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Ruling

Subject: GST treatment of insurance claim amounts and co-payments

Question 1

What is the GST treatment of claim amounts and co-payments received by stores you own?

Answer

The amounts received as claim amounts are consideration for a supply you make to the insurer. This is the service of providing relevant items or services to the customer/insured. This supply is only a taxable supply to the extent that the supply made to the customer is taxable, because it is a supply of the type considered by section 38-60 of the GST Act.

The amounts received as co-payments are consideration for a supply you make to the customer. This is the supply of the actual goods or services. The GST treatment of this supply depends on whether the actual goods or services are taxable or GST-free.

You also make a separate supply of services to the insurer by distributing the policies, and the commission is consideration for this supply. You currently treat this amount as taxable, and these amounts are not in question as part of this private ruling.

Question 2

What is the GST treatment of claim amounts and co-payments for your affiliated stores?

Answer

The claim amounts on-paid by you to the affiliated stores are consideration for a supply the affiliated store makes to the insurer. The affiliated store makes a supply of the service of providing relevant items or services to the customer/insured. This supply is only a taxable supply to the extent that the supply made to the customer is taxable, because it is a supply of the type considered by section 38-60 of the GST Act.

The co-payments paid by the customer are consideration for a supply made by the affiliated store to the customer. This is the supply of the actual goods or services. The GST treatment of this supply depends on whether the actual goods or services are taxable or GST-free.

Relevant facts and circumstances

You provide goods to consumers in Australia.

You are registered for GST.

You enter into an insurance administration agreement with an insurer, where you are authorised to provide distribution services in accordance with the agreement.

Distribution services means the marketing and promotion of insurance contracts, in stores nominated by you, on the insurer's behalf.

'Insurance contracts' refers to insurance contracts issued by the insurer to your customers that provide repair or replacement of covered products, and renewals of such contracts.

Your agreement with the insurer appoints you as the exclusive Authorised Representative to provide the distribution services in accordance with the agreement. 'Authorised Representative' means a person or corporation appointed by the insurer to act on its behalf in relation to the provision of financial services in accordance with the Corporations Act.

Your agreement specifies that you are an agent of the insurer (and not in any way a partner, employee or joint venturer).

Under the agreement you do not have authority to make any agreements with any persons on behalf of the insurer except as specifically authorised under the agreement.

Your agreement with the insurer allows you to nominate any individual, who satisfies the training and competency requirements prescribed by the insurer, to be appointed a sub-Authorised Representative. The insurer agrees not to unreasonably withhold its written consent to such appointment.

Where the insurer gives you consent to sub-contract, this does not relieve you of your obligations under your agreement with the insurer.

You have entered into an arrangement with affiliated stores under a Deed of Authorisation of Sub-Authorised Representative (the deed).

Where you cease to be an authorised representative of the insurer your deed immediately terminates and the appointment of the representatives is revoked.

Under the deed, and as an agent of the insurer, you engage your employees in the distribution services on behalf of the insurer at your retail stores. As an authorised representative of the insurer, you also authorise affiliated stores to provide distribution services.

Insurance policies are therefore sold either through a store you own or through an affiliated store.

You are remunerated by way of commission for each policy sold to a customer. You treat the commission as consideration for a taxable supply. Under the sub-authorisation arrangement deed you agree to pay to the franchisee a commission for their provision of distribution services. The commission payments are treated as taxable and do not form part of your private ruling request.

Customers who take up an insurance policy are able to make a claim in the event that relevant products are damaged, lost or stolen. They make the claim by contacting the insurer.

As outlined in the Product Disclosure Statement (PDS) (issued by the insurer to all policy-holders) the insurer then nominates an authorised repairer.

At the time a claim is approved, the insurer will send to the store where the covered products are to be repaired or replaced an e-mail advising that a claim has been approved ('Claim Advice'). The Claim Advice must provide the Claim number, the policy number, the Customer's name, the approved Claim Amount and the Date.

