Edited version of your written advice

Authorisation Number: 1051181188777

Date of advice: 16 January 2017

Ruling

Subject: GST and supply of hire car

Question 1

For goods and services tax (GST), who is liable to pay for the taxable supply of car hire made by the Australian company to the individual XYZ when the invoice for the hired car is sent to the insurer?

Advice

From the facts given, the arrangement between the Australian company and the insurer is that of a payment arrangement for GST purposes. The supply of the hired car is made to the individual XYZ under the Car Hire Agreement and therefore the individual XYZ is liable to pay for the taxable supply of car hire that they acquired from the Australian company.

Relevant facts

You are an Australian company and registered for GST.

You are a provider of vehicles to parties who have been involved in a motor vehicle accident and charge a rental/hire fee for the provision of those vehicles while the vehicles are being repaired. The charges for the hire of the vehicle are usually part of the cost of an insurance claim against the driver at fault in the accident causing the damage to the party undertaking the hire.

The individual XYZ was the driver of a vehicle that was involved in a car accident. The insurer for the party at fault has agreed to repair the damaged car and the insured would be eligible for a car hire while the car is being repaired.

XYZ entered into a contract with you for the hiring of a car. XYZ has provided details of the insurance claim in the contract and authorised you to charge their credit card for all charges under the legal agreement in accordance with the respective terms and conditions. XYZ also authorised you to arrange settlement of the replacement vehicle, to enter into correspondence and to receive payment on their behalf in relation to the rental claim.

You do not have any written or oral contractual arrangement with the insurance company in regard to the hired car made by XYZ other than in relation to the agreed pricing/rental rates. You follow up on payment on behalf of XYZ who has requested that you obtain reimbursement for the vehicle hire costs on their behalf from the insurer.

The discussions you have with the insurer in regard to XYZ's hire vehicle charges are to confirm XYZ's claim is all in order and the insurer accepts liability for the claim. The insurer requests that you submit the invoice on behalf of XYZ for them to arrange payment directly to you.

You invoiced the insurer for the hired car that was supplied to XYZ. The total amount in the invoice included a GST amount.

The insurer issued a cheque to XYZ and the cheque was sent to your mailing address. The insurer advised it did not include the GST amount in the payment to XYZ because the owner of the car is registered for GST and therefore the cost incurred to be reimbursed should not include GST. It did not receive the supply of the hired car and the payment is to reimburse the vehicle hire costs incurred by XYZ

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subdivision 78-D

Reasons for decision

Goods and Services Tax Ruling GSTR 2006/10 provides guidance on insurance settlements and entitlement to input tax credits.

According to GSTR 2006/10, an insurer has a number of alternatives available for settling an insurance claim. For example, in the case of a motor vehicle accident claim, the insurer may pay an agreed amount to the insured in the event of a total loss or organise with a repairer to repair the vehicle and provide the insured with a replacement vehicle or subsidise car hire for the insured.

Insurance settlements may involve arrangements between the insurer, the supplier of the goods, services or anything else and the insured. Arrangements involving three or more parties are commonly referred to as tripartite arrangements. An examination of the surrounding circumstances, which together with the agreement form the total fact situation, is relevant for determining whether the agreement correctly records the supplies that are being made between the parties.

Under a tripartite arrangement, it is possible that a supply is made to one entity under the terms of an agreement, but the supply is provided to another entity. The term 'provided' here is used to contrast with the term 'made'. It distinguishes between the contractual flow of the supply to the recipient (the entity to whom the supply is made) and the actual flow of the supply to another entity (the entity to whom the supply is provided). For example, an insurer arranges with a supplier (or repairer) to repair the insured's motor vehicle. It is also possible under a tripartite arrangement for two or more supplies to result from a single set of activities by a supplier.

In tripartite arrangements, it may be that the agreement, together with the surrounding circumstances, show that there is a binding obligation between the two parties making the arrangement for goods, services or anything else to be provided to a third party. Therefore, it is important to analyse the act or transaction that the insurer enters into when settling a claim to determine what supply is being made by whom and to whom.

Supply made to insurer

In the context of an insurance settlement, an insurer may arrange with a supplier to provide goods, services or anything else to the insured or a third party. We consider that, if an insurer enters into a binding obligation (either written or oral) with a supplier to provide goods, perform services or do something else for the insured or a third party in settlement of an insurance claim, and is liable to pay for that supply, the supplier is making a supply to the insurer, even though the supply may be provided to another entity, the insured or a third party.

Alternatively, an insurer may enter into a pre-existing framework or agreement with a supplier which contemplates that the parties act in a particular manner in respect of supplies by the supplier to the insured or third party and which establishes a liability owed by the insurer to the supplier (not the insured or third party) in the event that there is a supply by the supplier to the insured or third party

In the context of an insurance claim, the Commissioner considers that the following factors, in combination, may point to a supply being made by the supplier to the insurer under a tripartite arrangement:

a) there is a pre-existing framework or agreement between the insurer and the supplier which contemplates that the parties act in a particular manner in respect of supplies by the supplier to the insured or third party;

b) the pre-existing framework or agreement:

i. identifies a mechanism by which the insured or third party is to be identified such that the supplies made to the insured or third party come within the scope of the pre-existing framework or agreement; and

ii. specifies that the insurer is under an obligation to pay the supplier if there is a relevant supply by the supplier to the insured or third party and also sets out a mechanism by which such payment is authorised.

