Edited version of private advice

Authorisation Number: 1052219563841

Date of advice: 6 February 2024

Ruling

Subject: GST and adjustments

Question 1

Does the payment of refunds to Eligible Policyholders give rise to adjustment events under section 19-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the payment of refunds to Eligible Policyholders do not give rise to adjustment events under section 19-10 of the GST Act. The payments are applied against, and conditional upon, the renewal of an insurance policy. They do not have the effect of changing the consideration for the earlier supply of the legacy insurance policy.

Question 2

Will you have decreasing adjustments under section 19-55 of the GST Act, when refunds are paid to Eligible Policyholders?

Answer

No, you will not have decreasing adjustments under section 19-55 of the GST Act when refunds are paid to Eligible Policyholders.

Question 3

Have you overpaid GST by calculating the value of the renewed insurance policy with reference to the gross premium amount?

Answer

Yes, you will have overpaid GST on your supply of the renewed insurance policy. The refund is applied as a discount against the gross insurance premium amount at the time the Renewal Notice is issued. Therefore, the value of the supply of the renewed insurance policy is the gross premium net of the refund.

This ruling applies for the following period:

x February 20xx to x February 20xx

The scheme commenced on:

x February 20xx

Relevant facts and circumstances

You are an insurance company.

You are registered for GST.

You implemented a refund scheme under which all Eligible Policyholders who renewed their insurance within a yearly renewal window received a one-off refund, applied as a rebate or offset against the premium billed under their Renewal Notice.

As only renewals were eligible for a refund, policyholders who took out a brand-new policy during the renewal window did not have the refund applied against the premium attached to that policy.

The refund was notionally paid to refund customers for excess premiums collected under a legacy insurance scheme.

Whether the policyholder had held an insurance policy under the legacy scheme was not considered for the purposes of determining their eligibility for the refund.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 19-10

Section 19-55

Division 142

Reasons for decision

Under subsection 19-10(1) of the GST Act, an adjustment event is any event which has the effect of:

(a)  cancelling a supply or acquisition; or

(b)  changing the consideration for a supply or acquisition; or

(c)   causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition.

Without limiting subsection 19-10(1), paragraph 19-10(2)(b) of the GST Act specifies that the following event is an adjustment event:

(b)  a change to the previously agreed consideration for a supply or acquisition, whether due to the offer of a discount or otherwise...

The Commissioner's view on what constitutes an adjustment event is set out in Goods and Services Tax Ruling GSTR 2000/19 Goods and services tax: making adjustments under Division 19 for adjustment events.

In relation to what constitutes a change in the consideration for a supply or an acquisition, the Commissioner comments at paragraph 18 of GSTR 2000/19 that:

18. Where the consideration for a supply or acquisition changes for any reason you have an adjustment event...Whether a payment or allowance changes the consideration for a supply will depend on the circumstances. The same commercial term could be used to describe various types of arrangements which may be quite different in substance. The substance of the arrangement or event will determine whether it is an adjustment event.

While the refund is described in the Guidelines as a refund of the excess premium paid for a legacy insurance policy, in substance it is not a refund arrangement that has the effect of changing the consideration for the legacy insurance policy. The eligibility criteria for the payment of the refund does not establish a nexus between the payment and the earlier supply of the legacy insurance policy. The payment of the refund is merely contingent upon, and applied against, an eligible renewal of a current insurance policy.

In other words, the previously agreed consideration for the supply of the legacy insurance policy remains unaffected by your payment of the refund. There is no change to the bargain set between the policyholder and yourself under the terms of the legacy insurance contract.

That the refund is paid to policyholders who did not hold a legacy insurance policy and is not paid to policyholders who did hold a legacy insurance policy, evidences a disconnect between the payment of the refund and the consideration for the legacy insurance policy. A change in the consideration for the legacy insurance policy cannot occur independently of the legacy policyholder.[1]

The effect of the refund scheme is such that the legacy insurance policyholder remains liable to have paid the full premium amount to you. Likewise, you remain entitled to have received the full premium amount from the legacy insurance policyholder.

In substance, the effect of the refund is to discount the premium for the renewed insurance policy.

While the refund has the effect of reducing the gross premium for the renewed policy, this reduction is applied as a discount at the time of issuing the Renewal Notice to the policyholder. As there is no change to a previously agreed consideration for the renewed policy, there is no adjustment event (GSTR 2000/19, paragraph 21).

As the payment of the refund does not give rise to an adjustment event, you will not have a decreasing adjustment as the event does not satisfy paragraph 19-40(a), nor section 19-55 of the GST Act.

You may be entitled to claim a refund of excess GST under Division 142, where you have overpaid GST on your supply of the renewed insurance policy by incorrectly calculating the value of the supply as the gross premium amount, rather than the gross premium amount net of the discount.

[1] See GSTR 2000/19, paragraph 40; Electrical Goods Importer v Commissioner of Taxation [2009] AATA 854.