the refund, after deducting the Insurer and the other entity administration costs, is less than the minimum refund entitlement threshold of $xx.

● The Authority will apply the amounts below the minimum refund entitlement threshold and any unclaimed money for the purpose of a reduction in the Fund Levies payable for policies issued during the transition period.

● In accordance with the Guidelines, the insurer will manage and directly administer any premium refunds relating to certain insurance policies.

● Refunds will be paid to Eligible Policyholders who will generally be the policyholder that originally paid the premium to the insurer and claimed any input tax credit (where applicable).

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 Division 19

A New Tax System (Goods and Services Tax) Act 1999 section 19-10

A New Tax System (Goods and Services Tax) Act 1999 paragraph 19-10(1)(b)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 19-10(2)(b)

A New Tax System (Goods and Services Tax) Act 1999 section 19-40

A New Tax System (Goods and Services Tax) Act 1999 section 19-55

A New Tax System (Goods and Services Tax) Act 1999 section 19-70

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-10(3)

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-20(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-20(3)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 29-75(2)(b)

Reasons for decision

All references are to the A New System (Goods and Services Tax) Act 1999 (GST Act), unless otherwise stated.

Question 1

Summary

Refunds paid to Eligible Policyholders represent a change in the consideration for the supply of insurance.

Detailed reasoning

The question concerns whether the payment of the refunds to Eligible Policyholders in respect of the unearned premium surplus gives rise to an adjustment event, being a change in the consideration for the insurance coverage, for which the insurers are entitled to claim a decreasing adjustment.

The law concerning Adjustment Events is contained in Division 19 of the GST Act, and further articulated in GSTR 2000/19 Goods and services tax: making adjustments under Division 19 for adjustment events. In particular, section 19-10(1)(b) defines an adjustment event to include:

“any event which has the effect of … changing the consideration for a supply or acquisition”.

Section 19-10(2)(b) gives as an example of an adjustment event,

“a change to the previously agreed consideration for a supply or acquisition, whether due to the offer of a discount or otherwise”.

Paragraph 18 of GSTR 2000/19 confirms:

“Where the consideration for a supply or acquisition changes for any reason you have an adjustment event. … Whether a payment or allowance changes the consideration for a supply will depend on the circumstances”.

Relevant provisions of the Act and the Guidelines make it clear that the refunds to which eligible policyholders are entitled reflect an “adjustment of premiums to ensure that unearned premium surplus attributable to policies in force immediately before the start of the transition period is refunded to the policyholders”. As such, and supported by the manner in which they are calculated, it is apparent that the refunds have a clear and sufficient nexus to the initial supply of insurance so as to constitute a reduction in the consideration (ie. premiums) paid.

As such, we consider the payment of refunds to eligible policyholders represents a reduction in the consideration paid for the supply of insurance.

Further, the fact that the payment of many of the refunds are administered and physically paid to eligible policyholders by the Authority/another entity does not change or undermine the nature of these payments as adjustments to the price of the original supplies of insurance. The Authority/another entity are merely acting as a conduit for channelling the payment to the recipients. (Refer paragraphs 43 and 44 of GSTR 2000/19).

Question 2

Summary

Insurer is entitled to claim a decreasing adjustment in respect of the refunds paid.

Detailed reasoning

Please see the response to Question 1.

On the basis that the refunds of insurance premiums represent an adjustment event, the insurer will have an adjustment for their supplies of insurance under section 19-40, and specifically a decreasing adjustment under section 19-55.

Question 3

Summary

No, if the insurer’s decreasing adjustment is more than $75, it is attributable to the tax period in which the insurer becomes aware of the adjustment and holds an adjustment note. Please see the response to Question 4.

If the insurer’s decreasing adjustment does not exceed $75, it is attributable to the tax period in which the insurer becomes aware of the adjustment.

Detailed reasoning

Under section 29-20(1), the adjustment is attributable to the tax period in which an entity becomes aware of the adjustment. If the decreasing adjustment does not exceed $75, the insurer is not required to issue an adjustment note and therefore is entitled to a decreasing adjustment when they “become aware” of the adjustment.

Where the amount of the decreasing adjustment is more than $75, the decreasing adjustment is attributable to the tax period in which an entity holds an adjustment note (section 29-20(3)). Please see the response to Question 4 regarding exercising the Commissioner’s discretion to treat a document as an adjustment note.

Question 4

Summary

No, we consider the circumstances described would not warrant issuing such a determination. However, the Commissioner may consider treating as an adjustment note a particular document that is not an adjustment note.

For the Commissioner to use his discretion to treat the document issued by the Authority as adjustment note, the document should show details of the insurer. The Authority is merely acting as a conduit for channelling the payment to the policy holders.

Detailed reasoning

Pursuant to subsection 29-75(2)(b), if the supplier of the taxable supply has issued a tax invoice and the supplier becomes aware of an adjustment, the supplier must give to the recipient an adjustment note within 28 days after becoming aware of the fact.

In the facts of this case, the insurer will correctly identify all eligible policyholders and calculate the gross refunds. Under these circumstances, the insurer will be able to issue an adjustment note. Appendix 2 to GSTR 2013/2 discusses the circumstances in which the requirement to hold an adjustment note under subsection 29-20(3) does not apply. We consider the circumstances described in this case would not warrant a determination. A determination is made by a legislative instrument. The making of a legislative instrument involves a timely and complex process requiring tabling in parliament.

However, we may consider whether the Commissioner can use his discretion to treat a document issued by the insurer as an adjustment note.

For the Commissioner to use his discretion to treat the document issued by the Authority as adjustment note, the document should show details of the insurer. The Authority is merely acting as a conduit for channelling the payment to the policy holders. The Authority is not the entity that issued the insurance policy or issued the tax invoice to the eligible policyholders. The document issued by the Authority without identifying the insurer will not be sufficient for the Commissioner to use his discretion to treat the document as an adjustment note.

Question 5

Summary

Yes, the insurer makes a creditable acquisition of administration services from the Authority for which the insurer is entitled to an input tax credit.

Detailed reasoning

The Authority is making a supply of administrative services to the insurer. The insurer is making a creditable acquisition as the Authority is making a taxable supply to the insurer and other requirements of section 11-5 will be met. Accordingly, the insurer is entitled to an input tax credit.

Question 6

Summary

Yes, the insurer can attribute an input tax credit for the administration services to the tax period in which the insurer holds a tax invoice for these services.

Detailed reasoning

Under subsection 29-10(3) an entity must hold a tax invoice for a creditable acquisition when they lodge a BAS for the tax period to which the input tax credit on the acquisition would be attributable.

The insurer can attribute an input tax credit for the administration services to the tax period in which the insurer holds a tax invoice for these services.

Question 7

Summary

Yes, the insurer has an increasing adjustment on becoming aware of the amounts under $xx and the unclaimed money not refunded to eligible policyholders as this results in a change in consideration for the supply of insurance.

Detailed reasoning

The insurer would have made the decreasing adjustments as explained in the responses to Questions 1 and 2. Amounts under $xx and unclaimed money not refunded to eligible policyholders will be returned to the insurer.

These amounts returned to the insurer will result in a change in consideration for the supply of insurance. The insurer will have an increasing adjustment on becoming aware of this.

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