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Ruling

Subject: Goods and services tax (GST) and insurance

Question

Is GST payable on your supply of the insurance?

Answer

GST will be payable on the part of the insurance premium that represents the charge for the contingent right to non-monetary compensation (if a certain type of insurance cover is one of the types of cover selected under the policy). GST will not be payable on the balance of the premium.

Where a certain type of insurance cover is not one of the types of cover selected under the policy, GST will not be payable on the insurance premium at all.

Relevant facts and circumstances

You are registered for GST.

You operate an insurance business in Australia.

You will supply insurance to non-residents visiting Australia on a temporary basis.

The insurance will either be purchased by the traveller or by a representative in Australia on the traveller's behalf. The insurance contract will be between you and the traveller. The traveller will be overseas when the insurance policy is purchased.

The insurance policy will provide certain types of cover: The insurance policy will provide a right to be indemnified as well as a right to receive a certain sum upon the occurrence of an event.

The insurance settlements to compensate for certain events whilst travelling in Australia may be in the form of money or in the form of replacement goods. The insurance settlements relating to the other types of cover under the insurance policy will be in the form of money.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) subsection 7-1(1)

A New Tax System (Goods and Services Tax) section 9-5

A New Tax System (Goods and Services Tax) subsection 9-10(4)

A New Tax System (Goods and Services Tax) section 9-40

A New Tax System (Goods and Services Tax) section 38-190

Reasons for decision

Summary

You will make a mixed supply (provided that a certain type of cover is selected as part of the policy).

To some extent, the supply of the insurance is a GST-free supply of rights to non-residents under section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Therefore, to that extent, GST is not payable.

To some extent, the supply of the insurance is subject to GST (provided that a certain type of cover is selected as part of the policy) because all of the requirements of section 9-5 of the GST Act are satisfied to that extent.

Where a certain type of cover is not selected as part of the policy, the premium is not subject to GST at all.

Detailed reasoning

GST is payable by you where you make a taxable supply.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

you make the supply for *consideration; and

the supply is made in the course or furtherance of an *enterprise that

you *carry on; and

the supply is *connected with Australia; and

you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free

or *input taxed.

(*Denotes a term defined in section 195-1 of the GST Act)

In your case, you satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because:

· you will supply insurance for consideration

· the supply will be made in the course or furtherance of an enterprise that you carry on

· the supply will be connected with Australia, and

· you are registered for GST.

There are no provisions in the GST Act under which your supply is input taxed.

Therefore, what remains to be determined is whether you will make a GST-free supply.

Supplies of rights to non-residents

A supply that is made in relation to rights is GST-free under item 4 in the table in subsection 38-190(1) of the GST Act (item 4) if the supply is not a supply of real property and the supply is to an entity that is not an Australian resident and is outside Australia when the thing supplied is done.

However, a supply covered by any of items 1 to 5 in the table in subsection 38-190(1) of the GST Act is not GST-free if it is the supply of a right or option to acquire something the supply of which would be connected with Australia and would not be GST-free (in accordance with subsection 38-190(2) of the GST Act).

A supply of money is not a supply for GST purposes.

You are supplying insurance.

Goods and Services Tax Ruling GSTR 2003/8 deals with item 4.

Paragraph 27B of GSTR 2003/8 states:

27B. The creation, grant, transfer, assignment or surrender of a right is a supply that is made in relation to rights for the purposes of item 4.

Paragraphs 95 and 96 of this ruling cover the supply of insurance. They state:

Insurance

95. The general law recognises that what an insured obtains under a contract of insurance is a chose in action. Where, under the contract of insurance, the insurer agrees to compensate the insured for a loss that the insured may sustain through the happening of an event, this chose in action is a right to be indemnified if the insured event occurs. There is a supply by way of a creation of a right when the contract of insurance is entered into.

96. A contract of life insurance and many contracts of accident insurance are not contracts of indemnity as they provide for the payment of a specified sum upon the occurrence of an event such as death or accident. What the insured obtains is a chose in action that is a right to receive a certain sum upon the occurrence of the event. There is a supply by way of a creation of a right when the contract of insurance is entered into.

