Edited version of your private ruling

Authorisation Number: 1012588572798

Ruling

Subject: Proceeds of a life insurance settlement

Question 1

Are the proceeds of a life insurance settlement subject to GST?

Answer

No, the proceeds of the life insurance settlement are not subject to GST

Question 2

Are the proceeds of a life insurance settlement received by ABC Pty Ltd (you) that are applied to pay the balance of the lease payments owed by another entity subject to GST?

Answer

Yes, the proceeds applied to pay the balance of the lease payments are subject to GST.

Question 3

Is the transfer of the aircraft by you to XYZ Pty Ltd at deemed transfer value a taxable supply?

Answer

Yes, the transfer of the aircraft by you to XYZ Pty Ltd is a taxable supply.

Question 4

Will the payment of the surplus life insurance settlement to the estate of the late Mr X be a creditable acquisition to you?

Answer

No, the payment of the surplus life insurance settlement to the estate of the late X will not be a creditable acquisition.

Relevant facts and circumstances

Entities

· ABC Pty Ltd owned a subsidiary company.

· ABC Pty Ltd sold the subsidiary company to another entity in 2011.

· The other entity in turn owns a subsidiary company called XYZ Pty Ltd.

Leases

· ABC Pty Ltd owns capital items that were previously leased to its subsidiary company.

· ABC Pty Ltd (you) continues to own capital items. However, it ceased leasing the capital items to its subsidiary company, and instead they were leased to XYZ Pty Ltd.

· There were different leases for different capital items.

· The terms of the abovementioned lease were 60 monthly payments of $X per month, payable on the first of every month. There is a residual value of $X at the end of the lease.

· As the leases ended, XYZ Pty Ltd was going to buy the capital items at their residual values.

Insurance Policy

· Mr X (who owned XYZ Pty Ltd) arranged a life insurance policy for $X on his life at about the same time as the leases were entered into.

· The policy shows the Policy Owner was you, and the life insured was Mr X's.

· Mr X provided the consideration for the life insurance policy.

· You did not have a copy of the actual life insurance policy, because you did not arrange it, nor did you provide consideration for the policy.

· The beneficiary of the policy was you. This was to ensure that if Mr X died, sufficient monies would be available to pay out the lease commitments of XYZ Pty Ltd. This is not a 'key man' policy as you did not pay the premiums.

· Mr X died in a workplace accident. The capital items that were subject to the abovementioned lease was destroyed in the accident.

· You will consequently receive the insurance proceeds for the destroyed capital items and will apply the proceeds to pay out all of the lease commitments.

· It has also been decided that the other capital items that are part of the other leases will be transferred to XYZ Pty Ltd at their residual values, as outlined in the lease agreements. However, XYZ Pty Ltd will not pay for the capital items; rather, the insurance proceeds will be used to pay for the capital items to effect the transfer.

· You will then pay to the late Mr X's estate the surplus of the insurance monies received from the life policy.

Relevant legislative provisions

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

Section 7-1

Section 9-5

Section 9-10

Section 11-5

Reasons for decision

Question 1

Summary

No, the proceeds of a life insurance settlement are not subject to GST.

Detailed reasoning

Section 7-1 of the GST Act provides that you must pay GST on any taxable supply that you make.

Section 9-5 of the GST Act defines a taxable supply. It states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) 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.

(Items marked with an asterisk are defined in the Dictionary at section 195-1 of the GST Act).

Section 40-5 of the GST Act provides that financial supplies are input taxed, and refers to the Regulations for the definition of a financial supply. Subregulation 40-5.09(1) provides a definition of financial supply, and provides that the provision, acquisition or disposal of an interest is a financial supply if the provision, acquisition or disposal is for consideration, is in the course or furtherance of an enterprise, is connected with Australia, the supplier is registered or required to be registered for GST and the supplier is a financial supply provider.

Item 6 of the table in subregulation 40-5.09(3) provides that a life insurance business is input taxed.

However, you did not provide the consideration for the life insurance policy; Mr X provided the consideration for the life insurance policy. You have only received the settlement monies of the claim under the life insurance policy.

The settlement of a claim made under a life insurance policy is not the provision, acquisition or disposal of an interest in or under a policy of life insurance. Neither is the payment consideration for a supply made by the insured or any other entity. Therefore, you will not have made a taxable supply, and will not be required to account for an amount of GST, when you receive a payment in settlement of a claim under a policy of life insurance.

Question 2

Summary

Yes, the proceeds applied to pay the balance of the lease payments are subject to GST.

Detailed Reasoning

It is not in contention that you were making a taxable supply to XYZ Pty Ltd for the leases, and were reporting and remitting GST to the ATO. The supply of the aircraft on a lease arrangement was made by you to XYZ Pty Ltd for consideration, it was in the course or furtherance of an enterprise that you carry on, it was connected with Australia, and you were registered or required to be registered. The supply was not GST-free nor was it input taxed.

