ATO ID 2005/206: GST and acquisition of a salvaged motor vehicle on settlement of an insurance claim
Date of decision: 29 June 2005
Business line: Indirect Tax

Issue
Is the entity, an insurer, entitled to an input tax credit under section 66-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when:

Decision
No, the entity is not entitled to an input tax credit under section 66-10 of the GST Act as the entity did not provide, and is not liable to provide, consideration for the acquisition of the salvaged motor vehicle.

Facts
The entity is an insurer and is registered for goods and services tax (GST). An insured was involved in a motor vehicle accident and made a claim under their comprehensive motor vehicle insurance policy. The insured's motor vehicle was 'uneconomical' for the insurer to repair and so the entity settled the claim by paying out the insured for their loss. 'Uneconomic to repair' vehicles are referred to as 'salvaged motor vehicles'. Under the insurance policy, property in the motor vehicle passed to the entity. The supply of the salvaged motor vehicle by the insured to the entity is not a taxable supply under section 78-60 of the GST Act. The entity subsequently makes a taxable supply of the salvaged motor vehicle. The entity does not make any other payment to the insured or perform any other act for the insured in return for the salvaged motor vehicle.

Reasons for decision
Summary: The supply of the salvaged motor vehicle from the insured to the entity is not a taxable supply under section 78-60 of the GST Act. Subsection 66-10(1A) of the GST Act states that the amount of the input tax credit for a creditable acquisition of second-hand goods is one-eleventh of the consideration you provide, or are liable to provide, when the consideration is $300 or less. Subsection 66-10(1) states when the consideration you provide is more than $300, the amount of the input tax credit is one-eleventh of the consideration you provide, or are liable to provide, or when that amount is greater than the GST payable on a taxable supply of the good you make, the amount of the input tax credit is limited to the amount of GST on that taxable supply. Subsection 66-10(3) of the GST Act provides that section 66-5 of the GST Act will have effect despite section 11-25 of the GST Act. As the entity acquired the salvaged motor vehicle in carrying on its enterprise, the entity acquired the motor vehicle for a creditable purpose. The entity is registered for GST. The remaining requirement is that it provided, or was liable to provide consideration for the supply. Although the entity paid the insured a sum of money to cover the insured's loss, this payment was made in settlement of the insured's claim under the insurance policy. Section 78-20 of the GST Act provides that a payment or supply by an insurer, in settlement of a claim under an insurance policy, is not treated as consideration for an acquisition made by the insurer. Therefore, the entity's payment to settle the claim is not consideration for the acquisition of the salvaged motor vehicle. The entity does not make any other payment or perform any other act in return for the salvaged motor vehicle. Therefore, the entity does not provide consideration for the supply of the salvaged motor vehicle and its acquisition is not a creditable acquisition. As such, the entity is not entitled to an input tax credit under section 66-10 of the GST Act for the acquisition of the salvaged motor vehicle.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 11-5 subsection 66-5(1) subsection 66-5(3) subsection 66-10 subsection 66-10(A) subsection 66-10(1) subsection 66-10(3) section 78-20 section 78-60
Subject references: Goods and services tax GST insurance policy Insurance settlement under an insurance policy Salvage under an insurance policy GST second hand goods GST supplies & acquisitions Creditable acquisition GST consideration