Edited version of your written advice

Authorisation Number: 1012876652601

Date of advice: 11 September 2015

Ruling

Subject: Decreasing adjustment for payment made in settlement of an insurance claim

Question 1

For the purposes of subsection 78-10(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), assuming that subsection 78-10(2) is satisfied, is A entitled to claim a decreasing adjustment when I pays an amount to a third party insurer in settlement of an at fault claim against an I policyholder?

Answer

Yes, for the purposes of subsection 78-10(1) of the GST Act, assuming that subsection 78-10(2) is satisfied, A is entitled to claim a decreasing adjustment when I pays an amount to a third party insurer in settlement of an, at fault claim against an I policyholder.

Question 2

For the purposes of subsection 78-10(1) of the GST Act, assuming that subsection 78-10(2) is satisfied, is A entitled to claim a decreasing adjustment when I pays an amount directly to a third party in settlement of an at fault claim against an I policyholder?

Answer

Yes, for the purposes of subsection 78-10(1) of the GST Act, assuming that subsection 78-10(2) is satisfied, A is entitled to claim a decreasing adjustment when I pays an amount directly to a third party in settlement of an, at fault claim against an I policyholder.

Question 3

For the purposes of subsection 78-10(1) of the GST Act, assuming that subsection 78-10(2) is satisfied, is A entitled to claim a decreasing adjustment when I pays an amount directly to an authorised representative of a third party in settlement of an at fault claim against an I policyholder?

Answer

Yes, for the purposes of subsection 78-10(1) of the GST Act, assuming that subsection 78-10(2) is satisfied, A is entitled to claim a decreasing adjustment when I pays an amount directly to an authorised representative of a third party in settlement of an at fault claim against an I policyholder.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

A and I are GST registered. A is the representative member of a GST group of which I is a member.

I makes taxable supplies of general insurance policies to the public in relation to motor vehicles, boats, caravans and households.

In settlement of claims made under these insurance policies I may make a payment where I's insured is at fault and is liable for damage caused to a third party. I classifies the recipients of such payments into three beneficiary types:

I makes a payment to a third party insurer (TPI) where the TPI, acting on behalf of a third party, seeks compensation for damage for which I's at fault insured is liable (e.g. where the TPI exercises rights of subrogation to recover an amount from an I insured);

I makes a payment directly to a third party in order to compensate the third party for damage for which I's at fault insured is liable; or

I is asked by a third party to make a payment to the authorised representative of the third party in satisfaction of the third party's claim against an at fault I insured (e.g. where a non-insurer entity (e.g. a law firm) acts on behalf of the third party in respect of the third party's claim and the third party authorises I to make the payment to that non-insurer entity).

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 78-10.

Reasons for decision

Question 1

Summary

Where an insurance policy issued by I covers the insured for liability for damage to a third party and I makes a payment to a third party insurer (TPI) in settlement of a claim under that policy, I is entitled to a decreasing adjustment under section 78-10 of the GST Act.

Detailed reasoning

Subsection 78-10(1) of the GST Act states:

An insurer has a decreasing adjustment if, in settlement of a claim under an insurance policy, the insurer:

(a) makes a payment of money; or

(b) makes a supply; or

(c) makes both a payment of money and a supply.

Subsection 78-10(2) states that section 78-10 applies only if:

(a) the supply of the insurance policy by the insurer was solely or partly a taxable supply; and

(b) either:

(i) there was no entitlement to an input tax credit for the premium paid in relation to the period during which the event giving rise to the claim happened; or

(ii) there was an entitlement to such an input tax credit, but the amount of the input tax credit was less than the GST payable by the insurer for the taxable supply; and

(c) the insurer settles the claim for a creditable purpose; and

(d) the insurer is registered, or required to be registered; and

(e) the settlement does not relate solely to one or more non-creditable insurance events.