However, you will no longer continue to receive monies from XYZ Pty Ltd for the leases. The leases will be paid out in full, with the proceeds you have received from the life insurance policy being used for this purpose.

Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9) provides the ATO view on tripartite arrangements. Proposition 14 is of relevance to your situation. Paragraphs 177 to 180 of GSTR 2006/9 relevantly state:

Proposition 14: a third party may pay for a supply but not be the recipient of the supply

Payment for a supply

177. Subsection 9-15(1) provides that the consideration for a supply includes any payment 'in connection with', 'in response to' or 'for the inducement of' a supply of anything. Subsection 9-15(2) provides that the payment does not have to come from the recipient of the supply.

177A. For example in the Full Federal Court decision in TT-Line Company Pty Ltd v. Federal Commissioner of Taxation the Court observed that the payments made by the government entity formed part of the consideration for the supply of transport made by the ferry operator to the eligible passengers.

178. Similar to section 9-15, section 2 of the NZ GST Act states that consideration in relation to a supply to anyone includes any payment made 'by any other person'. The New Zealand case of Turakina Maori Girls College Board of Trustees & Ors v. C of IR (1993) 15 NZTC 10,032 provides further support that a third party may pay for a supply but not be the recipient of the supply. That case considered whether attendance dues paid by parents and guardians were consideration for supplies made by the proprietors of the school property. In its decision the NZ Court of Appeal stated (at 10,036) that the NZ GST Act 'does not require that the supply be to the person who pays the consideration' and went on to say (at 10,036) that 'the identity of the recipient is not significant, as long as there is a supply and the provision by some person of consideration in respect of it'.

179. It makes no difference to the GST liability of the supplier which entity provides the consideration, though there are clear ramifications for the recipient of the supply in determining whether they have made a creditable acquisition.

Sufficient nexus

180. In other GST rulings the Commissioner discusses the close coupling between supply and consideration in the GST Act. In determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration' those rulings take the view that:

· ·the test is whether there is a sufficient nexus between the supply and the payment made; this test is objective;

· ·regard needs to be had to the true character of the transaction; and

· ·an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

The consideration for the ongoing supply being made by you to XYZ Pty Ltd will now come from a third party, being the life insurance company. The requirements of section 9-5 of the GST Act are therefore still met.

Therefore, the payout that is applied to every lease (including the destroyed aircraft) will be subject to GST. The insurance rules that are incorporated within the GST Act, being Division 78, do not apply in this occurrence, as the insurance policy in question is not an insurance policy for an object, but rather is life insurance.

Question 3

Summary

Yes, the transfer of the aircraft by you to XYZ Pty Ltd will be a taxable supply.

Detailed Reasoning

The transfer of the aircraft by you to XYZ Pty Ltd will be a taxable supply. As outlined above in Question 2, the requirements of section 9-5 of the GST Act will be met if any supply you make is made for consideration, it is within the course or furtherance of an enterprise that you carry on, it is connected with Australia, and you are registered or required to be registered. The supply is not a GST-free supply, nor is it an input taxed supply.

The consideration, however, is not coming from XYZ Pty Ltd, but rather is coming from a third party.

This is a variation of the tripartite arrangement referred to above.

The supply by you of the capital items to XYZ Pty Ltd is a taxable supply.

Question 4

Summary

No, the surplus payment to the late Mr X's estate is not a creditable acquisition.

Detailed Reasoning

Section 7-1 of the GST Act provides that you can claim an input tax credit for any creditable acquisition that you make.

Creditable acquisition is defined in section 11-5 of the GST Act, which states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

Paragraph 11-5(a) mentions creditable purpose. The term 'creditable purpose' is defined in section 11-15 of the GST Act, which provides you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

Paragraph 11-5(b) mentions that the supply of the thing to you is a taxable supply. However, the estate of the late Mr X has not provided anything to you that could constitute a taxable supply.

We have already defined a taxable supply as a supply made for consideration, the supply is made in the course or furtherance of an enterprise that is carried on, the supply is connected with Australia and the entity making the supply must be registered or required to be registered for GST.

Section 9-10 of the GST Act defines a supply. It states:

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of *real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a *financial supply;

(g) an entry into, or release from, an obligation:

(i)  to do anything; or

(ii)  to refrain from an act; or

(iii)  to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

In this particular case, the estate of the late Mr X has not supplied anything to you that fits within the above definition. The estate has not supplied goods, services, advice or information, a grant, assignment or surrender of real property, a creation, grant, transfer, assignment or surrender of a right, a financial supply, an entry into or a release from an obligation or any combination.

As the estate has not made a taxable supply to you, then section 9-10 of the GST Act is not met.

As section 9-10 is not met, then paragraph 11-5(b) cannot be met, in that no taxable supply has been made to you. As no taxable supply has been made to you, you have not made a creditable acquisition. You therefore cannot claim an input tax credit on the payment that is made to the estate of the late Mr X.

As 11-5(b) is not met, there is no need to consider paragraphs 11-5(c) and 11-5(d) of the GST Act.