Edited version of private ruling

Authorisation Number: 1011854009636

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Ruling

Subject: Decreasing Adjustment in relation to Health Insurance Policies

You are seeking the Commissioner's confirmation that the health fund is entitled to decreasing adjustments pursuant to section 78-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to its taxable supplies of overseas visitor's health insurance policies.

Question 1

Is a health fund entitled to a decreasing adjustment pursuant to section 78-10 of the GST Act equal to 1/11th of the settlement costs on its taxable supplies of overseas visitor's health insurance policies, on the basis that the overseas visitor is the recipient of the insurance policy in both of the following scenarios?

(a) Where the premium is paid by the overseas visitor; or

(b) Where the premium is paid partially or fully by a third party (such as the overseas visitor's employer).

Answer

Provided the requirements of section 78-10 of the GST Act are satisfied, a health fund will be entitled to a decreasing adjustment in relation to the overseas visitor's health insurance policies, irrespective of whether the premium is paid by the overseas visitor or is paid partially or fully by a third party.

The health fund will be entitled to a decreasing adjustment in accordance with section 78-15 of the GST Act.

Question 2

Will the facts in this case be sufficient to substantiate the health funds' entitlement to the above mentioned decreasing adjustments - that is, due to the prevalent facts will the Commissioner confirm that no further enquiries are required to be made by the health fund?

Answer

A health fund will only be entitled to a decreasing adjustment pursuant to section 78-10 of the GST Act if the requirements of Subdivision 78-A of the GST Act are satisfied.

A health fund cannot assume that no input tax credits will be claimed on their policies. The insurer must ask the question of the insured and receive a response in order to satisfy the requirements of the GST Act.

Relevant facts and circumstances

The health fund is registered for GST.

The health fund, a private health insurer registered under the Private Health Insurance Act 2007 as a health related business, underwrites health insurance policies designed especially for Temporary Residents working in Australia (overseas visitors).

The health insurance plans are suitable for people applying for working visas, and for holders of temporary working visas.

All plans comply with the Department of Immigration and Citizenship regulations regarding minimum levels of cover for 457 and other specified 400 series visas.

The health insurance policy is supplied to the overseas visitor who is named as the insured party in the Membership Certificate.

As the insured party, the overseas visitor is liable to pay the premium which is inclusive of GST.

The overseas visitor may enter into an agreement with a third party (such as their employer) that the third party will pay the premium on their behalf.

While the health fund's claim form includes questions about GST it does not specifically ask about an entitlement to an input tax credit.

Private health insurance is governed by the Private Health Insurance Act 2007.

Section 121-30 of the Private Health Insurance Act 2007 excludes from health insurance business 'business of a kind specified in the Business Rules'. The section states:

121-30 Exception: insurance business excluded by the Private Health Insurance (Health Insurance Business) Rules

Despite section 121-1, *health insurance business does not include a business of a kind that the Private Health Insurance (Health Insurance Business) Rules state not to be a health insurance business.

Rules 17 and 18 of the Private Health Insurance (Health Insurance Business) Rules established under the Private Health Insurance Act 2007 (Health Insurance Business Rules) relevantly state:

17. Insurance that is not health insurance business - certain overseas visitors

(1) Subject to this rule, for section 121-30 of the Act, the business of undertaking liability, by way of insurance, or an arrangement to make payments under an employee health benefits scheme, is not health insurance business if the insurance covers:

(a) a matter referred to in subsection 121-1(2) of the Act; and

(b) a person who, at the time of entering into the relevant contract of insurance, is or expects to be, temporarily present in Australia and who:

(i) is not, or will not be, an eligible person; or

(ii) is an eligible person by reason only of being treated as an eligible person under subsection 7(2) of the Health Insurance Act 1973; and

(iii) is not an overseas student or specified temporary visa holder who has insurance provided by a private health insurer in the circumstances referred to in rule 18.

Note 'Overseas student' and 'specified temporary visa holder' are defined in rule 18.

(2) Despite subrule (1), during the period from the commencement of these Rules until 1 July 2008, the business referred to in that subrule is health insurance business if it is conducted by a private health insurer.