We have considered as fact that, for the purposes of the claim arrangements with the insurer, this occurs for your stores and affiliated stores. We note in further support of this fact that the PDS is given to customers of both types of stores.

If a claim is approved by the insurer the customer then attends a store (owned or affiliated) for repair or replacement.

When this occurs, you will be paid an amount by the insurer ('claim amount') towards the cost of repairing or replacing the product.

At the end of each week you invoice the insurer for the claim amounts on claims settled by the insurer in the previous week. The insurer must pay you the claim amount within fourteen days of the invoice date.

For affiliated stores, the claim amount will be paid directly by the insurer to you, and you will forward or on-pay the claim amount to the affiliated store. You agree to pay claim amounts to the affiliated store within 14 days of you receiving the payment from the insurer 'in respect of the relevant approved claim'.

At the time an insured customer with an approved claim from the insurer attends a store, you are entitled to charge the insured customer a 'co-payment' for assisting with the servicing of each claim approved by the insurer. You determine this amount, and it is paid directly by the customer to you.

At the time an insured person attends an affiliated store for a repair or replacement under a claim approved by the insurer, it is the affiliated store who is entitled to charge the customer the co-payment amount determined by you (and to keep this amount).

You also set the retail price of insurance contracts, the rates of commission and the claim amounts and co-payments for your affiliated stores.

You have provided relevant documents being:

Insurance Administration Agreement (the agreement)

Deed of Authorisation of Sub-Authorised Representative (the deed)

Product Disclosure Statement

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 38-60

Reasons for decision

Question 1

Summary

For the stores that you own, you have an agreement with the insurer and you provide a service to the insurer. You also provide goods and or services to the insured customer. You therefore make two supplies, and the consideration received from each party is in connection with the corresponding supplies that you make to them.

Detailed reasoning

Treatment of claim amount for your stores

To determine the supplies that are made in your circumstances it is necessary to look at the respective agreements between the parties (the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply, see proposition 11 of GSTR 2006/9).

In your circumstances, the insurer enters into an arrangement with your customers for insurance cover for the products that they purchased from you. You facilitate this arrangement (through the provision of distribution services) however you are not a party to the insurance contract. You have an arrangement with the insurer regarding the distribution services. You may then also provide repair or replacement services to the insured.

You are remunerated by the insurer, by way of commission, for each policy sold to a customer. You treat this commission as consideration for a taxable supply that you make. We agree that under your arrangement with the insurer you are making a supply of distribution services, and that this is a taxable supply.

The GST treatment of the claim amount you receive is also determined by looking at your agreements.

Where an insurer arranges with you to provide goods, services or anything else to an insured party, if the insurer enters into a binding obligation with you to provide goods, perform services or do something else for the insured in settlement of an insurance claim, and is liable to pay for that supply, you make a supply to the insurer, even though the supply may be provided to another entity (see paragraph 47 GSTR 2006/10).

Similarly, an insurer may enter into a pre-existing framework or arrangement with you which contemplates that the parties act in a particular manner in respect of supplies by the supplier to the insured which establishes a liability owed by the insurer to you (rather than the insured having the liability to you) in the event that there is a supply to the insured (see paragraph 47A GSTR 2006/10).

Both of these types of arrangement (binding obligation or pre-existing framework) result in a supply being made to the insurer.

In your arrangements with the insurer you may be required to provide a particular supply (of goods or repairs) to the insured. Where you do so your arrangements with the insurer require you to act in a certain way towards the insured persons and towards with the insurer. For example, the insurer assesses the loss or damage to the goods and provides details of an approved claim (by email). Where a customer presents with an approved claim you are required to perform the relevant services or provide the relevant goods.

You know that you will receive the claim amount from the insurer when an insured customer attends your store for repair or replacement with an approved claim. You know that you are to invoice the insurer for the claim amount, and that they will pay this within the relevant agreed time. The claim amount is a liability that the insurer has to you (in their own right), by virtue of your general framework and also by specific written agreement in your insurance administration agreement.

