Edited version of your written advice

Authorisation Number: 1013043402078

Date of advice: 1 July 2016

Ruling

Subject: Goods and services tax - insurance, decreasing adjustment and increasing adjustment

In this ruling, unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Question

When an entity (Insurer) electronically transfers an amount from one of its bank accounts
(Account 1) to a second bank account (Account 2) as a result of two of its policyholders involving in a single accident in which both of their cars were damaged and one of them was at fault in causing the accident, in relation to the transfer of the amount:

1. whether Insurer has a decreasing adjustment pursuant to section 78-10

2. whether Insurer has an increasing adjustment pursuant to subsection 78-40(1), and

3. whether Insurer has any other GST consequences.

Answer

1. No. The transfer of the amount is not made in a settlement of a claim under paragraph 78-10(1)(a).

2. No. Subsection 78-40(1) does not apply because Insurer does not have a decreasing adjustment under Division 78 in relation to the transfer of the amount.

3. No. The transfer falls outside the GST net

Relevant facts and circumstances

Insurer is registered for GST and underwrites their own comprehensive car insurance policies.

A policyholder notifies Insurer of a claim. Where the policyholder has no entitlement to input tax credits for the premium paid, Insurer has a decreasing adjustment determined under section 78-10.

Where it is established that a third party has caused damages to the policyholder's car, Insurer may exercise their rights of subrogation under the policyholder's insurance policy to seek recovery from the third party who has caused the damages and is found to be at fault.

Where Insurer is seeking recovery of the policyholder's claim for an authorised repair and Insure has claimed an ITC for the repair costs, the GST exclusive repair costs are to be recovered.

Where two policyholders (Party A and Party B) of Insurer involve in a single accident in which both insured cars are damaged, Insurer will:

• pay for the costs to repair Party A's car

• pay for the costs to repair Party B's car

• determine which of Party A and Party B is at fault (percentages of fault) in causing the accident

• determine an amount of the costs to repair the damaged car of the no (or less) fault policyholder to be attributable to the at fault policyholder

• transfer the amount from one of its bank account (Account 1) to a second bank account (Account 2)

• use the amount transferred for the purposes of risk rating and premium pricing for the at fault party, and

• not use the amount transferred for the purposes of risk rating and premium pricing for the no (or less) fault party.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 subsection 33-10(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 33-10(2)

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

A New Tax System (Goods and Services Tax) Act 1999 section 78-15

A New Tax System (Goods and Services Tax) Act 1999 section 78-40

A New Tax System (Goods and Services Tax) Act 1999 subsection 162-70(5)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Decreasing adjustment

Among other things, section 78-10 provides:

(1) 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.

(2) however, this section only applies 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 …

Payments by insurers upon claims lodged

Ordinarily, in an accident involving two cars, because fault typically is not determined immediately (but rather through an investigation process by the insurers), the final decision on who is at fault (in causing the accident) and pays for the damages usually has to wait until the investigation is complete. However, a policyholder who has lodged his claim with his insurer may not be able to wait for the payout, so an insurer pays while determining fault and then seeks to recover those costs later from the at fault party or his insurer.

Two policyholders in a single accident

Party A and Party B are Insurer's policyholders of comprehensive car insurance policies for Vehicle A and Vehicle B respectively. Their cars are involved in a single accident.

Insurer pays the claims lodged by Party A and Party B respectively.

Insurer determines that Party A is at fault in causing the accident in which their cars are damaged.

Costs of repairing damages to Vehicle B

Among other things, Insurer contracts a panel beater to repair Vehicle B and pays for the GST inclusive repair costs from Account 1 before Insurer determines Party A is at fault. Insurer claims the related input tax credit.

As Party B is not at fault, Insurer will not take the GST exclusive costs in repairing Vehicle B into account for the purposes of risk rating and premium pricing for Party B.

Recovery

To give effect to this, Insurer uses the procedures in its recovery process when it deals with external insurers, recovery agents and other third parties to ensure it would 'remove' the repair costs from Party B's record by 'recovering' them from Party A who is the at fault party.

Rights of subrogation

Insurer has primary liability under a comprehensive car insurance policy and bears the risk of loss suffered by a policyholder in a car accident (whether the policyholder is at fault or not). Under the policy, Insurer has no right to be indemnified by the policyholder. However, Insurer has subrogation rights allowing it to legally pursue a third party who is at fault and causes an insurance loss to the policyholder.