Goods and Services Tax Ruling GSTR 2006/10 (GSTR 2006/10) discusses the interaction between Division 11 and Division 78 of the GST Act where a payment of money or a supply is made by an insurer in the course of settling a claim under an insurance policy. Paragraph 7 of GSTR 2006/10 states that if goods which are insured under a general insurance policy are damaged, lost or stolen the insurer may make a cash payment to the insured or third party for replacing or repairing the goods, pay a supplier directly for goods supplied to the insured or third party or acquire replacement goods and supply them to the insured or third party. Paragraph 8 of GSTR 2006/10 states:

8. For the purposes of this Ruling, when we use the term 'third party', we are referring to an entity that the insured has a liability to. For example, the insured has a liability to an entity because of damage caused by the insured to that entity. Consequently, the insurer may make a payment or a supply to that entity in settlement of the insured's claim under the policy.

The ruling request referred to paragraph 33 of GSTR 2006/10 which refers to section 78-10 of the GST Act and states:

33. If an insurer settles an insurance claim by way of payment of money to the insured or a third party, or reimburses the insured or a third party for costs incurred, or to be incurred, then the insurer may be entitled to a decreasing adjustment.

The ruling request noted, however, that paragraph 8 of GSTR 2006/10 defines 'third party' as 'an entity that the insured has a liability to'. It was stated that where an insurer makes a payment to a TPI the payment is not made to a third party but to an entity acting on behalf of the third party.

The ruling request then referred to the entitlement to a decreasing adjustment conferred by subsection 78-10(1) of the GST Act which states that an insurer has a decreasing adjustment if the insurer makes a payment of money 'in settlement of a claim under an insurance policy'. It was submitted that, in providing a decreasing adjustment, subsection 78-10(1) does not discriminate according to whether the payment is made by an insurer to a third party or a TPI acting on behalf of a third party and merely requires that the payment is made 'in settlement of a claim under an insurance policy'. Consequently where an insurance policy issued by I covers the insured for liability for damage to a third party and I makes a payment to a TPI in settlement of a claim under that policy, I is entitled to a decreasing adjustment under section 78-10 of the GST Act.

We agree with that submission. It is supported by the views expressed by the ATO in issues 2, 4 and 5 of the ATO's Insurance Industry Partnership issues register which were issued as public rulings for the purposes of the Taxation Administration Act 1953 in 2010.

Those public rulings deal with subrogation. The meaning of 'subrogation' as used in Division 78 of the GST Act is discussed in a public ruling based on issue 2 in the Insurance Industry Partnership issues register and entitled What is meant by the term subrogation?:

Issue

1. What is covered by the term 'subrogation' as used in Division 78? Does it include all recoveries?

ATO view

2. Subrogation is limited to the circumstances where the insurer has taken over the rights of the policy holder in accordance with the terms of the contract of insurance between the insurer and the policy holder. The situation covered by Division 78 is where the insurer receives funds from an entity that is not party to the contract of insurance when the insurer is exercising rights the insured would otherwise be exercising if it had not handed those rights to the insurer.

Applying the ATO view of subrogation to the scenario outlined in the ruling request, subrogation occurs when, pursuant to the insurance policy between the TPI and the third party the TPI pays the claim made by the third party against the TPI for the damage to the third party's goods and the TPI then steps into the third party's shoes in respect of the third party's claim against I's insured for causing that damage. The TPI then receives a payment from an entity (i.e. I) that is not party to the contract of insurance between the third party and TPI as a result of the TPI exercising rights that the third party would otherwise be exercising. I makes the payment to the TPI rather than the third party as a result of subrogation, i.e. the TPI taking over the rights of the TPI's policyholder (the third party).

References to an insurer 'exercising of rights of subrogation in respect of an insurance policy' appear throughout Division 78, i.e. in sections 78-35, 78-40, 78-75 and 78-110 of the GST Act.