Following the reasoning from GSTR 2006/10 discussed above, we consider that the insurer is the recipient of a supply made by you in those circumstances, being your supply of the service of providing goods or repairs to policy holders under the agreed arrangements. Their payment of the claim amount to you is in satisfaction of their liability to you for this supply. Therefore this payment of the claim amount is consideration for the supply that you make to the insurer.

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

Relevant legislation was recently introduced as a result of the decision in Commissioner of Taxation v Secretary to the Department of Transport (Victoria) [2010] FCAFC 84 and the consequent amendments to the ATO view of tripartite arrangements. This legislation is section 38-60 of the GST-Act which considers third party procured GST-free health supplies.

This section states that where you supply a service to an insurer of making one or more other supplies of goods or services to an individual, and at least one of the supplies to the individual is wholly or partly a GST-free health supply under Subdivision 38-B, then the supply to the insurer is GST-free to the same extent that the underlying supply or supplies to the individual would be GST-free.

In your circumstances, the supply to the insured customer may include the supply of a GST-free medical aid or appliance of the type considered under section 38-45 of the GST Act. Where this is the case, the proportion of the supply to the insured customer that is a GST-free supply can also be applied to your supply of the service to insurer of providing that GST-free good or service to the insured customer. That is, if the supply to the insured customer is entirely GST-free then your supply to the insurer of providing this will also be entirely GST-free. If your supply to the insured customer is partly taxable and partly GST-free then your supply to the insurer of providing this will also be partly GST-free and partly taxable in the same proportion.

It should be noted that under section 38-60(4) of the GST Act, a supply is not GST-free (to any extent) under this section if the supplier and the recipient agree that the supply, or supplies of a kind that include that supply, not be treated as GST-free supplies. That is, you and the insurer may agree that you will not treat the supply to the insurer as GST-free. For example, this may occur because it is administratively easier for the parties to adopt this treatment.

Treatment of co-payment for your stores

Following the principles in GSTR 2006/9, one set of activities may constitute the making of two (or more) supplies. In the context of an insurance claim, there may be two supplies made by you, one to the insurer and a second supply to the insured.

Your supply to the insurer of the service of providing the goods or repairs means that the insured customer still receives the supply of the actual goods or repairs. We consider that in these circumstances there is therefore an additional supply to the insured customer, being your supply of the actual goods or repairs.

You have agreed with the insurer that you are entitled to receive a co-payment directly from the customer when you service an approved claim. You set the amount of this co-payment, and it is for the purpose of assisting with the servicing of each claim approved by the insurer. The co-payment is also detailed in the product disclosure statement given to customers who enter into the insurance arrangement. Therefore the insured customer has a liability to you in their own right for the amount of the co-payment required under the arrangements.

As the insured customer provides a co-payment, we consider that this amount is directly connected with the supply of a product or repairs. It is therefore properly characterised as consideration for that supply, and not consideration for any other supply (see paragraphs 107-108 of GSTR 2006/10).

As the insured customer gives consideration for your supply to them, and the supply is made in the course or furtherance of your enterprise, you are registered and there is the requisite connection with Australia all of the requirements of section 9-5 of the GST Act are met. Therefore this supply will be taxable to the extent that it is not GST-free or input taxed.

This supply may be taxable or GST-free or partly taxable and partly GST-free depending on what is supplied.

Question 2

Summary

Where a claim is presented in an affiliated store, a pre-existing framework is established between the insurer and the affiliated store. Where repairs or replacements are undertaken by the affiliated store, the claim amounts you forward to that store are consideration for this supply made by the affiliated store to the insurer.

The affiliated store also provides goods and or services to the insured customer. The co-payments paid by the insured customer to the franchised store are consideration for the supply made to the insured customer.

