Edited version of private advice

Authorisation Number: 1052325960096

Date of advice: 1 November 2024

Ruling

Subject: GST and insurance to non-residents of Australia

Issue 1

Question 1

Is the supply by the Insurer of a pre-paid insurance policy (ABC Policy) a GST-free supply under paragraph (b) of item 4 in the table of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (table item 4(b)) where the application and Premium payment for an ABC Policy is accepted by the Insurer when the Policy Holder is located outside the indirect tax zone (Australia) and is not an Australian resident for tax purposes?

Answer

Yes. Table item 4(b) applies to the Insurer's supply of the pre-paid ABC Policy as the insurance to the non-resident is:

•         a supply made in relation to rights; and

•         the rights are created when the recipient is outside Australia as both the required Premium payment and acceptance of the application occurs when the recipient is outside Australia.

The supply is therefore GST-free under section 38-190.

Question 2

Is the supply by the Insurer of the insurance policy (Policy XYZ) GST-free under table item 4(b) where the application for an XYZ Policy is accepted by the Insurer when the Policy Holder is located outside of Australia and is not an Australian resident for tax purposes?

Answer

Yes. Table item 4(b) applies to Insurers supply of the XYZ Policy where the Premium payment for the minimum period relevant to the application have been paid with the application as the insurance to the non-resident is:

•         a supply made in relation to rights; and

•         the rights are created when the recipient is outside Australia as both the required Premium payment (minimum or full) and acceptance of the application occurs when the recipient is outside Australia.

The supply will therefore be GST-free under section 38-190.

Issue 2

For the purposes of this private ruling reference to:

•         the 'original supply' or 'original rights' is a reference to the initial supply of rights (in questions 1-2) by the Insurer to the Policy Holder whilst the Policy Holder is located outside Australia.

•         the 'level of cover' is referencing the cover and benefits associated with the 'product' offered by the Insurer.

•         the 'period of cover' is referencing the 'start date' and 'end date' as specified in the application form accepted by the Insurer.

Question 3

a)     Does the supply by the Insurer, which was initially GST-free in the circumstances under questions 1 and 2, continue to be GST-free when the Insurer accepts a Policy Holder's application to upgrade or downgrade their level of cover whilst the Policy Holder is located in Australia?

b)     Is the additional Premium payable by the Policy Holder upon changing the level of cover consideration for the original supply?

c)      If a new supply is made, can the Commissioner of Taxation (Commissioner) confirm that only the additional Premium payable is consideration for the further supply and the further supply is subject to GST?

Answer

a)     To the extent that the supply of the original rights by the Insurer continue in the upgraded or downgraded product, those original rights continue to be GST-free under table item 4(b) for the period covered by the original agreement.

However, to the extent that there are additional rights granted upon upgrading and an additional Premium is payable, the Insurer is considered to make a further supply of rights to the Policy Holder. In respect of this further supply of rights, table item 4(b) does not apply and the supply of rights will not be GST-free, as the Policy Holder is in Australia when they are supplied.

Where the Insurer accepts a Policy Holder's application to downgrade (or decrease) the Policy Holders level of cover there is no new or further supply within the meaning of section 9-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

b)     No. Where the Insurer accepts a Policy Holder's application to upgrade their level of cover whilst located in Australia, any additional Premium payment by the Policy Holder is not consideration within the meaning of section 9-15 of the GST Act for the original supply.

c)      Yes. The Commissioner confirms that only the additional Premium payment is consideration for a further supply of rights, and the further supply will be a taxable supply under section 9-5 and subject to GST.

Question 4

a)     Does the supply by the Insurer, which was initially GST-free in the circumstances under questions 1 and 2, continue to be GST-free when the Insurer accepts a policyholder's application to add a new person, or remove an existing person from the ABC Policy or XYZ Policy whilst the Policy Holder is located in Australia?

b)     Is the additional Premium payable by the Policy Holder upon adding a new person to the ABC Policy or XYZ Policy consideration for the original supply?

c)      If a new supply is made, can the Commissioner confirm that only the additional Premium payable in relation to the added person is consideration for the further supply and the further supply is subject to GST?

