Edited version of private ruling

Authorisation Number: 1011644640683

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Ruling

Subject: Decreasing Adjustment

Issue 1

Are you entitled to a decreasing adjustment under section 78-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) where you settle a claim for home warranty insurance?

Decision

You are not entitled to a decreasing adjustment where you settle a claim for home warranty insurance in circumstances where there is an entitlement to an input tax credit on the premium. This would generally be the case where a builder enters into the contract of insurance.

In limited circumstances you may be entitled to a decreasing adjustment if there is no entitlement or only a partial entitlement to an input tax credit on the premium, and all other requirements of section 78-10 of the GST Act are met. This may be the case where a home owner enters into the contract of insurance and pays the premium and neither the home owner nor the builder have an entitlement or partial entitlement to an input tax credit on the premium.

Issue 2

Are you entitled to a decreasing adjustment where you settle a claim for home warranty insurance under section 78-10 of the GST Act in circumstances where an owner builder enters into the contract of insurance?

Decision

You will be entitled to a decreasing adjustment in those circumstances, provided the owner builder has no entitlement or only a partial entitlement to an input tax credit on the premium and all other requirements of section 78-10 of the GST Act are met.

Relevant facts and circumstances

You are registered for GST.

You have commenced providing home warranty insurance.

Home warranty insurance is designed to protect home owners when the builder fails to complete work or rectify defective work.

The home warranty insurance scheme in NSW is given legislative effect through the provisions of the Home Building Act 1989 (NSW) (HB Act) and the Home Building Regulations 2004 (NSW) (HB Regulations).

Section 92 of the HB Act provides that residential building work must be insured, the contract of insurance must be in the name of the person contracted to do the work and a certificate of insurance must be provided to the other party to the contract.

A penalty for breach of the provisions is contained in Section 92. The party liable for the penalty is not specified but the drafting of section 92(1) indicates the penalty would most likely be imposed on the builder as 'a person must not do residential building work unless a contract of insurance is in force'.

The contract for insurance can be entered into by either the home builder or the home owner (Regulation 54 of HB Regulations).

The home owner is the insured party (Section 99 of HB Act).

The beneficiary of the insurance policy is the home owner (Regulation 55 of HB Regulations). The builder is not required to be a beneficiary under the contract.

The HB legislation does not specify who is liable for the insurance premium. Either the builder or the home owner can take the necessary steps to ensure a contract of insurance is in place. In most cases the builder will enter into and pay for the insurance.

Regulation 56 of the HB Regulations expands on losses that are indemnified including:

Loss or damage resulting from non completion of work because of the insolvency, death or disappearance of the contractor.

Loss or damage where beneficiary can not recover compensation from the builder.

Loss or damage from faulty design.

Section 18B of the HB Act provides information in regard to warranties for residential building work. It confirms the builder (holder of a contractor licence) provides a full warranty on the quality and timeliness of the work.

The Insurance Policy for Residential Building Work is directed at the home owner.

It commences 'The policy covers you …'

'You' is defined as 'the person on whose behalf the work is done or is to be done, and any successor in title to that person'.

Policy information and claim procedures provided for 'you', i.e. the home owner.

The insurance form asks for:

builder details, license number etc, section x includes the question 'Are you entitled to claim an Input Tax Credit on the Premium?'

owner details at Section x.

Builder Declaration:. The builder is referred to as the applicant. The builder acknowledges 'it is the initial and successive home owners who are the beneficiaries and not I/we as the applicant/builder.'

Site, construction, contract, payment, etc, details in other sections.

A "builder's copy" of the certificate of insurance is issued to the builder and an "owner's copy" to the owner.

Reasons for decision

Issue 1

An insurer has a decreasing adjustment on the settlement of an insurance claim if they satisfy the provisions of section 78-10 of the GST Act.

The only test of section 78-10 in question is paragraph 78-10(2)(b) - is there an entitlement to an input tax credit for the premium paid?

The other tests are not in question.

There will be an entitlement to an input tax credit on the premium if the recipient of the supply is making a creditable acquisition.

It is understood that the builder is the party that generally applies for and obtains the home warranty insurance for any given project.

In these circumstances it is considered likely that the builder will be entitled to an input tax credit on the acquisition of the policy.

Facts that point to the builder making a creditable acquisition and being entitled to an input tax credit are:

the builder will generally enter into the contract of insurance;

the builder is considered the applicant in the contract;

the builder will generally pay the premium;

the contract of insurance is in the builder's name;

the builder is liable for a penalty if conducting building work that is not subject to an insurance policy;

the insurance policy provides protection to the builder where they cannot meet their obligations under a residential building contract.

If a builder requested a private ruling based on these facts they would be advised that, subject to being registered for GST, they are entitled to an input tax credit.

It follows that you are not entitled to a decreasing adjustment in these circumstances.

It is understood that there may be occasions where the home owner organises the insurance and makes payment of the premium direct to you. It may be that the builder plays no part in the acquisition of the insurance other than signing the application form.

It is accepted that in these limited circumstances the home owner may be considered the recipient of the supply of the insurance policy and neither party entitled to an input tax credit on the premium.

If this is the case, and all other requirements of section 78-10 of the GST Act are met, you would be entitled to a decreasing adjustment when you settle a claim.

In these circumstances it is recommended that you obtain a declaration on the insurance application form that no input tax credit will be claimed on the premium.

Issue 2

You are entitled to a decreasing adjustment where you settle a claim for home warranty insurance if there is no entitlement or only a partial entitlement to an input tax credit on the premium and all other requirements of section 78-10 of the GST Act are met.

It is accepted that where the owner builder enters into the contract of insurance it may be a situation where there is no entitlement to an input tax credit on the premium. However this will depend on the facts of the owner builder and other parties to the supply of the insurance.

Again, it is recommended that you obtain a declaration on the insurance application form that no input tax credit will be claimed on the premium.