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Edited version of your private ruling
Authorisation Number: 1012596845344
Ruling
Subject: GST and insurance settlement payment
Question 1
Is the professional indemnity insurance settlement received by the entity consideration for a supply under section 78-50 of the A New Tax System (Goods and Services Tax) Act 1999?
Answer
No, the insurance settlement received by entity is not consideration for a supply.
Relevant facts and circumstances
The entity took out a professional indemnity (PI) insurance policy with the PI Insurer specific to a project. The policy was arranged through a broker engaged by the entity.
The PI Insurer issued a tax invoice in relation to the insurance policy. The entity paid the invoice and claimed the full input tax credit. At about this time, the broker's data system recorded the entity's position in relation to input tax credit entitlement as 'to be advised'.
The broker advised the PI Insurer of a potential claim under the PI policy.
The PI Insurer confirmed that it would grant indemnity to the entity and a progress payment was made. The claim was finalised and settled the PI Insurer agreeing to make a further payment.
In relation to a separate insurance policy, the broker notified a different insurer about a claim (second claim). The notification of the second claim was made at about the same time as the broker notified the PI Insurer of the PI claim. A loss adjuster report was prepared in relation to the second claim and the report contains a notion 'GST Status: All parties registered / 100% ITC'. It is unclear how this was determined by the loss adjuster.
It is not clear if the broker notified the PI Insurer of the entity's entitlement to full input tax credits in relation to the PI policy premiums.
Due to restructuring and changes in personnel, the entity is not able to determine whether the PI Insurer was notified of the entity's entitlement to input tax credits in relation to the PI insurance policy. Furthermore, there is no documentary evidence to indicate whether or not the notification was made.
There were numerous insurance policies in relation to the project as well as the operation of the entity. The broker arranged other policies on behalf of entity and it is possible that one or more of these included a separate policy with PI Insurer.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 78-45
A New Tax System (Goods and Services Tax) Act 1999 section 78-50
Reasons for decision
Section 78-45 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that the payment of money in settlement of a claim under an insurance policy is not consideration for a supply.
However, section 78-50 of the GST Act treats the payment as consideration if the insured was entitled to an input tax credit on the acquisition of the insurance and it did not 'inform the insurer of the entitlement to an input tax credit for the premium it paid' at or before the time that a claim was first made under the policy.
Therefore, if the PI Insurer was not notified of the entity's entitlement to full input tax credits in relation to the PI policy, the entity will have made a taxable supply in return for the settlement payment.
How an insurer is to be informed of the insured's entitlement to input tax credits is not prescribed in the GST Act. Ordinarily, it may be addressed as a matter of course in the issuing of the paperwork for the policy or in a claim form being submitted. However, the PI insurance policy was not an ordinary policy, it was created specifically for the project. Furthermore, the claim made under the policy was not an ordinary claim and it is likely that no 'claim form' was ever submitted. The informing of the PI Insurer may have been done through the initial contact between the broker and the PI Insurer or when the broker first made contact with the PI Insurer to notify it of a potential claim.
There appears to have been no doubt in the entity's 'mind' that it was entitled to full input tax credits and it is reasonable to assume that the insurance broker was fully aware of the requirements to notify the insurer of the entitlement to the input tax credits. Furthermore, there appears to have been no doubt in the PI Insurer's 'mind' that the entity was entitled to full input tax credits when it proceeded to pay the settlement amount
Given the nature of the project and the PI policy, it is reasonable to conclude the broker had the requisite knowledge of the project to know that the entity was entitled to full input tax credits. The loss adjuster report in relation to the second claim noted that the insured (the entity) was entitled to full input tax credits. This indicates that the insurer had been notified (either by the broker or by some other means) of the entity's entitlement and it is reasonable to conclude that this also occurred in relation to the PI policy.
Based on the information provided, it is reasonable to conclude that either the broker or the entity advised the PI Insurer of the entity's entitlement to full input tax credits in relation to the PI Policy premiums. Therefore, section 78-50 of the GST Act does not apply and section 78-45 of the GST Act provides that the settlement payment is not treated as consideration for any supply made by entity.