Section 78-35 deals with the position of the TPI in the scenario outlined in the ruling request, i.e. where, in settlement of a claim made by the TPI in TPI's exercising of rights of subrogation in respect of an insurance policy, an entity that is not insured under the policy (i.e. I) makes a payment to the TPI. Section 78-35 states that that payment is not treated as consideration for a supply made by the insurer (the TPI) or by the entity insured (the third party). A public ruling based on issue 4 in the Insurance Industry Partnership - issues register entitled Subrogation - imbalance between sections 78-35 and 78-40 explains the effect of section 78-35 as it states (in part):

ATO view:

…

3. Section 78-35 does have the effect that there is no input tax credit available to an entity making a payment to an insurer in settlement of a claim the insurer makes in exercise of its rights of subrogation.

Subsection 78-40(1) states that Division 19 of the GST Act (which deals with Adjustment Events) applies to a decreasing adjustment which an insurer (i.e. the TPI) has under Division 78 as if that decreasing adjustment were an input tax credit and settlement of the claim to which the adjustment relates (i.e. the claim by the third party under the third party's policy with the TPI) were a creditable acquisition made by the TPI and any payment made by another entity (I) in settlement of a claim made by the TPI in 'the exercising of rights of subrogation' in respect of the insurance policy in question were a reduction in the consideration for the acquisition. The public ruling entitled Subrogation - imbalance between sections 78-35 and 78-40 explains the effect of section 78-40 as follows:

ATO view

2. Section 78-40 does provide an increasing adjustment where an insurer has had a decreasing adjustment under Division 78 and it recovers amounts in exercise of rights of subrogation.

A further public ruling based on issue 5 in the Insurance Industry Partnership issues register entitled Subrogation - will section 78-15 prevail over section 78-35? indicates that I cannot claim an input tax credit under section 78-35 in respect of a payment made by I to the TPI but I can claim a decreasing adjustment under section 78-10 because the payment is made 'in settlement of a claim under an insurance policy' issued by I (i.e. the policy issued by I to I's insured). The public ruling entitled Subrogation - will section 78-15 prevail over section 78-35? states:

Issue

1. Most subrogation payments are between insurance companies. Instances will exist where the 'entity that is not insured under the policy' (section 78-35) (third party) is another insurance company and the provisions of section 78-15 will allow that insurer to claim an input tax credit for the claim payment. Will section 78-15 prevail over section 78-35 to allow an input tax credit to the third party insurance company?

ATO view

2. There will be occasions where the payment made to the first insurance company (the one exercising its rights of subrogation by the second insurance company (the 'entity that is not insured under the policy') is made by the second insurance company in settlement of a claim under one of its policies. In this instance, section 78-10 and section 78-15 could operate in relation to that payment.

3. Sections 78-10 and 78-15 provide for a decreasing adjustment, not an input tax credit. Section 78-35 only operates to deny an input tax credit that would otherwise be available under Division 11. In this way, sections 78-10, 78-15 and 78-35 are not mutually exclusive.

Applying the view expressed by the ATO in Subrogation - will section 78-15 prevail over section 78-35? to the present case:

I is obliged by the terms of the insurance policy issued to I's insured to pay the TPI;

consequently the payment made by I to the TPI is 'in settlement of a claim under an insurance policy' for the purposes of subsection 78-10(1) and gives rise to a decreasing adjustment for I under section 78-10 if the requirements in subsection 78-10(2) are satisfied; and

section 78-35 does not deny I the decreasing adjustment because section 78-35 denies an input tax credit, not a decreasing adjustment.

When subrogation is taken into account (i.e. a TPI steps into the shoes of a third party), the statement in paragraph 8 of GSTR 2006/10 that 'third party' refers 'to an entity that the insured has a liability to' would include that TPI. Consequently we do not consider that paragraph 33 of GSTR 2006/10 denies I a decreasing adjustment where an insurance policy issued by I covers the insured for damage caused to a third party and, in settlement of a claim by the insured, I makes a payment to the TPI. If I nevertheless takes the view that GSTR 2006/10 and the public rulings dealing with subrogation are inconsistent and both apply to I then subsection 357(1A) in Schedule 1 to the Taxation Administration Act 1973 allows I to rely on either ruling.