Answer

a)     To the extent that the supply of the original rights by the Insurer continue when a new person is added, or an existing person is removed, those original rights continue to be GST-free under table item 4(b) for the period covered by the original agreement.

However, to the extent that there are additional rights granted upon adding a new person and an additional Premium is payable, the Insurer is considered to make a further supply of rights to the Policy Holder. In respect of this further supply of rights, table item 4(b) does not apply as the Policy Holder is in Australia when they are supplied, and the further supply will not be GST-free.

Where the Insurer accepts a Policy Holder's application to remove an existing person from the Policy there is no new or further supply within the meaning of section 9-10.

b)     No. Where the Insurer accepts a Policy Holder's application to add a new person whilst located in Australia, any additional Premium payment by the Policy Holder is not consideration for the original supply within the meaning of section 9-15.

c)      Yes. The Commissioner confirms that only the additional Premium payment is consideration for a further supply of rights within the meaning of section 9-15, and the further supply is taxable under section 9-5 and is subject to GST.

Question 5

a)     Does the supply by the Insurer, which was initially GST-free in the circumstances under questions 1-2, continue to be GST-free when the Insurer accepts a policyholder's application to extend the term of their ABC Policy whilst the Policy Holder is located in Australia?

b)     Is the additional Premium payment by the Policy Holder consideration for the original supply?

c)      If a new supply is made, can the Commissioner confirm that only the additional Premium payable in relation to period extension is consideration for the further supply and the further supply is subject to GST?

Answer

a)     Where there is an extension of the ABC Policy that occurs in Australia, the initial period of cover supplied under the original agreement remains GST-free under table item 4(b). The additional period of cover of the ABC Policy will constitute a further supply of rights made by the Insurer, and table item 4(b) does not apply to this additional period of cover as the Policy Holder is in Australia when they are supplied. The additional period of cover will not be GST-free.

b)     No. The additional payment by the Policy Holder is not consideration for the original supply within the meaning of section 9-15.

c)      Yes. The Commissioner confirms that only the additional Premium payment is consideration for a further supply within the meaning of section 9-15, and the further supply will be taxable under section 9-5 and is subject to GST.

Question 6

a)     Does the supply by the Insurer, which was initially GST-free in the circumstances under questions 1 and 2, continue to be GST-free when the Insurer accepts a policyholder's application to change the 'start date' of insurance coverage of the Policy whilst the Policy Holder is located in Australia?

b)     Is the additional Premium payment by the Policy Holder consideration for the original supply?

Answer

a)     Where there is a change in the cover start date and the initial length of cover remains unchanged, the supply under the original agreement continues to be GST-free under table item 4(b).

To the extent the initially supplied length of cover is:

-       extended, there is a further supply of rights to the Policy Holder within the meaning of section 9-10. In respect of this further supply of rights, table item 4(b) does not apply as the Policy Holder is in Australia when they are supplied. This further supply, therefore, is not GST-free.

-       reduced, there is no new or further supply made within the meaning of section 9-10.

b)     No. The additional Premium payment by the Policy Holder upon extending the period of cover is not consideration for the original supply within the meaning of section 9-15. The additional Premium payment is consideration for the new and further supply of rights.

Question 7

Does the supply by the Insurer, which was initially GST-free in the circumstances under questions 1 and 2, continue to be GST-free when the Insurer accepts a policyholder's application to suspend the insurance coverage of the Policy whilst the Policy Holder is located in Australia and later re-instates the cover on removal of the suspension?

Answer

Where the period of cover supplied under the original agreement remains unchanged, the suspension and later re-instatement of the ABC Policy and XYZ Policy continues to be GST-free under table item 4(b).

In addition, for an ABC Policy, where there is a change to the period of cover under the original agreement (as the suspension may cause a change to the 'end date'), to the extent that the original length of cover remains unchanged, the supply continues to be GST-free under table item 4(b).