18. Overseas students and specified temporary visa holders

(1) For section 121-30 of the Act, the business of undertaking liability, by way of insurance, with respect to a matter referred to in subsection 121-1 (2) of the Act is not health insurance business if:

(a) the liability is undertaken by a private health insurer under:

(i) an overseas student health insurance contract; or

(ii) a specified temporary visa holder health insurance contract; and

(b) the insurer includes the business in a health benefits fund conducted by the insurer.

(2) In this rule:

overseas student health insurance contract and specified temporary visa holder health insurance contract each means an insurance policy made in accordance with a written agreement between a private health insurer and the Commonwealth that allows the private health insurer to pay benefits in respect of the whole or part of the fees and charges incurred by an overseas student or a specified temporary visa holder, as the case may be, or by a dependant of the student or visa holder, in relation to the provision in Australia of any or all of the following:

(a) medical, surgical, diagnostic, nursing, dental, chiropody, chiropractic, eye therapy, occupational therapy, physiotherapy, speech therapy or similar services or treatment;

(b) services involving the supply, alteration, maintenance or repair of hearing aids, spectacles, contact lenses, artificial teeth, eyes or limbs (including parts of teeth or limbs) or other medical, surgical, prosthetic or dental aids, equipment or appliances;

(c) drugs or medicinal preparations;

(d) ambulance services;

(e) services by an attendant of a person who is sick or disabled;

(f) professional services for which medicare benefits would otherwise be payable under the Health Insurance Act 1973;

(g) hospital treatment.

specified temporary visa holder means a person, other than an overseas student, who is the holder of, or an applicant for, a temporary visa that includes a condition under the Migration Regulations 1994 requiring the person to maintain adequate arrangements for health insurance while the holder is in Australia.

student visa has the meaning given by subsection 5 (1) of the Migration Act 1958.

The Health Insurance Business Rules define an eligible person as:

eligible person has the same meaning as in subsection 3 (1) of the Health Insurance Act 1973 and includes a person who is treated as an eligible person under sections 6, 6A or 7 of that Act.

Section 3(1) of the Health Insurance Act 1973 defines an eligible person to mean an Australian resident or an eligible overseas representative (mainly a diplomatic or consular head, or staff, of another country and their families.)

The overseas visitors, who are the insured parties under the plans in this private ruling request, are not eligible persons for the purposes of the Health Insurance Business Rules.

Question 1

Summary

Provided the requirements of section 78-10 of the GST Act are satisfied, a health fund will be entitled to a decreasing adjustment in relation to the overseas visitor's health insurance policies, irrespective of whether the premium is paid by the overseas visitor or is paid partially or fully by a third party.

A health fund will be entitled to a decreasing adjustment in accordance with section 78-15 of the GST Act.

Detailed reasoning

Generally, supplies of health insurance policies will be GST-free. However, the Health Insurance Business Rules can exclude certain insurance from being health insurance business. Such insurance will not be GST-free under section 38-55 of the GST Act. Where the health insurance policy is a taxable supply, section 78-10 of the GST Act, which relates to decreasing adjustments for settlements of insurance claims, may apply.

However, there is no entitlement to a decreasing adjustment under section 78-10 of the GST Act if the insurer is entitled to an input tax credit under section 11-20 of the GST Act for the settlement of the insurance claim.

Section 78-10 of the GST Act provides for a decreasing adjustment to the portion of the policy that is a taxable supply. Section 78-10 - Decreasing adjustments for settlements of insurance claims states as follows:

(1) 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.

(2) However, this section only applies if:

(a) The supply of the *insurance policy by the insurer was solely or partly a *taxable supply; and

(b) Either:

(i) 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

(ii) 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.

(2A) In working out the amount of the input tax credit for the purposes of subparagraph (2)(b)(ii), disregard section 131-40 and 131-50 (which are about amounts of input tax credits under the annual apportionment rules).

(3) An event is a non-creditable event if the supply of an *insurance policy would not be a *taxable supply if it were only an insurance policy against loss, damage, injury or risk that relates to that event happening.

The first requirement to be satisfied for the section to apply is that the supply of the insurance policy by the insurer must be solely or partly a taxable supply.

Taxable Supply

The requirements that must be satisfied for a supply to be a taxable supply are set out under section 9-5 of the GST Act. The section provides that an entity makes a taxable supply if:

· the entity 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 for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In supplying health insurance policies to foreign nationals temporarily residing in Australia, a health fund will satisfy the positive requirements of section 9-5 of the GST Act.

