ATO ID 2003/698: GST and payments made under an insurance policy for bad debts
Date of decision: 4 September 2002
Business line: Indirect Tax

Issue
Does the entity, a supplier, have an increasing adjustment under section 21-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it receives a payment made under an insurance policy that covers the non-payment of customer debts?

Decision
No, the entity does not have an increasing adjustment under section 21-10 of the GST Act when it receives a payment made under an insurance policy that covers the non-payment of customer debts as the payment is not the recovery of the amount previously written off.

Facts
The entity is a supplier. The entity has an insurance policy with an insurer to cover the non-payment of customer debts. The entity is registered for goods and services tax (GST) and made a taxable supply to a customer. The customer was unable to pay the amount owing and the entity wrote this amount off as a bad debt. The entity claimed a decreasing adjustment, under section 21-5 of the GST Act, equal to 1/11th of the amount that had been written off. The entity made a claim under its insurance policy and received a payment in settlement of their claim from the insurer. The payment from the insurer is not made for or on behalf of the entity's customer as a payment of the customer's debt. The settlement amount is determined in accordance with the terms and conditions of the insurance policy.

Reasons for decision
Summary: Section 21-10 of the GST Act, provides that an entity has an increasing adjustment equal to 1/11th of the amount recovered if: The entity previously claimed a decreasing adjustment, under section 21-5 of the GST Act, of 1/11th of the amount that had been written off. Therefore, the entity has satisfied the first requirement of section 21-10 of the GST Act. The second requirement in section 21-10 of the GST Act is that the entity recovers all or part of the amount previously written off, or all or part of the amount that has been overdue for 12 months or more. The payment the entity received from the insurer resulted from a claim the entity made under their insurance policy. The payment from the insurer is not made for or on behalf of the entity's customer as a payment for the customer's debt. The settlement amount from the insurer is in relation to a claim made under a separate supply, that is, the supply of an insurance policy. It is a payment that the insurer is liable to make to the entity in accordance with the terms and conditions of the insurance policy. The payment by the insurer to the entity does not cancel the debt owed to the entity by the customer. The liability of the customer to repay the amount owed still remains. The entity has not received a payment from the customer. The amount received from the insurer is not, for the purposes of section 21-10 of the GST Act, a recovery of any of the amount written off by the entity. Accordingly, the entity does not have an increasing adjustment.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 21-5 section 21-10
Related public rulings and determinations: Goods and Services Tax Ruling GSTR 2000/2
Subject references: Goods & services Tax GST bad debts Recovering amounts Write off GST net amount & adjustments Decreasing adjustment Increasing adjustment GST insurance policy Insurance settlement under an insurance policy