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Edited version of your written advice
Authorisation Number: 1013126802750
Date of advice: 22 November 2016
Ruling
Subject: GST and payment to a third party by an insurer
Question
Is GST payable on compensation received by you from your legal representative insurer for expenses not recovered?
Answer
No. GST is not payable on compensation received by you from your legal representative insurer for expenses not recovered.
Relevant facts and circumstances
You are freehold owners of a property.
You instructed your legal representative to prepare a lease in which some expenses would be recoverable.
By what has been agreed to be an error of your legal representative, the lease did not provide for recovery of some expenses, despite the legal representative who prepared the lease being instructed to recover those expenses.
The tenant refused to reimburse you for the expenses and you made a successful claim against your legal representative insurer for expenses not recovered.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 78-65
Reasons for decision
Position of third parties
According to section 78-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), 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:
● the payment is made in settlement of a claim under an insurance policy under which the entity is not insured; and
● the payment is to discharge a liability owed to that entity by the entity insured.
Section 78-65 of the GST Act applies to the situation where the insured has a liability to a third party. This could be because of damage caused by the insured to the third party, and the settlement from the insurer is made to enable that liability to be discharged.
In this case, you receive a payment from the insurer of your legal representative who have a liability to you for professional negligence. The payment is made in settlement of a claim under the insurance policy under which you are not the insured.
Therefore, section 78-65 of the GST Act applies. The payment made to you by an insurer in settlement of a claim under an insurance policy under which you are not the insured is not consideration for a supply that you made to the insurer.