In addition, there are no circumstances which would make the supplies input taxed under Division 40, of the GST Act.

However, section 38-55 of the GST Act provides that private health insurance is GST-free. Private health insurance is defined under section 195-1 of the GST Act to mean insurance provided under a contract of insurance that was entered into by a private health insurer (within the meaning of the Private Health Insurance Act 2007) in the course of carrying on health insurance business (within the meaning of Division 121 of that Act).

Private health insurance is governed by the Private Health Insurance Act 2007. Section 121-30 of the Private Health Insurance Act 2007 excludes health insurance business of a kind that the Health Insurance Business Rules state not to be a health insurance business.

Health Insurance Business Rules 17 and 18 provide that policies provided to certain overseas visitors, overseas students and specified temporary visa holders are not health insurance business.

Because the provision of the above health insurance policies are not health insurance business under the Health Insurance Business Rules, the health insurance supplies, which are the subject of this private ruling request, are not GST-free under subsection 38-55(1) of the GST Act but rather taxable supplies under section 9-5 of the GST Act.

Entitlement to an input tax credits

Paragraph 78-10(2)(b) of the GST Act provides that the section (section 78-10) only applies if there was no entitlement to an input tax credit for the premium paid or 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.

Goods and Services Tax Ruling GSTR 2006/10 GST: insurance settlements and entitlement to input tax credits (GSTR 2006/10) discusses the interaction between Division 11 and Division 78 of the GST Act where a payment of money or a supply is made by an insurer in the course of settling a claim under an insurance policy. Paragraph 91 of GSTR 2006/10, in relation to cash settlements, provides:

91. If the insurer settles the insurance claim by way of a cash payment to the insured or a third party, the insurer has not made a creditable acquisition and is not entitled to an input tax credit. However, the insurer will be entitled to a decreasing adjustment under Division 78 where the insured does not have an entitlement to a full input tax credit on the premium paid to the insurer.

Where the premium is paid by the overseas visitor the activity is private and not part of an enterprise that the overseas visitor carries on. We agree that, in these circumstances, there will be no entitlement to an input tax credit for the premium paid.

Where the premium is paid partially or fully by a third party (such as the overseas visitor's prospective employer), the third party will be entitled to an input tax credit for the premium paid if they satisfy section 11-20 of the GST Act.

Section 11-20 of the GST Act states that an entity is entitled to an input tax credit for any creditable acquisition that it makes.

Section11-5 of the GST Act provides that an entity makes a creditable acquisition if:

· it acquires anything solely or partly for a creditable purpose

· the supply of the thing to the entity is a taxable supply

· the entity provides, or is liable to provide, consideration for the supply, and

· the entity is registered, or required to be registered for GST.

To be entitled to claim input tax credits all of the above requirements must be satisfied.

Goods and Services Tax Ruling GSTR 2006/9 GST: Supplies (GSTR 2006/9) discusses the general context of the GST Act and outlines how this informs the meaning of the term 'supply' in the GST Act including its relevance to input tax credit entitlements.

Specifically, paragraph 183 of GSTR 2006/9 states:

If you provide or are liable to provide consideration for a supply, but you are not the recipient of the supply, you are referred to in this Ruling as a 'third party payer'. As a third party payer you do not make a creditable acquisition in relation to your payment because the supply is not made to you as required by section 11-5. Making a payment for a supply that is made to another entity is not sufficient to make you the recipient of that supply.

The health insurance contracts are supplied to and acquired by the overseas visitor.

Where the premium is paid partially or fully by a third party, the third party will generally not be entitled to an input tax credit for the premium paid because they do not satisfy section 11-5 of the GST Act.

Reimbursement of the insurance premium to an employee

Under paragraph 111-5(1)(ab) of the GST Act an employer may be entitled to an input tax credit if it reimburses an employee for an expense that the employee incurs, and the reimbursement constitutes an expense payment benefit. The reimbursement is treated as consideration for an acquisition that the employer makes from the employee.

Subsection 111-5(2) of the GST Act provides that the fact that the supply to the employer is not a taxable supply does not stop the acquisition being a creditable acquisition. A requirement under subsection 111-5(3) of the GST Act, is that the supply to the employee must have been a taxable supply. The acquisition is not a creditable acquisition to the extent (if any) that the employee or their associate, agent, officer or partner, is entitled to an input tax credit for acquiring the thing acquired in incurring the expense.