Issue 3:

Question 8

a)     Is the Insurer process to establish the physical location of the Policy Holder at the time of acceptance of the ABC Policy or XYZ Policy fair and reasonable?

b)     Where there is no evidence available to the Insurer that suggests that a Policy Holder has a place of abode in Australia at the time of application, can each Policy Holder be treated as a non-resident?

Answer

Question 9 does not involve the application of a provision of a taxation law, and as such the Commissioner is not empowered under section 359-5 of Schedule 1 of the Taxation Administration Act 1953 to rule on this question.

This ruling applies for the following period:

1 January 2024 to 31 December 2027

Relevant facts and circumstances

The Insurer is an entity carrying on an enterprise in Australia and is registered for GST.

the Insurer supplies a range of insurance products to its customers.

This ruling request concerns the GST treatment of two particular groups of insurance products: "ABC" and "XYZ".

For the purposes of questions 1 to 3, the individual recipients are not Australian residents under section 6(1) of the Income Tax Assessment Act 1936.

ABC Insurance

An ABC Policy is designed to provide insurance to overseas individuals who will arrive in Australia. Where the Insurer supplies such policy, it is governed by the Insurers rules, terms and conditions (ABC Rules).

An overseas individual (Individual S) completes the Insurers online application form whilst overseas. In completing this form Individual S provides the following details:

• the individuals to be covered (the Insured Person/s)
• the period of cover (i.e. start date and end date)
• what they want to be covered for. This is selected by reference to a 'product' offered (i.e. the level of cover).

The Insurer requires payment of ABC premiums at the time of application and will only accept applications where the premiums have been paid up front for the entire period of cover.

Upon the Insurer accepting the application the Insurer supplies the Policy Holder under a contract of insurance.

Whilst the Insurer has accepted the application in advance of the Policy Holder's arrival in Australia, coverage under the ABC Policy will only commence from the date that the Individual S arrives in Australia (i.e. the cover start date') and other requirements are satisfied.

A policy that covers multiple years (i.e. multi-year, pre-paid ABC Policy) is issued as a single policy.

XYZ Policy

An XYZ Policy is designed to insurance to particular type of visitor to Australia to meet Visa requirements. Where the Insurer supplies such policy, it is governed by the Insurers rules, terms and conditions (XYZ Rules).

An overseas visitor (Individual V) completes the Insurers online application form whilst overseas. In completing this form Individual V provides the following details:

•         the individuals to be covered (the Insured Person/s)

•         estimated 'cover start date' being the date on which the cover starts and is the start date for the specified 'period of cover'.

•         what they want to be covered for. This is selected by reference to a 'product' offered (i.e. the level of cover).

The application form identifies that payment can be made at agreed intervals.

At the time of submitting the application form to the Insurer the applicant is required to make payment of a premium. The Insurer will only accept the application where the premiums for the minimum period relevant to the applicant, have been paid.

The minimum period of an XYZ Policy is one month and there is no defined maximum period. The XYZ Policy continues until it is terminated in accordance with the XYZ Rules.

Upon the Insurer accepting the application the Insurer supplies the Policy Holder under a contract of insurance.

Whilst the Insurer has accepted the application in advance of the Policy Holder's arrival in Australia, coverage under the XYZ Policy will only commence from the date that Individual V arrives in Australia (i.e. the cover start date') and other requirements are satisfied.

Changes to policies (ABC and XYZ)

Occasionally, changes to a policy may be requested by a Policy Holder during the term of the policy. These changes require the Insurers endorsement and are limited to the following circumstances:

•         a change to the 'level of cover' - In such a case the Policy Holder will upgrade or downgrade their level of cover by changing from the original product selected (at application) to another product within the relevant Rules. Such a change gives rise to either an increase or decrease in the level of benefit and cover provided by the Insurer to the Policy Holder. Where the Insurer accepts a Policy Holders request to change and there is:

­   an increase (i.e., upgrade) in the level of cover, a further Premium is payable by the Policy Holder to the Insurer.