Under the insurance policy, you are supplying a right to be indemnified as well as a right to receive a certain sum upon the occurrence of an event.

Therefore, we consider that your supply of insurance to the non-resident travellers constitutes a supply that is made in relation to rights.

You are supplying a contingent right to receive monetary and non-monetary settlements where certain events happen.

This is not a supply of real property.

You will supply this contingent right to non-residents who are outside Australian when the thing supplied is done (that is, when the insurance contract is entered into).

To the extent that the insurance cover provides for monetary settlements (where the insured events happen), the supply of the insurance is GST-free under item 4. The exception in subsection 38-190(2A) of the GST Act does not apply to that extent because the supply of a monetary settlement is not a supply for GST purposes.

The part of the insurance that provides for certain types of compensation is a supply of a contingent right to receive a supply that is connected with Australia. The supply of the something may or may not be GST-free (it will depend on the situation). However, given that it would be very rare for the supply of the something to be GST-free, it is reasonable to treat this part of the insurance cover as not being GST-free under Item 4 at all.

Apart from item 4, there are no provisions of the GST Act under which the supply of the insurance is GST-free to the extent that it provides for certain types of compensation where the event happens while the traveller is travelling in Australia.

Hence, as all of the requirements of section 9-5 of the GST Act are satisfied, GST is payable on the supply of the insurance cover to the extent that it provides for certain types of compensation where the event happens while the traveller is travelling in Australia.

To the extent that the insurance policy provides the contingent right to other benefits, the supply of the insurance is GST-free and therefore not a taxable supply.

Goods and Services Tax Ruling GSTR 2001/8 deals with mixed supplies. Paragraph 16 of GSTR 2001/8 states:

16. In this Ruling the term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised.

You will make a mixed supply of insurance. There are separately identifiable taxable and non-taxable parts that need to be individually recognised for GST purposes.

The premium will need to be allocated between the taxable component and the non-taxable component on any fair and reasonable basis. The GST will be 1/11^th of the consideration or estimated consideration for the taxable component.

Where a certain type of cover is not one of the types of cover selected under the policy, GST will not be payable at all on the premium.

Below are some fair and reasonable methods of calculating GST on the taxable component (where there is a taxable component).

Method 1

If you have built up the premium amount based on notional charges you have calculated for each type of cover, you should divide the notional charge for a certain type of cover by 2 (because the settlement under that cover may be monetary or non-monetary) and then divide the result of that calculation by 11.

Method 2

Divide the amount you would have charged for a certain type of cover if the policy was comprised only of that type of cover by 2 and then divide the result of that calculation by 11.

Method 3

Step 1

Divide the maximum amount that the insured is insured for in respect of a certain type of cover by 2.

Step 2

Divide the result of the calculation at Step 1 by the maximum amount that the insured is insured for under the entire policy.

Step 3

Multiply the result of the calculation at Step 2 by the premium amount.

Step 4

Divide the result of the calculation at Step 3 by 11.

Method 4

Step 1

Estimate the proportion of the total value of settlements to be made in a given period under the insurance policies that contain the same set of cover that will be comprised of settlements made under a certain type of cover under such policies.

(For example, if you estimate you will make settlements with a total value of (an amount of money) in a single year under policies that contain all cover types and you estimate that of this (an amount of money), (an amount of money) would be the value of settlements made under a certain type of cover under such policies, the proportion would be a certain percentage).

Step 2:

Divide the result of the calculation at Step 1 by 2.

Step 3

Multiply the result of the calculation at Step 2 by the premium amount.

Step 4

Divide the result of the calculation at Step 3 by 11.

Method 5

Step 1

Calculate the proportion of the total value of settlements made in a given period under the insurance policies that contain the same set of cover that is comprised of settlements made under a certain type of cover under such policies.

Step 2

Divide the result of the calculation at Step 1 by 2.

Step 3

Multiply the result of the calculation at Step 2 by the premium amount.

Step 4

Divide the result of the calculation at Step 3 by 11.