The affiliated store therefore makes two supplies, and the consideration received from each party is in connection with the corresponding supplies made to them.

Detailed reasoning

Treatment of claim amount for franchised stores

When a claim is presented in a franchised store and work is undertaken by the franchised store, we consider that the insurer establishes a pre-existing framework with the franchised store and the activities of the franchised store then take place in accordance with this framework.

The pre-existing framework is established when the insurer sends an email to the store where the covered products are to be repaired or replaced (in these circumstances a franchised store) once the claim is approved by the insurer. This email correspondence provides information on the claim amount and other details. We consider that where this occurs, this establishes a liability owed by the insurer to the affiliated store in the event that there is a supply of goods or repairs to the insured. Where the customer presents for assistance under an approved claim the affiliated store is also required to perform the relevant services or provide the relevant goods in accordance with this framework or arrangement.

Based on the reasoning in GSTR 2006/10 (in particular paragraph 47A) the affiliated store therefore makes a supply to the insurer.

We consider that this is a supply for consideration. The affiliated store knows that they will receive the claim amount in respect of their supply (and are advised this by the insurer). We consider that the claim amount is an entitlement of the affiliated store, and is in respect of this pre-authorisation framework with the insurer and the supply that this establishes.

In these circumstances you pass or transfer the consideration to the affiliated store for their supply of the service to the insurer. However, the payment of the claim amount to the affiliated store is directly connected with (and therefore in respect of) the supply that the affiliated store makes to the insurer. It is consideration for that supply. Your liability to forward the claim payments is an administrative arrangement to pay for a supply made by the affiliated store to the insurer (a third party payment).

Therefore under this analysis the affiliated store makes a taxable supply to the insurer, but only to the extent that this supply is not input taxed or GST-free. Section 38-60 regarding third party procured GST-free health supplies must therefore be considered to determine whether this supply may be GST-free (or partly GST-free).

For the purposes of subsection 38-60(1)(a) of the GST Act it has been established that the franchised store makes a supply of a service to an insurer. The service is the franchised store making one or more other supplies of goods or services to an individual in settlement of a claim under an insurance policy with the insurer. Therefore section 38-60 can be relied on to make their supplies to the insurer GST-free to the same extent as the underlying supply of the repairs or replacement goods. For example, where the supply to the customer is partly taxable and partly GST-free then your supply to the insurer will also be partly taxable and partly GST-free. The treatment of the underlying supply is discussed in relation to the co-payments.

As previously noted, under section 38-60(4) of the GST Act the franchised store and the insurer may instead agree that the supplies not be treated as GST-free supplies if they prefer for administrative reasons (in which case they will not be GST-free to any extent).

We also note for the sake of completeness that under the arrangements between the parties you also have rights and obligations with both the insurer and the franchised store. These rights and obligations may result in you making supplies to either, or both, of these parties. However, where you do not receive consideration in respect of these supplies they will not be taxable.

Treatment of co-payment for franchised stores

Following the principles in GSTR 2006/9, we consider that the activities of the affiliated store mean that the store makes two supplies, the supply made to the insurer (as discussed above) and also a supply to the insured. The analysis of this transaction is the same as when you receive a co-payment from a customer in a store that you own.

We consider that the additional supply to the insured customer is the supply of the actual goods or services.

You have agreed with the affiliated store that they are entitled to receive a co-payment directly from the customer when they service an approved claim. As the insured customer provides a co-payment, we consider that this amount is directly connected with the supply of the actual goods or services to them. It is therefore properly characterised as consideration for that supply, and not consideration for any other supply (see paragraphs 107-108 of GSTR 2006/10).

As the insured customer gives consideration for this supply to them, where all the other requirements of section 9-5 of the GST Act are met the supply to the insured customer will be taxable to the extent that it is not GST-free or input taxed.

This supply may be taxable or GST-free, or partly taxable and partly GST-free, depending on what is supplied.