Edited version of your written advice

Authorisation Number: 1051207398459

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Date of Advice: 23 March 2017

Ruling

Subject: GST and decreasing adjustment

Question 1

Does section 78-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply to allow a decreasing adjustment (DA) on the payments made by you to policyholders (the Payments) which reimburse the policyholders for expenses they have incurred?

All further legislative references are to the GST Act unless stated otherwise.

Answer

Yes. Section 78-10 applies to allow a DA on the Payments which reimburse the policyholders for expenses they have incurred.

Relevant facts and circumstances

You are registered for Goods and Services Tax (GST).

A GST Group was formed and you became the representative member of that GST group.

You are carrying on an enterprise as a general insurance company.

The insurance products offered by you to policyholders and potential policyholders are all taxable general insurance products for GST purposes.

Settlements under these policies do not relate to non-creditable insurance events.

The claim process and circumstances surrounding the Payments

When a policyholder notifies you of a claim, a claims team member will commence a new claim in your system. The policyholder is required to confirm their input tax credit entitlement, that is, their entitlement to input tax credits for GST paid on their premium in relation to the period in which the claim event occurred. The policyholder's input tax credit entitlement is recorded in your system against the new claim.

This private ruling is provided on the circumstances where policyholders have no entitlement to an input tax credit for the premium paid in relation to the period during which the event occurred giving rise to the claim.

In most cases, an employee of yours will assess the policyholder's claim. In some circumstances, you will directly engage a service provider to undertake an assessment of the claim or provide a report detailing the extent of damage. Where this occurs, you advise that a creditable acquisition is made under Division 11 if GST was levied by the service provider.

Alternatively, at your direction, the policyholder will engage the assessor or service provider who is assessing the claim. You will then reimburse the policyholder for the cost associated with engaging the assessor or service provider (referred to in this private ruling as a Payment). When you direct the policyholder to incur such costs it is verbally agreed upfront between you and the policyholder that you will reimburse the policyholder for the cost by making a Payment to them.

When a policyholder makes a claim for loss under their contents policy, you will instruct the policyholder over the phone that a police report will be required to substantiate the claim. That is, proof that the theft occurred. You will advise and confirm with the policyholder that you will repay them for the cost of the report if their claim is valid.

Similarly, if the policyholder's insured property is a damaged computer, the advisor will instruct the policyholder to source a report from their local Information Technology specialist detailing the damage and provide a copy to you. This report would then be used in determining whether the computer will be repaired or replaced. The policyholder is advised that they will be repaid the cost of the report.

For some claims under building insurance policies, policyholders undertake makeshift repairs and then engage the builder to undertake a full report. You will reimburse the policyholder for the cost of the report in addition to the amount spent on the makeshift repairs.

As such, the reimbursements (Payments) are made under circumstances where the policyholder:

Engages an assessor or service provider to assess the damage to the insured property;

Obtains a police incident report;

Obtains a driving history report from a transport authority/body; or

Incurs costs to carry out emergency building repairs and obtain a full building report.

The information that is obtained by the policyholder will be used by you in deciding how to settle the policyholder's claim.

An entitlement to input tax credits under Division 11 does not arise for Payments you make.

The terms in the PDS for the respective insurance products form the contractual terms between you and the policyholder as the contractual policy documents make reference to the terms of the PDS.

As advised, if the Payments are not covered by any clauses within policy contractual documents, you would still reimburse the client so as to settle the claim made by the policyholder.

Policyholders are not agents of you when they engage an external supplier. You have explained that in an insurance context, reimbursing a policyholder means a cash settlement to a policyholder for a loss they have incurred in relation to a claim.

Policyholders are not remunerated for engaging with external suppliers.

In respect of the transaction between the policyholder and the external supplier, if the policyholder did not pay for the things acquired from the external supplier the policyholders remains liable to pay. There is no recourse to you for that liability to pay.

Relevant legislative provisions

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

Reasons for decision

Agency and reimbursement

In the context of an insurance claim, an insurance policy may allow the insured to arrange or authorise repairs on behalf of the insurer.

Goods and Services Tax Ruling GSTR 2006/10 Goods and services tax: insurance settlements and entitlement to input tax credits (GSTR 2006/10) considers agency at paragraphs 69 to 75 and recognises that it will be a question of fact as to whether the insured is acting as an agent for the insurer in arranging or authorising repairs.

In this case, the policyholder is not an agent when it engages an external supplier. This is supported by the absence of any express or implied authority to act as an agent of the insurer and that:

Policyholders are not remunerated for engaging with external suppliers; and

No recourse exists to you for the liability of the policyholder to pay the external supplier for acquisitions made from the external supplier.

Furthermore, entitlement to input tax credits under Division 11 does not arise for Payments you make.

Decreasing adjustment under section 78-10

Subsections 78-10(1) and 78-10(2) provide that:

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

Makes a payment of money; or

Makes a supply; or

Makes both a payment of money and a supply.

(2) However, this section only applies if:

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

Either:

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

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

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

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

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

In this case, it is not contested that the requirements of subsection 78-10(2) are satisfied because:

Your supplies of general insurance policies are taxable supplies;

The policyholders have no entitlement to an input tax credit for the premium paid;

You are registered for GST; and

Settlements under the insurance policies you provide do not relate to non-creditable insurance events.

Paragraph 33 of GSTR 2006/10 provides that:

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.

Importantly, the opening words to subsection 78-10(1) provide that a decreasing adjustment arises if the payment of money or supply or both payment of money and supply are made in settlement of a claim under an insurance policy.

Paragraphs 10 to 20 of Goods and Services Tax Determination GSTD 2011/1 Goods and services tax: is an ex gratia payment by an insurer in response to a claim under an insurance policy a payment made 'in settlement of a claim'? (GSTD 2011/1) discusses the meaning to the phrases 'a claim under an insurance policy' and 'in settlement of a claim' in the context of ex gratia payments. Those paragraphs are not reproduced in full here. However, those paragraphs provide that a claim may be made under an insurance policy irrespective of whether or not there is a right to remedy under the terms of the policy and that an ex gratia payment, in the insurance context, may be made in settlement of a claim where the insurer is released from all liability in relation to the claim. Therefore, we are of the opinion that the Payments are made in settlement of a claim by the policyholder under its insurance policy as such Payments are made to cover the policyholders for the costs they incur due to their claim as a result of the insured event.

As the Payments were in settlement of a claim under an insurance policy and the requirements of subsection 78-10(2) are satisfied you are entitled to a decreasing adjustment under section 78-10 for the Payments you make which reimburse the policyholders for expenses they have incurred.