GST and insurance
If you are registered for GST and hold an insurance policy for an asset you use either partly or wholly for business purposes, you can claim a partial or full credit for the GST included in the premium. You can claim the full GST credit if the asset is used wholly for business or, if you also use it privately, you can claim the portion of GST credit that reflects the proportion of business use.
You cannot claim GST credits if the insurance is to cover your input-taxed supplies (such as providing loans or credit).
You need to tell your insurer you are registered for GST and the proportion you can claim as GST credit, as this may affect any settlement they make as a result of a claim.
Our role is only to provide advice on applying tax laws to insurance.
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If you hold an insurance policy but are not registered for GST you cannot claim credits for GST included in your premiums.
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The settlement amount is based on the terms of the contract and not on the GST legislation. However, in general, the insurer will only compensate you in respect of actual loss incurred. For example, if there were repairs to be made for the GST inclusive cost of $5,500 and you are registered for GST and when you pay for the repairs, you would be entitled to claim the 100% GST credits. You would claim a GST credit of $500, which is 1/11th of the payment you made to the repairer. The insurer would take that into account and pay you the amount of $5,000.
The payment of money by an insurer in settlement of a claim under an insurance policy does not give rise to a GST liability for you, as long as you notify the insurer of the entitlement to GST credits on the premium when, or before, claim was made. .
If you have not told your insurer your GST status and the proportion of GST credits you can claim, you may have to pay GST when your claim is settled.
Car insurance settlements
How GST credits in car insurance settlements are claimed depends on who the insurer pays and whether they have a contract with the repairer to repair cars they have provided policies for.
Generally, you cannot claim a GST credit for payments your insurer makes to a service provider if the insurer:
- has a contract with a supplier to provide a service to you, and
- pays the settlement directly to the service provider.
You can, however, claim a GST credit for payments your insurer makes to the service provider on your behalf.
The following examples illustrate four situations:
- insurer has no contractual arrangement and no contact with the repairer (see Example 1: Betty)
- insurer has no contractual arrangement with the repairer, but pays the repair account directly on behalf of the driver (see Example 2: Sarah)
- insurer has a contractual arrangement with the repairer to repair cars the insurer's policies cover (a so-called 'preferred supplier') (see Example 3: Tom)
- the insured person is not registered for GST (see Example 4: Bill).
Example 1: Betty
Betty is registered for GST and holds a car insurance policy with ABC Insurance. She tells ABC she can claim a 100% GST credit for the GST included in the policy price.
Betty has a car accident and ABC insurance agrees the damage to her car will cost $5,500 (including GST) to fix. Betty pays repair costs of $5,500 (or spends $5,500 on a new car).
ABC Insurance pays Betty $5,000 in full settlement of her claim. Betty claims a GST credit of $500 ($5,500 x 1/11th) when she lodges her next activity statement.
Betty's out -of-pocket expense is zero (that is, $5,000 from the insurer plus $500 GST credit).
Because Betty told ABC she could claim a GST credit for her insurance premium, she does not have a GST liability on the payment received from ABC in settlement of her claim.
Example 2: Sarah
Sarah holds an insurance policy with XYZ Insurance. She uses her car 100% for business purposes and can claim 100% GST credits on the premium. When she damages her car, XYZ Insurance:
- agrees the damage will cost $5,500 (including GST), to fix
- instructs a repairer to repair the vehicle.
XYZ has no contract with the repairer.
Sarah asks XYZ Insurance to pay the repairer directly the amount less GST ($5,000). Sarah pays the remaining $500.
As XYZ Insurance paid the repairer on behalf of Sarah when she asked them to (as a simplified payment arrangement), Sarah is considered to have paid $5,500 for the repairs. Sarah can claim a GST credit of $500 (1/11th of $5,500).
Example 3: Tom
Tom holds an insurance policy with Sure Insurance. He uses his car for business purposes and can claim 100% GST credits on the premium. When he damages the car, Sure Insurance:
- agrees that the car can be repaired at a cost of $5,500 (including GST)
- pays a repairer to make the repairs.
Sure Insurance has a contract with the repairer to repair vehicles for Sure Insurance policy holders.
Sure Insurance pays the repairer the full $5,500 and claims a GST credit of $500. Tom does not make any payment to the repairer and cannot claim a GST credit.
Example 4: Bill
Bill has a car accident and repairs will cost $5,500. Bill is not registered for GST, so he cannot claim a GST credit for GST included in the cost of the repairs.
Bill makes a claim under his insurance policy. He is covered for the full, GST-inclusive cost of the repairs and the insurer pays Bill $5,500.
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We provide advice on applying tax laws to insurance. We:
- do not mediate in contractual disputes between insurers and their clients
- do not work out the amount an insurance company must pay you under an insurance claim.
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Last modified: 04 Aug 2016QC 16258