­   a decrease (i.e., downgrade) in the level of cover, no further Premium is payable by the Policy Holder to the Insurer.

•         adding or removing a person - In such a case the Policy Holder can change who is covered under their policy by adding or removing individuals. Generally, where the Insurer accepts:

­   the addition of a new person, a further premium is payable by the Policy Holder,

­   the removal of an individual, no further Premium is payable by the Policy Holder to the Insurer.

•         Extension of term (ABC only) - In this case an ABC Policy Holder may request to extend the term of their ABC Policy (from what was originally requested at the time of application) if they are extending their stay in Australia. Where the Insurer accepts an ABC Policy Holders request to extend the term of the policy, a further Premium is payable by the ABC Policy Holder to the Insurer.

•         Change in the 'start date' of coverage - In this case the Policy Holder may change the start date of the Policy. Where the Insurer accepts such a change this will not result in a change to the Premium payable so long as the end date is also changed accordingly. However, if a change in the Policy start date results in a change in the length of cover of the Policy, this will also result in a change in the amount of the Premium payable. For example, if the Policy start date is changed to an earlier date and the end date is not brought forward accordingly, the length of cover of the Policy will be extended and the Policy Holder will be required to make further Premium payments to be covered for the extended period. Alternatively, if the Policy start date is changed to a later date and the end date is not pushed back accordingly, the length of cover of the Policy will be reduced, and the Policy Holder may in certain circumstances be entitled to request a partial refund of the paid Premiums referrable to the reduced period.

•         Suspension of policy - In this case a Policy Holder may suspend their Policy while on a leave of absence from Australia and later reinstate their Policy on their return. Depending on the time period in question, a suspension may result in a partial refund of the paid Premiums referrable to the suspension periods. On resuming the Policy there will be no change to the Premium already paid for the remaining coverage periods, provided the end date of the Policy is not extended.

When there is a change under a Policy, the Policy Holder is sent a confirmation of the change to an existing policy.

Establishing the physical location of a recipient

As the recipient of the supply of ABC or XYZ will always be the individual Policy Holder, it is relevant to establish where the Policy Holder is located at the time the application is accepted.

The Insurer requires the applicant (Policy Holder) to confirm whether they are physically located "in" or "outside" of Australia at the time of making the application. As the application is approved on the day it is made, the information on the application identifies whether the applicant is outside Australia.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 38-190

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Issue 1

Questions 1 and 2

Summary

For question 1, table item 4(b) applies to the Insurers supply of the pre-paid ABC Policy as the insurance to the non-resident is:

•         a supply made in relation to rights; and

•         the rights are created when the recipient is outside Australia as both the required Premium payment and acceptance of the application occurs when the recipient is outside Australia.

The supply will be GST-free under section 38-190.

For question 2, table item 4(b) applies to the Insurer's supply of the XYZ Policy where the Premium payment for the minimum period relevant to the application have been paid with the application as the insurance to the non-resident is:

•         a supply made in relation to rights; and

•         the rights are created when the recipient is outside Australia as both the required Premium payment (minimum or full) and acceptance of the application occurs when the recipient is outside Australia.

These supplies will also be GST-free under section 38-190.

Detailed reasoning

Section 9-5 sets out the requirements of a taxable supply, including that the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The meaning of a supply is set out in section 9-10 of the GST Act and provides at paragraph 9-10(2)(e) that a supply includes a creation, grant, transfer, assignment or surrender of any right.

Consideration 'for a supply or acquisition' is defined in section 195-1 as any consideration, within the meaning given by sections 9-15 and 9-17, that is 'in connection with the supply or acquisition'. Subsection 9-15(1) provides that the consideration for a supply includes any payment 'in connection with', 'in response to' or 'for the inducement of' a supply of anything.