Although the discussion above refers to I making the payment, we acknowledge that, in accordance with section 48-50 of the GST Act, A (as the representative member of a GST group of which I is a member) has the decreasing adjustment under section 78-10 of the GST Act.

Question 2

Summary

Paragraph 33 of GSTR 2006/10 confirms that I may be entitled to a decreasing adjustment if I settles an insurance claim by way of payment of money to a third party in respect of damage for which an at fault I insured is liable.

Detailed reasoning

The submissions in the ruling request focussed on a payment made by I directly to a TPI or an authorised representative of a third party in respect of damage for which an at fault I insured is liable.

We assume that this is because the paragraph 33 of GSTR 2006/10 and the definition of 'third party' in paragraph 8 of GSTR 2006/10 do not suggest that I is denied a decreasing adjustment under section 78-10 of the GST Act where, in settlement of a claim under an insurance policy issued by I to I's insured who is at fault and is liable for damage caused by the insured to a third party, I makes a payment directly to the third party. For the purposes of paragraph 8 of GSTR 2006/10 that third party is a 'third party', i.e. 'an entity that the insured has a liability to' and paragraph 33 of GSTR 2006/10 confirms that I may be entitled to a decreasing adjustment if I settles an insurance claim 'by way of payment of money to the insured or a third party'.

Although the discussion above refers to I making the payment, we acknowledge that, in accordance with section 48-50 of the GST Act, A (as the representative member of a GST group of which I is a member) has the decreasing adjustment under section 78-10 of the GST Act

Question 3

Summary

Paragraph 35 and Example 7 in GSTR 2006/10 support the view that A is entitled to a decreasing adjustment where I pays an amount direct to an authorised representative of a third party in respect of damage for which an at fault I insured is liable.

Detailed reasoning

The ruling request made a distinction between a TPI (an entity, acting on behalf of the third party) and an authorised representative (an entity authorised by the third party to receive the payment made by I).

It was submitted that A is entitled to a decreasing adjustment pursuant to section 78-10 in respect of a payment made by I to an authorised representative of a third party if that payment is in settlement of a claim under an insurance policy.

That submission is supported by paragraphs 33 and 35 in GSTR 2006/10. Paragraph 33 states that an insurer may be entitled to a decreasing adjustment where the insurer settles a claim by way of reimbursing a third party 'for costs incurred, or to be incurred'. Paragraph 35 goes further and states that the insurer may be entitled to a decreasing adjustment where the insurer 'provides consideration for a supply by a supplier to the insured or third party'. Example 7 in paragraphs 96 to 99 of GSTR 2006/10 demonstrates that an insurer is entitled to a decreasing adjustment for providing consideration for a supply by a supplier to the insured in settlement of a claim. In Example 7 a camera is stolen from the premises of an insured which has a contents insurance policy with an insurer. The insured orders a replacement camera from a supplier and lodges a claim which informs the insurer that a replacement camera has been ordered from the supplier. In settlement of the claim the insurer does not make a payment to the insured but instead makes a payment to the supplier. Paragraph 98 of GSTR 2006/10 confirms that the insurer is entitled to a decreasing adjustment under Division 78.

In our view by lodging a claim and informing the insurer that a replacement camera has been ordered from the supplier the insured made the supplier an authorised representative of the insured in relation to the claim, i.e. authorised the supplier to receive the payment made by the insurer in settlement of the claim. In Example 7 the insurer is entitled to a decreasing adjustment in respect of the payment made to the supplier. We consider that that would also be the case where, in settlement of a claim, I makes a payment to the authorised representative of a third party in respect of damage for which an at fault I insured is liable.

Although the discussion above refers to I making the payment, we acknowledge that, in accordance with section 48-50 of the GST Act, A (as the representative member of a GST group of which I is a member) has the decreasing adjustment under section 78-10 of the GST Act.