ATO ID 2001/116: GST and Decreasing Adjustments
Date of decision: 26 September 2000
Business line: Indirect Tax

Issue
Does the entity, an insurer, have a decreasing adjustment under Division 78 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it reimburses an intermediary, with whom it has entered into an agreement under subdivision 153-B of the GST Act, where that intermediary makes an acquisition directly for the purpose of settling an insurance claim on behalf of the entity?

Decision
No, the entity does not have a decreasing adjustment under Division 78 of the GST Act when it reimburses an intermediary, with whom it has entered into an agreement under subdivision 153-B of the GST Act, where that intermediary makes an acquisition directly for the purposes of settling an insurance claim on behalf of the entity.

Facts
The entity has a warranty insurance business. The entity agrees to cover the cost of replacing and repairing a defective part or workmanship in a product. The entity markets this type of insurance through a Third Party Administrator (TPA). The entity has entered into agreements under subdivision 153-B of the GST Act with the TPAs. They are both registered for goods and services tax (GST). The insurance is administered as follows. The insurer supplies a policy to the TPA for a premium of $55. The TPA claims $5 input tax credit and sells the insurance to the insured for $77. In accordance with the agency agreement when a claim is made the TPA administers the claim by organising repair and replacement services through individual repairers or retailers who are retained by the TPA. The TPA also pays the cost of the replacement or repair. The intermediary authorises the repairs, enters into a binding obligation with the repairers and is liable for the cost of the repairs The TPA is reimbursed the actual cost of the repair or replacement from the entity.

Reasons for decision
Summary: Under subdivision 153-B of the GST Act, an entity may, in writing, enter into an arrangement with an intermediary under which the intermediary will, on behalf of that entity, make supplies to third parties or acquisitions from third parties, or both. The effect of such an arrangement is that the intermediary is treated as making the supplies to, or acquisitions from third parties and the entity is treated as making corresponding supplies to or acquisitions from the intermediary (paragraph 153-50(c)of the GST Act). This means that the entity is treated as making the supply of insurance to the intermediary. The intermediary is treated as acquiring that insurance. The intermediary is then treated as making a supply of that insurance to the insured. Section 78-10 of the GST Act states that an insurer may have a decreasing adjustment if, in settlement of a claim under an insurance policy, the insurer makes a payment of money or digital currency, makes a supply, or both. Under section 78-20 of the GST Act, such a payment or supply is not to be treated as consideration for a creditable acquisition made by an insurer. This has effect despite section 11-5 of the GST Act, which is about creditable acquisitions. Goods and Services Tax Ruling GSTR 2006/10 provides guidance for determining whether an acquisition or payment (in settlement of a claim) will result in a decreasing adjustment (under Division 78 of the GST Act) or a creditable acquisition (under Division 11 of the GST Act). In the Commissioner's view it is considered that there needs to be a binding obligation between the insurer and the repairer or other supplier for there to be supplies acquired by the insurer from the repairer or other supplier in respect of which the insurer can claim input tax credits. These same principles apply to supplies and acquisitions made by principals and intermediarys under subdivision 153-B of the GST Act It is the TPA that enters into the binding obligations with suppliers and not the entity. The TPA has acquired the supply and will be entitled to input tax credits for the GST paid on the supply. However, the entity will be treated as making a corresponding acquisition from the TPA (subparagraph 153-50(c)(ii) of the GST Act). The reimbursement to the TPA from the insurer will be consideration for a creditable acquisition made by the entity and the entity will be entitled to an input tax credit. The reimbursement will be consideration for a taxable supply made by the TPA. The Commissioner considers that there is no entitlement to a decreasing adjustment where an insurance settlement gives rise to an input tax credit for the insurer. Therefore, the entity will not be entitled to a decreasing adjustment under Division 78 of the GST Act.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 Division 11 Section 11-5 Division 78 Section 78-10 Section 78-20 Subdivision 153-B Paragraph 153-50(c) Subparagraph 153-50(c)(ii)
Related public rulings and determinations: GSTR 2006/10
Related ATO interpretative decisions: ATO ID 2001/117
Subject references: Goods and Services Tax GST insurance Insurers