Goods and Services Tax Ruling GSTR 2006/9 Goods and Services Tax: Supplies (GSTR 2006/9) considers 'sufficient nexus' in paragraph 180 which states:

180. In other GST rulings the Commissioner discusses the close coupling between supply and consideration in the GST Act. In determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration' those rulings take the view that:

•         the test is whether there is a sufficient nexus between the supply and the payment made; this test is objective;

•         regard needs to be had to the true character of the transaction; and

•         an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

In this case the Insurer supplies insurance policies to individuals. These policies are considered to satisfy the requirements of a taxable supply where they are not covered by a GST-free provision.

Section 38-190 of the GST Act provides that in certain circumstance the supplies of things, other than goods or real property, for consumption outside the indirect tax zone (Australia) are GST-free.

The Insurer submits the supply of the policies to a Policy Holder are GST-free under table item 4(b). of subsection 38-190(1). This provision states:

Supplies of things, other than goods or real property, for consumption outside Australia ...

Table 1: Supplies of things, other than goods or real property, for consumption outside Australia...

Note that *asterisk denotes a defined term in section 195-1 of the GST Act

Table item 4(b) will be satisfied if the supply is:

•         made in relation to rights

•         the recipient is a not an Australian resident under subsection 6(1) of the Income Tax Assessment Act 1936; and

•         the recipient is outside Australia when the thing supplied is done.

Goods and Services Tax Ruling GSTR 2019/1 Goods and services tax: supply of anything other than goods or real property connected with the indirect tax zone (Australia) (GSTR 2019/1) states:

The creation, grant, transfer, assignment or surrender of a right

49. A supply can be the creation, grant, transfer, assignment or surrender of a right. In these cases the 'thing' being supplied is done where the right is created in that other person, ranted, transferred or assigned to that other person or surrendered respectively.

50. The act that creates that right in another or grants, transfers or assigns that right to another, or surrenders the right, depends on the facts of each individual case.

51. If, under an agreement, you supply another party the grant of a right to use certain intellectual property, the granting of that right is done where the agreement is made. That is where the last act necessary to create a binding contract was performed. If the agreement is made in Australia14, the supply of that right satisfies paragraph 9-25(5)(a).

52. If the agreement is made outside Australia, the supply does not satisfy paragraph 9-25(5)(a).

The supply of insurance is a supply in relations to rights. Goods and Services Tax Ruling GSTR 2003/8 Goods and services tax: supply of rights for use outside Australia - subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2) (GSTR 2003/8) states at paragraph 95:

Insurance

95. The general law recognises that what an insured obtains under a contract of insurance is a chose in action. Where, under the contract of insurance, the insurer agrees to compensate the insured for a loss that the insured may sustain through the happening of an event, this chose in action is a right to be indemnified if the insured event occurs. There is a supply by way of a creation of a right when the contract of insurance is entered into.

According to the circumstances in this case, the individual recipients (Policy Holders) are not Australian residents under section 6(1) of the Income Tax Assessment Act 1936. Further the recipients are not in Australia at the time of the Insurers acceptance of the application and the payment of the relevant Premium (minimum of full) is made. However, what remains to be determined in respect of the policies is when the thing supplied is 'done'.

The Insurer submits that for ABC and/or XYZ Policies the "thing will be done" when the Insurer accepts the application and communicates its acceptance of the application to the Policy Holder (in practice this is always on the same day). For an ABC Policy, that right will be the right to coverage for the specified period which may be a single-year or multi-year period. In the case of an XYZ Policy, that right will be the right to coverage on an ongoing basis, for so long as the Policy Holder pays its premiums and remains eligible under the relevant Rules.

In this case we consider that the contract of insurance is formed once the Insurer has accepted the application, and the Policy Holder has made the required Premium payment (full or minimum). Although the ABC Rules and XYZ Rules determine the commencement of a policy will arise once the start date of the policy has passed, this is not relevant to the formation of the contract. Rather the supply is created upon acceptance by the Insurer of the application and the required Premium amount is paid whilst the individual is outside Australia.

