Edited version of your written advice

Authorisation Number: 1012660538854

Ruling

Subject: GST and general law agency

Question 1

In making the claim against the liable party's insurer for the repair costs of your client's car, should the claim amount be GST-inclusive?

Answer

Whether the claim amount is GST-inclusive or not depends on the actual loss incurred by your client. Please see the Reasons for Decision.

Relevant facts and circumstances

• You are a car accident management company.

• You provide a rental vehicle to the not-at-fault driver following a motor vehicle accident.

• You also arrange for the repair of the car with a repairer.

• The repairer will repair the vehicle under instruction from an independent assessor.

• You enter into two agreements with the client: Contract of Indemnity for car rental/repair and Authority to Act.

Authority to Act Letter

• The client appoints you to act as their authorised agent to manage and handle all matters pertaining to the accident, for administrative costs, repair costs and hire vehicle costs.

• The authority allows you to have the rights and ability to deal with the relevant insurer, third parties or its insurer.

• The client assigns to you any rights, debts or interest in the claim which is the subject of the authority and permit you to receive all relevant settlement funds in respect thereof and for remittance of such funds to be payable to them in their name.

Contract of indemnity

Conditions of Indemnity

• You indemnify the client for the rental costs in consideration of the client subrogating their rights to you, and to recover the rental costs/repairs from the liable party and written assignment of this debt

• You are subrogated to the rights of the client and the assignment of the debt to recover the rental cost charges and/or repair costs.

• The client has by signing this contract, assigned the debt of hire charges, repairs costs, towages, administrative costs or any other legal chose in action over to you.

• Whilst the client is liable to pay the hire charges, you will attempt to recover them on the client's behalf by reason of the assignment of the client's right of recovery contained in the Letter of Authority to Act.

• Whilst the client is legally liable for the hire charges/repairs, you will not ask for payment from the Client whilst the matter is the subject of a claim. If for any reason, you are unable to recover them, you may waive the charges either in full or in part.

Assignment

Assignment of the rights of the client and the assignment of debts, to you includes:

• You or your agents have the right to commence proceedings in the name of the client.

• You or your agents have the right to collect all money recovered on behalf of the client.

• You or your agents have the right to keep and apply all monies recovered to the satisfaction of the rental costs.

• You or your agents have the right to obtain all information on behalf of the client, necessary to recover the rental costs.

• The client (claimant) understands the rental vehicle is not free of charge and the client is liable to pay the rental costs/repairs, unless you recover such costs in full.

• The repairer will invoice you direct and you will in turn recover the repair costs and hire car costs from the liable party's insurance company by way of invoice.

• When you receive the funds from the insurance company you will pay the repair invoices from the repairer which includes GST.

Relevant legislative provisions

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

Division 9

Division 11

Division 78

Subdivision 153-A

Reasons for decision

Question 1

Summary

Whether the claim amount is GST-inclusive or not depends on the actual loss incurred by your client. Where your client is entitled to input tax credits on the acquisition of repair services, the actual loss (claim amount) would be GST-exclusive. Where your client is not entitled to input tax credits on the acquisition of repair services, the actual loss would be GST-inclusive. Your client's entitlement to input tax credits must be communicated to the liable party's insurer. In general, the liable party's insurer will only compensate the not-at-fault driver (your client) in respect of the actual loss incurred.

The payment of money by the liable party's insurer in settlement of a claim under an insurance policy does not give rise to a GST liability for the person (you) receiving the money, as the payment is to discharge a liability owed to your client by the liable party.

Detailed reasoning

The payout amount is based on the terms of the contract and not on the GST legislation. Nor does the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provide for the amount, or how to work out the amount, of an insurance payout. Therefore, as this is not a matter determined by the taxation law, it is not a matter we can provide advice on.

However, we understand that in general, the insurer will only compensate the insured and/or third party in respect of actual loss incurred. For example, if there were repairs to be made for the GST inclusive cost of $5500 and the insured and/or third party is registered for GST, and entitled to claim 100% input tax credits, we understand that the assumption is that when the insured and/or third party pays for the repairs, they would be entitled to claim the 100% input tax credits. The payment by the insured and/or third party to the repairer is consideration for a taxable supply. Therefore 1/11^th of the payment from the insured and/or third party to the repairer is GST. The insured and/or third party would claim an input tax credit of $500, which is 100% of the GST of $500 from the ATO. Therefore, we understand that the insurer would take that into account, and pay the insured and/or third party the amount of $5,000. However, please note that the amount of the payout depends on the insurance policy and is a matter between the insured and the insurer.

In your case, the third party referred to in the above paragraph would be the not-at-fault driver, that is, your client. Your client has assigned the rights to you to collect the claim amount (car repair costs) from the liable party's insurer.

In order to determine the input tax credit entitlement on the acquisition of repair costs, we need to consider whether you make the acquisition in your own right or you are making the acquisition as an agent for your client.

Are you acting as a general law agent for the Client in relation to the car repair?

Goods and Services Tax Ruling GSTR 2000/37 describes what is meant by principal/agent relationships ('agency relationships') and explains the operation of the general law agency.

Some key points of the Ruling:

• An entity may be authorised by another party to do something on that party's behalf. Generally, the authorised entity is called an agent. The party who authorises the agent to act on their behalf is called the principal.

