Edited version of private advice

Authorisation Number: 1052170155083

Date of advice: 18 September 2023

Ruling

Subject: Insurance settlements and decreasing adjustments

Question

Did you have decreasing adjustments in respect of payments fraudulently processed against insurance policies underwritten by you, on the basis that the fraudulent payments were made 'in settlement of a claim' under subsection 78-10(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

This ruling applies for the following period:

xx September 20xx to xx September 20xx

The scheme commenced on:

xx January 20xx

Relevant facts and circumstances

You are registered for GST.

You issue general insurance policies, which are treated as taxable supplies under s 9-5 of the GST Act.

Fraudulent claim settlement payments were processed against insurance policies which were underwritten by you (the fraudulent payments).

These fraudulent payments were processed against legitimate claims that had been made by policyholders under genuine insurance policies, in circumstances where the originating claim had been settled and the claim file closed.

The fraudulent payments were processed against closed claim files, on top of what had been legitimately claimed by the policyholder. This was done without providing notification of the fraudulent payments to the policyholder.

You became aware of the fraudulent payments through an internal investigation. Up until that point, you had made decreasing adjustments in respect of the fraudulent payments on the belief that they were legitimate claim settlement payments to which s 78-10(1) of the GST Act applied.

Relevant legislative provisions

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

Reasons for decision

Subsection 78-10(1) of the GST Act provides that you will have decreasing adjustments in respect of the fraudulent payments if the monetary payments were made in settlement of a claim under an insurance policy.

It is assumed that the conditions set out in s 78-10(2) are satisfied in respect of the fraudulent payments, such that s 78-10(1) can apply to them.

The insurance policies against which the fraudulent payments were made were insurance policies as defined in s 195-1 of the GST Act, being:

...a policy of insurance (or of reinsurance) against loss, damage, injury or risk of any kind, whether under a contract or a law. However, it does not include such a policy to the extent that it does not relate to insurance (or reinsurance) against loss, damage, injury or risk of any kind.

The substantive issue is therefore whether the fraudulent payments were made 'in settlement of a claim' under those insurance policies.

The Commissioner relevantly considers the meaning of the phrase 'in settlement of a claim' in 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)

In relation to the meaning of the phrase 'a claim under an insurance policy,' the Commissioner's view as set out at paragraphs 12 to 13 of GSTD 2011/1 is that:

12. ...the phrase 'a claim under an insurance policy' means exercising a right, under a contract or statute, to remedy against loss, damage, injury or risk. The phrase also means asserting, making a demand to, and a right, under a contract or statute, to such remedy.

13. Hence, 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.

In considering the ordinary meaning of 'settlement,' the Commissioner forms the view at paragraph 20 of GSTD 2011/1 that:

20. ...[a] 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.

In accordance with this view, the phrase 'in settlement of a claim' formulates a two-part-test. Firstly, there must be an exercise or assertion of a right under a contract or statute to a remedy against loss, damage, injury, or risk. That is, a remedial claim must be made, irrespective of whether there is a right to such a remedy. Secondly, there must be a payment that releases the insurer from all liability in relation to that claim.

In this case, there were no substantiating claims made for the fraudulent payments. While the fraudulent payments were processed against legitimate claim files, those claim files had been closed on the basis that full settlement of the originating claim had occurred. In this respect, the fraudulent payments were made in addition to what had been legitimately claimed by the policyholder in settlement of their rights under the insurance contract.

While the fraudulent payments were notionally made in connection with legitimate claims, the fraudulent payments were not made in settlement of those claims. Those legitimate claims had been settled legitimately.

In the absence of substantiating claims for the fraudulent payments, it cannot be said that the fraudulent payments were made 'in settlement of a claim.'

Therefore, you did not have deceasing adjustments in respect of the fraudulent payments, on the basis that the fraudulent payments were not made 'in settlement of a claim' under subsection 78-10(1) of the GST Act.