As the supply is to a non-resident that is outside Australia when the thing supplied is done, it follows that table item 4(b) applies to treat the ABC Policy or XYZ Policy as GST-free.

Issue 2

Question 3-7

Summary

Where the Policy Holder is located in Australia when the Insurer accepts a Policy Holder's application to make the relevant change in questions 3-7, to the extent:

• the supply of rights under the original agreement continue after the relevant change, the supply of the initial right continues to be GST-free under table item 4(b),
• there are additional rights granted and an additional Premium payment is made, the Insurer is considered to make a further supply of rights to the Policy Holder under section 9-10 of the GST Act. The additional Premium payment is consideration for the further supply of rights under section 9-15 of the GST Act, and table item 4(b) does not apply as the Policy Holder is in Australia when they are supplied. Consequently, the further supply is a taxable supply under section 9-5 and subject to GST.
• the original rights supplied are removed, there is no new or further supply.

Detailed reasoning

Whether the payment of the additional Premium that is made in respect of a change listed in questions 3 to 7 is consideration for the original supply or alternatively a new supply will depend on the arrangement executed. Where a conclusion is reached that an event gives rise to a new and further supply, then table item 4(b) can no longer apply as the Policy Holder is subsequently located in Australia.

For the purposes of this reasoning, reference to the 'original supply' or 'original rights' is a reference to the initial supply (of rights) by the Insurer to the Policy Holder whilst the Policy Holder is located outside Australia.

Character of the rights in the ABC and XYZ policy

As explained above, under the terms of the ABC Policy or XYZ Policy, the Policy Holder obtains a chose in action, where the Insurer agrees to provide benefits (i.e. the cost to allowed limits) in respect of an Insured Person in accordance with the relevant Rules. The Premium represents the consideration for this supply.

In determining what rights were originally granted, attention must be given to the language used in the particular documents and arrangement entered into by the parties, the commercial circumstances and thing that is intended to be secured by entry into the agreements. In this context it is considered that the right must be defined together with the matters which include:

• what is and is not covered
• who is or is not covered by the policy
• the period during which the cover is provided
• any other relevant documents which establish what rights are being supplied.

In the Insurers circumstances the arrangement is executed as follows:

Step 1: the applicant (whilst outside Australia) completes an application form in which they specify their details together with:

• who is to be insured
• the level of cover (represented by a product)
• the 'Cover start date' and 'Cover end date'. However, in the case of an XYZ Policy provision of the 'Cover end date' is optional.

Step 2: upon acceptance of the application, the Insurer will issue a Certificate of Cover to the Policy Holder

Step 3: Upon entry into Australia, the Policy Holder may choose to make a change to the policy. This is provided by various terms found in the Rules.

Step 4: The Policy Holder notifies/contacts the Insurer to request the relevant change.

Step 5: Upon acceptance/endorsement of the change the Insurer will send the Policy Holder a new Certificate of Cover setting out the change of cover details with details of any additional or reduction in Premium.

It is clear from the above steps that depending on the selection by the applicant in Step 1, it will result in a supply of an ABC Policy or XYZ Policy in Step 2, however the choices at time of entry into the agreement will be determinative of what right is supplied in Step 2.

In characterising the supply of rights, it is clear that the supply of original rights (in Step 2) is different to the rights that exist following a change (in Step 5), such that the effect of the contractual arrangement is that the Policy Holder may be granted something further upon acceptance of the change.

The above characterisation is consistent with the discussion in Goods and Services Tax Ruling 2000/19 Goods and services tax: making adjustments under Division 19 for adjustment events (GSTR 2000/19) which explains the Commissioner's view on the operation of Division 19 of the GST Act. Relevantly at paragraph 51 in GSTR 2000/19 it states:

Endorsements to existing insurance policies

51. Insurance policies may be endorsed to increase existing cover for an insured. An example of this is where an insured seeks extra cover under a home contents insurance policy for a new addition to the house or contents. The premium may be increased as a result of the extra cover. The increase in the premium is not an adjustment event, it is consideration for further supply. The further supply is the provision of the extra cover.