• For commercial law purposes, an agent is a person who is authorised, either expressly or impliedly, by a principal to act for that principal so as to create or affect legal relations between the principal and third parties.

• The principal is bound by the acts of an agent as a result of the authority given to the agent. In cases of actual authority, the relationship between a principal and an agent is a consensual one so that no party can claim to be a principal's agent unless both parties consent to the creation of the agency. The principal will be liable for acts of the agent within the scope of the authority that the principal gives to the agent by virtue of his or her conduct and actions.

• When an agent uses his or her authority to act for a principal, then any act done on behalf of that principal is an act of the principal. Also, a principal is not bound by acts that are not within the expressed, implied or ostensible authority conferred on the agent. However, the principal may ratify or confirm an unauthorised dealing.

Paragraph 28 of GSTR 2000/37 provides factors that indicate an agency relationship:

In most cases, any relevant documentation about the business relationship, the description used by the parties and the conduct of the parties establish the existence of an agency relationship. Therefore, the following factors may show that you are an agent under an agency relationship, although no single factor (by itself) is determinative:

any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party;

• any exercise of the authority that you are given to enter into legal relations with a third party;

• whether you bear any significant commercial risk;

• whether you act in your own name;

• whether you are remunerated for your services by way of commissions and whether you are

• entitled to keep any part of your remuneration secret from another party; and

• whether you decide the price of things that you might sell to third parties.

In your circumstances; you have entered into two written agreements with the Client who is the not-at-fault driver and also is the hirer of your rental car: the Contract for Indemnity and the Authority to Act Letter. Under the above arrangement with your Client:

• You are appointed to be the authorised agent for the client.

• The scope of the authority to act on behalf of the Client is:

• to manage and handle all matters pertaining to the relevant accident, for administrative costs, repair costs and hire vehicle costs,

• to have the rights and ability to deal with the Client's insurer, third parties and/or their insurer,

• to be assigned all and any rights, debts or interest in the claim (which is the subject of the Letter of Authority) and to receive all relevant settlement funds in respect thereof and for remittance of such funds to be payable to you in your name.

Following the grant of the authority, you arrange car repairs for the client and recover the car repair costs from the liable party's insurer. You act within your authority to obtain car repair for your client, the principal.

• You do not bear any significant commercial risk in relation to the repair of the client's car. You will recover the repair costs against the liable insurer under the assignment of the client's right to you. Otherwise, the client is liable for the repair costs [see the Contract of Indemnity].

• Under the authority, you do not act in your own name. Although you have entered into repair contract with a repairer (on behalf of the client) and you receive the tax invoice (in your name) from the repairer, it is the view of the Tax Office in paragraph 29 of GSTR 2000/37 that:

• In some situations, these factors may be difficult to establish. For example, situations may arise where:

• the existence of a principal is disclosed but not named; or

• the existence of a principal is not disclosed to third parties.

• However, documents used by the parties and the conduct of the parties may still indicate the existence of an agency relationship.

• You cannot determine the costs of the repair. You cannot set the price as a supplier in your own right. You do not make the repair supply in order to decide the price. Your role is to act as an agent for the client.

Therefore, it is considered that you are the client's general law agent, not in your own right in relation to the repair of the car.

GST payable and input tax credits under agency relationships

Under Subdivision 153-A of the GST Act, when an agent is authorised to undertake a transaction on behalf of the principal, thereby binding the principal to the legal effects of the transaction, then the transaction is made by the principal through the agent.

If you are an agent at general law, you are an agent for GST purposes. Accordingly, if you are an agent (where taxable supplies are made through you), the principal is liable for any GST payable on the supplies. Also, if you are an agent (where creditable acquisitions are made through you), the principal is entitled to any input tax credits.

Applying the agency relationship to your circumstances

As a general law agent you arrange for the repair of your client's car. The repairer provides repair services to your client through you. The supply of repair services is not made to you. The client makes the creditable acquisition if the client meets the requirements under section 11-5 of the GST Act.

Section 11-5 of the GST Act provides for the requirements for an acquisition to become creditable:

• you acquire a thing solely or partly in carrying on your enterprise (not private/domestic nature or to make input taxed supply)

• the supply of the thing to you is taxable supply

• you are liable to provide consideration for the acquisition, and

• you are registered for GST.

Depending on the entitlement to input tax credits, the actual loss will be GST-inclusive or GST-exclusive, as discussed before.

You, as an agent, are not entitled to any input tax credits on the acquisition of the repair services that your client makes through you.

You will not have a GST liability when you receive the claim amount.

Subsection 78-65(1) of the GST Act provides:

(1) The making of any payment by an insurer to an entity is not treated as *consideration for a supply to the insurer by the entity, to the extent that:

(a) the payment is made in settlement of a claim under an *insurance policy under which the entity is not insured; and

(b) the payment is to discharge a liability owed to that entity by the entity insured.

The payment made by the liable party's insurer is not treated as consideration for a supply to the insurer by your client as the payment is made in settlement of a claim under an insurance policy and the payment is to discharge a liability owed to your client by the liable party.

Under the agreements with you, the client assigns you the right to receive the settlement amount from the liable party's insurer that they are liable to pay to the client.