In the car accident involving Party A and Party B, Party A is the third party from the perspective of Party B and Insurer, and vice versa. Although Insurer deals separately with Party A and Party B, Insurer undertakes those activities as one entity in one legal capacity. If Insurer exercises the subrogation rights under Party B's comprehensive car insurance policy to pursue Party A for the purposes of recovering Party B's loss, Insurer is dealing with itself and not with another entity. This is because Insurer has primary liability under Party A's comprehensive car insurance policy and has no right to be indemnified by Party A. Insurer cannot pursue Party A or any other entity to recover the insurance loss suffered by Party B.

Transfer of an amount of the GST exclusive repair costs

As Party A is the at fault party causing the car accident, Insurer transfers the amount of GST exclusive repair costs from the Account 1 to Account 2.

The transfer between the two accounts operated by Insurer may be referred to as an 'electronic payment' as it is an online banking transaction on the internet.

For GST purposes, however, the transfer is not an 'electronic payment' as defined in section 195-1. The term 'electronic payment' is defined for the purposes of subsections 33-10(1) and (2) and 162-10(5) in relation to payment of assessed net amounts and GST instalments respectively.

GSTR 2014/3 provides:

85. The Macquarie Dictionary defines 'payment' as '2. That which is paid; compensation; recompense' or '3. Requital'.

The Macquarie Dictionary defines:

• 'paid' as '2. to give (money, etc.) as in discharge of debt or obligation'

• 'compensation' as '2. something given or received as an equivalent for services, debt, loss, suffering, etc.; indemnity'

• 'recompense' as '6. remuneration or reward', and

• 'requital' as '2. a return or reward for service, kindness, etc.' or ' 3. retaliation for a wrong, injury, etc.'.

Therefore, we consider that a payment of money is a transaction involving two separate entities: a payer and a payee.

For GST purposes, we consider that the transfer of the amount of GST exclusive repair costs is not a payment of money for the purposes of paragraph 78-10(1)(a).

The risk rating and premium pricing for Party B will not take into account this amount of GST exclusive repair costs.

However, the risk rating and premium pricing for Party A will take into account this amount of GST exclusive repair costs.

Settlement of claim

Because Insurer pays the claims by Party A and Party B respectively before determining who is at fault in causing the accident, the transfer of the amount of GST exclusive repair costs from the Account 1 to Account 2 is a mechanism to ensure that the risk rating and premium pricing for Party A and Party B respectively is determined correctly.

For GST purposes, we consider that the transfer between the two accounts is not a payment of money made by Insurer in a settlement of a claim made by Insurer in exercising its subrogation rights under an insurance policy issued (to Party B) by Insurer under paragraph 78-10(1)(a).

Decreasing adjustment

Therefore, Insurer does not have a decreasing adjustment under section 78-10.

Subsection 78-40(1)

Subsection 78-40(1) provides:

Division 19 applies in relation to a *decreasing adjustment that an insurer has under this Division as if:

(a) the adjustment were an input tax credit: and

(b) the settlement of the claim to which the adjustment relates were a *creditable acquisition that the insurer made; and

(c) any payment or supply made by another entity, in settlement of a claim made by an insurer in the insurer's exercising of rights of subrogation in respect of the *insurance policy in question, were a reduction in the *consideration for the acquisition.

For subsection 78-40(1) to apply, we consider that among other things, the following circumstances must exist.

Firstly, the insurer must have a decreasing adjustment arising in settlement of a claim under an insurance policy (under section 78-10). An example is Insurer X pays Insured X a settlement payment for a total loss.

Secondly, the insurer must receive a payment in settlement of a claim made by the insurer in the insurer's exercising of rights of subrogation in respect of the insurance policy. Continue from the above example. Party Y is at fault in causing the accident and is insured by Insurer Y. Insurer X receives a payment from Insurer Y in settlement of a claim made by Insurer X in exercising its rights of subrogation in respect of Party X's policy.

Subsection 78-40(1) will apply to the payment Insurer X receives from Insurer Y.

In the accident involving Party A and Party B, we consider that as explained above, the transfer between two Insurer's bank accounts is not a payment of money made by Insurer in a settlement of a claim made by Insurer in exercising its subrogation rights under an insurance policy issued (to Party B) by Insurer under paragraph 78-10(1)(a).

It follows that the transfer is not a payment of money received by Insurer in a settlement of a claim made by Insurer in exercising its subrogation rights under an insurance policy issued (to Party B) by Insurer under paragraph 78-40(1)(c).

Therefore, Insurer does not have an increasing adjustment under subsection 78-4(1).

Any other GST consequences

For GST purposes, as explained above, the transfer is not a payment of money. Therefore, the transfer falls outside the GST net and has no GST consequences.