GST issues registers

Insurance industry partnership

Reinsurance issues

1 Financial reinsurance

Issue

TR 96/2 states that the ATO treats financial reinsurance as a loan arrangement rather than reinsurance. By contrast, APRA recognises that it may be insurance. If it is insurance we would expect it was taxable whereas if it is not and therefore a financial supply, it will be input taxed. If taxable, the reinsurer pays the government GST and the insurer claims an equal input tax credit. If it is a financial supply there will be no GST paid or refunded. Clearly with the round robin it makes no difference for insured and reinsurers so long as we know the correct method to be used. Should it be treated as a financial supply?

Non-interpretative - straight application of the law.

ATO view

Contracts of reinsurance are specifically excluded from being a financial supply (item 7 or regulation 40-13). It is therefore a question of fact as to whether it is a contract of reinsurance. Where it is a bona fide contract of reinsurance it will not be a financial supply.

Note that there is not a round robin as if it is a financial supply, the reinsurer making the supply is not entitled to input tax credits on acquisitions to the extent they relate to making the supply.

2 Reporting of unearned premium by reinsurers on supplies of proportional treaty reinsurance on the BAS

Issue

Section 10 of the Transition Act attributes it to the first tax period. Due to timing factors and complexities of calculation not all reinsurers will have received the information from the respective insurers within their first tax period. Are reinsurers able to report unearned premium on a later BAS?

Non-interpretative - straight application of the law.

ATO view

Strictly applying the law, no. The reinsurer would be required to amend the BAS for the first tax period.

Using the 8ths Method to calculate unearned premium as at 30 June 2000

Issue

Section 12 of the GST Transition Act states that a supply for a period that spans 1 July 2000, is taken to be made continuously and uniformly throughout the period.

This requires a supplier to apportion the supply purely on the basis of the period of the supply. For example, if a supply is made for 12 months with 165 days before 1 July, 200/365ths of the supply would be subject to GST.

Some reinsurers have stated that they are unable to calculate accurately the unearned premium of each of their proportional treaties using the 365ths method and to do so would incur large compliance costs.

Under the proportional risk attaching treaties, the supply of reinsurance covers the policies supplied by the insurer in the twelve month period of the reinsurance cover. This means that a 12 month proportional risk attaching treaty reinsurance policy has a life of 2 years as an underlying policy supplied by the insurer of the last day covered by the treaty that also runs for twelve months will not end until twelve months after the treaty ends.

The reinsurer will not know how many policies are supplied by the insurer on any given day covered by the treaty.

For reinsurance supplied under a proportional risk attaching treaty many insurers have adopted the 8ths method, an industry accepted accounting method, to determine unearned premium.

The 8ths method assumes that all underlying policies attach half way though the quarter in which they actually attach and that their period of risk is 12 months. (There are 8 half quarters in each year).

Where the insurer has used the 8ths methods to calculate the unearned premium, the 365ths method would require the insurer to go back and check each underlying policy for the attachment date and period of the policy. This information is not always readily available and the insurer would need to expend considerable resources to achieve this.

For example under a proportional reinsurance treaty the reinsurer agrees to reinsure 30% of all comprehensive motor vehicle insurance written by the insurer. This could entail thousands of underlying policies to be rechecked.

Non-interpretative - other references

See also:

•

GSTR 2000/7 - Goods and services tax: transitional arrangements - supplies, including supplies of rights, made before 1 July 2000 and the extent to which such supplies are taken to be made on or after 1 July 2000

•

GSTR 2000/19 - Goods and services tax: making adjustments under Division 19 for adjustment events

ATO view

Where possible, the 365ths method should be used to calculated unearned premiums as at 30 June 2000.

Where this is not possible the 8ths method is acceptable to calculate unearned premium as at 30 June 2000, provided that both the insurer and reinsurer are registered for GST. The insurer will only be able to claim at most as an input tax credit the same amount that the reinsurer accounts for as GST.

Additional premium and 'risk attaching' policies

Issue

See example 3.2 - Risk attaching policies in the ATO reinsurance examples.

How is 'additional premium' for risk attaching policies that span 1 July 2000 to be treated for GST purposes? Is it apportioned over the period of the treaty or is it subject to full GST as it is paid after 1 July 2000?

The September Quarter has two underwriting quarters:

•

one for the previous underwriting year

•

one for the current underwriting year.

Reinsurers have stated that at the end of June they do not know what is the proper premium due to information coming in 6 months to 3 years after the policy.

For source of ATO view, refer to:

•

GSTR 2000/7 GSTR 2000/19 - Goods and services tax: making adjustments under Division 19 for adjustment events

ATO view

Calculate the GST on the premium as it is known. Any additional amount of premium leads to an adjustment event (for change in consideration) under Division 19 as the additional amounts are paid. For policies that span 1 July 2000 and have been apportioned under section 12 of the GST Transition Act, the additional premium needs to be apportioned in the same proportions as the original premium.

Example

Both the Insurer and Reinsurer are registered for GST.

The Insurer places a 'risks attaching' property surplus treaty for the period 1 July 1999 to 30 June 2000 with the Reinsurer. The insurer receives a 20% commission from the Reinsurer paid quarterly.

The Insurer will calculate the unearned premium as at 30 June 2000 in accordance with section 12 of the Transition Act. In this example all the primary policies attaching to this Treaty are for 12 months duration. The method used to determine the unearned premium was the actual date of the attachment of the individual policies. The total Unearned Premium was calculated as $271,875.

The Insurer sends an RCTI to the Reinsurer as follows:

•

Unearned premium as at 30 June 2000 $271,875.00

•

GST on unearned premium (payment attached) $27,187.50

Additional premium of $45,000 was paid on 1 October 2000 and relates to the premium earned under the 'risk attaching' treaty for the period 1 July 1999 to 30 June 2001. Therefore 365/731 of the additional premium relates to the period 1 July 2000 to 30 June 2001. This portion of the additional premium is subject to GST as it relates to the supply of reinsurance made after 30 June 2000.

Calculation

Premium Adjustment 365/731 × $45,000 = $22,469.22 GST on Premium Adjustment = $2,246.92

The Insurer will issue a recipient created adjustment note as follows:

5 GSTR 2013/1

Issue

Does GSTR 2013/1 tax invoices, apply to reinsurance brokers?

Non-interpretative - straight application of the law.

ATO view

Yes - where it refers to insurance brokers, this includes reinsurance brokers.

1. Proportional reinsurance = A reinsurance under which the insurer and the reinsurer share the risk in agreed proportions which may be fixed or variable depending on the insurer's retention and the sum insured. The reinsurer shares proportionally the premiums earned and the claims incurred plus certain expenses incurred by the insurer.

Treaty reinsurance = A standing agreement between Insurers and Reinsurers for the cession or assumption of certain risks as defined in the contract. Treaty reinsurance may be divided into two broad classifications:

1.

The participating type which provides for sharing of risks between the Insurer and the Reinsurer. (Proportional Reinsurance)

2.

The excess of loss type which provides for indemnity by the Reinsurer only for loss, or losses, which exceed some specified predetermined amount. (Non-Proportional Reinsurance).

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