The view in GSTR 2000/19 does not explain what is meant by the supply of 'extra cover', however it is reasonable to conclude that the 'extra cover' is referencing new rights that are created and supplied for the new addition or contents. Therefore, these new rights are being added to something (i.e., additional property) that is not covered by the existing policy. In creating such a supply, it is treating the further supply as separate to the existing cover. However, the scope of the above paragraph does not identify when such rights are to be viewed as a mixed or composite supply, nor does it contemplate every scenario that can give rise to a new/further supply. This is critical to resolving the matter in question.

In Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration (GSTR 2001/6) at paragraph 47 it states:

47. The definition of a taxable supply requires, among other things, that you make a supply for consideration. There needs to be a supply, a payment and the necessary relationship between the supply and the payment. Where one party makes a monetary payment to another, something of economic value is provided. The question is whether there is a sufficient nexus between the supply and the payment as consideration.

The Commissioners view in Goods and Services Tax Ruling GSTR 2006/9 Goods and Services Tax: Supplies (GSTR 2006/9) also considers rights and at paragraph 136 and 137 states:

136. .... As pointed out in GSTR 2003/8:

Rights are created under executory contracts and although the creation of such rights is supported by valuable consideration, the supply may not be characterised as a supply that is made in relation to rights if, for example, those rights contribute to the supply as a whole but cannot be identified as the dominant part of the supply.

137. The grant of a right or entry into an obligation may be a term or condition of a larger transaction. Where the grant of the right or entry into the binding obligation is the substance of the transaction it will be the subject matter of a supply.

Further in Goods and Services Tax Ruling GSTR 2008/1 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) it states:

40. Where a transaction comprises a bundle of features and acts, it may be necessary to characterise what is supplied to determine whether a particular provision applies in whole or in part. The characterisation should be undertaken in a manner that is consistent with the object of the particular statutory provision in issue. For example, if a provision specifically requires different treatment of two components of a transaction, this will mean that the two components must necessarily be separately recognised. However, that does not mean that the two components need to be separately recognised for all purposes of the GST Act.

40A. An identification of the essential character of what is supplied may inform whether a particular transaction falls within the terms of a specific statutory provision, and whether it does so wholly or only to some extent. You must consider all of the circumstances of the transaction to ascertain its essential character. However, that does not mean that an economic substance over legal form approach is endorsed for working out the essential character of what is supplied. For more guidance on how to characterise a supply, go to paragraphs 222 to 246 of Goods and Services Tax Ruling GSTR 2006/9.

41. By having regard to the essential character or features of the transaction it can be ascertained whether a supply contains separately identifiable taxable and non-taxable parts or is a composite supply of one thing. It is a composite supply of one thing if one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

...

43. A mixed supply is a single supply made up of separately identifiable parts where one or more of the parts is taxable and one or more of the parts is non-taxable, and these parts are not integral, ancillary or incidental in relation to the dominant part of the supply. On the other hand, a composite supply is a single supply made up of one dominant part and other parts that are not treated as having a separate identity as they are integral, ancillary or incidental to the dominant part of the supply.

44. In working out whether you are making a mixed or composite supply, the key question is whether the supply should be regarded as having more than one separately identifiable part, or whether it is essentially a supply of one dominant part with one or more integral, ancillary or incidental parts.

Paragraph 59 of GSTR 2001/8 states:

59. No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. Having regard to all the circumstances, and taking a commonsense and practical approach, indicators that a part may be integral, ancillary or incidental include where:

•         you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

•         it represents a marginal proportion of the total value of the package compared to the dominant part; or

•         it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

•         it contributes to the proper performance of the contract to supply the dominant part.

In the case of the ABC Policy and XYZ Policy, upon entry into the agreement, it is recognised that rights are not conferred by the Insurer for all circumstances. However, under the Rules the Policy Holder has the right to request certain changes. Where such change is accepted by the Insurer, it may result in changes to the Premium amount.