c) the framework or agreement and the mechanism for authorising the payment are in existence before the supply by the supplier to the insured or third party (that is, the supplier knows in advance that the insurer is obliged to pay some or all of the consideration in the event of the supply to the insured or third party);

d) the supplier makes the supply to the insured or third party in conformity with the pre-existing framework or agreement between the insurer and the supplier; and

e) the obligation of the insurer to make payment pursuant to the pre-existing framework or agreement is not an administrative arrangement to pay on behalf of the insured or third party for a liability owed by the insured or third party to the supplier. Rather, once the supply becomes a supply to which the pre-existing framework or agreement applies, the pre-existing framework or agreement establishes a liability owed by the insurer (not the insured or third party) to the supplier in the event that there is a supply by the supplier to the insured or third party.

Ultimately, it is a question of fact and degree whether a supply to the insurer can be identified (and for which the payment is consideration). If such a supply is identified the payment by the insurer is consideration for an acquisition made by the insurer.

The following is an example of a pre-existing framework or agreement and the GST consequences under this framework/agreement:

Tom holds an insurance policy with Sure Insurance. He uses his car for business purposes and can claim 100% GST credits on the premium. When he damages the car, Sure Insurance:

● agrees that the car can be repaired at a cost of $5,500 (including GST)

● pays a repairer to make the repairs.

Sure Insurance has a contract with the repairer to repair vehicles for Sure Insurance policy holders.

Sure Insurance pays the repairer the full $5,500 and claims a GST credit of $500. Tom does not make any payment to the repairer and cannot claim a GST credit.

This can be contrasted with a payment arrangement where the insurer meets an insured's liability to pay a supplier, such as a repairer. In such cases, there is only one supply, that is, from the supplier to the insured.

Payment arrangements

If the insurer meets an insured's liability to the supplier without the supplier taking on any other binding obligation to the insurer, the payment by the insurer is simply a payment by a third party entity, that is, the insurer. This payment arrangement does not change the fact that the supplier makes the supply to the insured, and not to the insurer. The insurer is not making an acquisition under Division 11 and is not entitled to input tax credits for payments made to the supplier. It does not matter that the insurer and the supplier actually have arrangements in place before the event (whether under an agreement or not) to pay for the goods or services supplied to the insured or a third party, whether invoices are sent directly to the insurer or whether costs are directly debited to the insurer.

A feature of these arrangements is that the agreement for the supply of the goods or services is between the supplier and the insured and that an obligation to pay remains with the insured. The fact that the insurer meets the insured's liability does not alter this. There is no binding obligation between the supplier and the insurer for the supply of goods or services to the insured, nor a pre-existing framework or agreement which establishes a liability owed by the insurer to the supplier (not the insured or third party) in the event that there is a supply by the supplier to the insured or third party. The arrangement between the supplier and the insurer remains that of a payment arrangement.

The following are examples of a payment arrangement and the GST consequences of the payment arrangement:

Example 1:

Betty is registered for GST and holds a car insurance policy with ABC Insurance. She tells ABC she can claim a 100% GST credit for the GST included in the policy price.

Betty has a car accident and ABC insurance agrees the damage to her car will cost $5,500 (including GST) to fix. Betty pays repair costs of $5,500 (or spends $5,500 on a new car).

ABC Insurance pays Betty $5,000 in full settlement of her claim. Betty claims a GST credit of $500 ($5,500 x 1/11th) when she lodges her next activity statement.

Betty's out -of-pocket expense is zero (that is, $5,000 from the insurer plus $500 GST credit).

Because Betty told ABC she could claim a GST credit for her insurance premium, she does not have a GST liability on the payment received from ABC in settlement of her claim.

Example 2:

Sarah holds an insurance policy with XYZ Insurance. She uses her car 100% for business purposes and can claim 100% GST credits on the premium. When she damages her car, XYZ Insurance:

● agrees the damage will cost $5,500 (including GST) to fix

● instructs a repairer to repair the vehicle.

XYZ has no contract with the repairer.

Sarah asks XYZ Insurance to pay the repairer directly the amount less GST ($5,000). Sarah pays the remaining $500.

As XYZ Insurance paid the repairer on behalf of Sarah when she asked them to (as a simplified payment arrangement), Sarah is considered to have paid $5,500 for the repairs. Sarah can claim a GST credit of $500 (1/11th of $5,500).

Applying facts to the above information

In your case, XYZ has assigned their rights to you to make a claim and collect the hire costs of the car from the liable party's insurer. The insurer has mailed the cheque it issued to XYZ directly to you. The insurer has advised you that the amount paid to XYZ did not include GST because it was advised that the insured is registered for GST. Since you did not have any binding obligation with the insurer in regard to XYZ's hired car, the arrangement between you and the insurer is that of a payment arrangement when the insurer made the payment to you on behalf of XYZ.

In this instance XYZ is the one that has acquired the hired car from you as your hire agreement is with XYZ. The obligation to pay for the hired car remains with XYZ under the hire agreement. The fact that the insurer pays part of XYZ's invoice to you does not alter XYZ's obligation to pay for the hired car. You are entitled to receive the total amount you invoice for your taxable supply of car hire to XYZ and where only part payment is received from the insurer, XYZ is responsible to pay the outstanding amount.