ATO ID 2001/117: 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 a payment or supply or both in settlement of insurance claims 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 a payment or supply or both in settlement of insurance claims on behalf of the entity. Furthermore, the entity is not entitled to claim an input tax credit under section 11-5 of the GST Act.

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). By way of illustration, the insurance is administered as follows. The entity supplies a policy to the TPA for a premium of $55. The TPA claims a $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 paying the cost of repairs to the insured where the insured has repaired the item itself or arranged for another party to repair the item. The TPA does not enter into a binding obligation with the repairers. 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 the 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 an 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). These same principles apply to supplies and acquisitions made by principals and intermediarys under subdivision 153-B of the GST Act. In those circumstances where the TPA facilitates payment after accepting a claim from the insured, the TPA (who, because of the agreement under Subdivision 153-B of the GST Act, is treated as having supplied insurance to the insured and so is treated as the insurer), is not making an acquisition because the TPA has not entered into a binding obligation with the supplier. Instead, the TPA is making a payment in settlement of an insurance claim and may have a decreasing adjustment under Division 78 of the GST Act. Subsection 78-10(2) of the GST Act states that an insurer will not be entitled to a decreasing adjustment where the entity acquiring the insurance policy was entitled to input tax credits in respect of the premium. The TPA (who, because of the agreement under subdivision 153-B of the GST Act, is treated as having acquired insurance from the insurer) is entitled to an input tax credit in respect of the premium. Therefore, the entity is not entitled to a decreasing adjustment under Division 78 of the GST Act. Furthermore, as there is no acquisition, the entity will not be entitled to an input tax credit under section 11-5 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 Subsection 78-10(2) Subdivision 153-B Paragraph 153-50(c)
Related public rulings and determinations: GSTR 2006/10
Related ATO interpretative decisions: ATO ID 2001/116
Subject references: Goods and Services Tax GST insurance Insurers