Draft Goods and Services Tax Ruling GSTR 2011/D1 GST: tax invoices provides, at paragraphs 152 and 153, as follows:

152. Division 111 has special rules covering the situation where you reimburse an employee, an officer of a company or a partner for an expense they incur for an acquisition directly related to that position.

153. Providing the requirements of the Division are met, the reimbursement is treated as consideration for an acquisition you make from that person. This acquisition may be a creditable acquisition for you notwithstanding that the supply to you is not a taxable supply. You may claim the input tax credit for a creditable acquisition if you hold the tax invoice that was issued to the person you reimbursed. The tax invoice may identify that person and not you as the recipient of the taxable supply.

The requirement to obtain the relevant tax invoice provides a link between the entitlement to an input tax credit and the health insurance premium paid. Goods and Services Tax Ruling GSTR 2001/3 GST and how it applies to supplies of fringe benefits provides at paragraph 90:

The reimbursement needs to be made for a particular expense to satisfy the requirements of Division 111. Employers and employees need to agree or have some understanding or arrangement as to which types of expense are being reimbursed so that a particular acquisition is involved. …

Section 78-10 of the GST Act only applies if there is no entitlement or only a partial 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 (paragraph 78-10(2)(b) of the GST Act).

In our view, by reimbursing an employee for the premium paid on an overseas visitor's health insurance policy, the employer becomes entitled to an input tax credit in relation to the premium paid.

Therefore, where an employer reimburses an employee the cost of an overseas visitor's health insurance policy, the employer may be entitled to an input tax credit. In these circumstances the insurer will not be entitled to a decreasing adjustment under Division 78 of the GST Act.

The insurer settles the claim for a *creditable purpose

Because the settlements of the claims are in the course of the insurance business of making taxable supplies of insurance policies and the settlement does not relate to making input taxed supplies, the insurer, is settling the claims for a creditable purpose.

The insurer is *registered, or required to be registered

As a matter of fact, the health fund is registered for GST.

Therefore, provided the requirements of section 78-10 of the GST Act are satisfied, a health fund will be entitled to a decreasing adjustment in relation to the overseas visitor's health insurance policies, irrespective of whether the premium is paid by the overseas visitor or is paid partially or fully by a third party.

Additional Information

Please note, GSTR 2011/D1 is a draft for public comment. It represents the Commissioner's preliminary view about the way the law applies.

If the final ruling differs materially from the draft, the final ruling will prevail. This may effect the GST treatment of the issues in this advice. Therefore, we recommend that you monitor our website for the release of the final ruling and consider its effect on your issues.

Question 2

Summary

A health fund will only be entitled to a decreasing adjustment pursuant to section 78-10 of the GST Act provided the requirements of Subdivision 78-A of the GST Act are satisfied.

Detailed reasoning

Section 78-10 of the GST Act only applies if all of the requirements of subsection 78-10(2) of the GST Act are satisfied.

Paragraph 78-10(2)(b) requires the insurer to be satisfied that:

Either:

(i) 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

(ii) 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

Paragraph 24 of GSTR 2006/10 provides:

Where the insured does not inform the insurer of its entitlement to an input tax credit on its premiums, or understates its entitlement, the payment or supply by the insurer is treated as consideration for a supply by the insured to the extent of the understatement. The supply made by the insured is treated as a taxable supply whether or not the entity is registered or required to be registered, at the time of the settlement or at the time of the payment or supply by the insurer.

All health funds need to ask the question of the insured as to whether there is an entitlement to an input tax credit for the premium.

The health fund's claim form questions are not sufficient to determine whether the insured or a third party has an entitlement to claim part or all of the GST paid as an input tax credit. An employer may be entitled to an input tax credit where the employer reimburses an employee for the cost of an overseas visitor's health insurance policy.

A health fund cannot assume that no input tax credits will be claimed on their policies. The insurer must ask the question of the insured and receive a response in order to satisfy the requirements of the GST Act.

A declaration that includes questions to enable a health fund to determine if the claimant or another party paying for a plan such as a Sponsor/Employer has an entitlement to claim part or all of the GST paid as an input tax credit will be sufficient to satisfy this legislative requirement.