The Insurer submits that in accepting the application for a policy, the Insurer creates, and the Policy Holder obtains or acquires, a right to be indemnified in relation to particular costs incurred in respect of persons covered under the Policy, in accordance with the Rules. The Policy Holder also receives a right to change the terms of their Policy in the future, subject to agreement with the Insurer. In the Insurer's view, a subsequent change to the Policy is a change to the circumstances in which those pre-existing rights may be exercised. The Insurer does not consider that the Insurer's acceptance or processing of changes to a pre-existing Policy is a separate "supply" for GST purposes. Rather, it is a change to the terms and conditions under which the Insurer agrees to indemnify the Policy Holder under an existing policy. To the extent that the Insurer's agreement to vary the terms and conditions of the Policy may be characterised as a supply, it is not a supply that is made for consideration. In particular, the Insurer does not charge any administration or other change-related fees to the Policy Holder. In addition, the Insurer does not consider that the payment of Premiums has a sufficient nexus with the agreement to vary the terms and conditions of the Policy; rather, the payment of Premiums is specifically referable to the ongoing right to reimbursement in accordance with the Rules. Accordingly, to the extent that there is a change (increase or decrease) in the Premiums payable in respect of a particular Policy, there will be an adjustment event. Specifically, there is an increase in the consideration payable for the Insurer's original supply of a right to be indemnified in accordance with the Rules.

The Insurer also submits that if the Insurer were to treat a change in Policy as the creation of a new Policy for GST purposes, this would create an outcome which is not consistent with the legal or commercial reality of the transaction. Legally, the Insurer is not making two supplies; what is supplied under a contract of insurance is a single chose in action. The Insurer has not created a separate set of rights (i.e. it has not cancelled the existing policy and reissued a new policy), and it is not possible to treat the "change" in cover as a new set of rights. It continues to make a single supply of a right to be indemnified in accordance with the Rules. This right was created whilst the Policy Holder was outside of Australia.

In accordance with the view in GSTR 2001/8 it is accepted that the right granted to a Policy Holder to make a change to the policy is not a separate supply for the purposes of section 9-10 of the GST Act at the time of entry into the original agreement. Rather this right is part of the terms and conditions of the arrangement. The Policy Holder exercises this right by making (or requesting) the relevant change. It is also noted that there is no separate charge to the Policy Holder to obtain the right to make a change either at commencement or at a later date.

However, we do not accept the conclusion that:

•         a subsequent outcome upon acceptance of a change in respect of the Policy does not give rise to a separate or new supply under section 9-10 of the GST Act, or

•         a change (increase or decrease) in the Premiums payable in respect of a particular Policy, will give rise to an adjustment event under Division 19 of the GST Act.

Such conclusions can only be determined by reference to the relevant circumstances. In doing so, attention must be given to the language used by the parties, the commercial circumstances and thing that is intended to be secured by entry into the agreements.

Applying the above principles

Although we accept that there is a single enduring Policy (or policy number) that arises, as explained, the Insurer's acceptance of the application at the time of entering into the agreement identifies what rights have been created and supplied under the relevant Policy. In this case we consider that where the Policy Holder is located in Australia when the Insurer accepts a Policy Holder's application to make the relevant change in questions 3-7, to the extent:

•         the supply of rights under the original agreement continue after the relevant change, the supply of the initial right continues to be GST-free under table item 4(b),

•         there are additional rights granted and an additional Premium payment is made, the Insurer is considered to make a further supply of rights to the Policy Holder under section 9-10 of the GST Act. The additional Premium payment is consideration for the further supply of rights under section 9-15 of the GST Act, and table item 4(b) does not apply as the Policy Holder is in Australia when they are supplied. Consequently, the further supply is a taxable supply under section 9-5 and subject to GST.

•         the original rights supplied are removed, there is no new or further supply.