Private ruling: GST and building indemnity insurance
Date of advice: 12 December 2018
Published: April 2019
Date scheme commenced: 13 December 2018

Ruling: Q1: In the case of a builder performing domestic building work, does the homeowner make an acquisition of the building indemnity insurance (BII) policy? | A1: Yes. The homeowner makes an acquisition of the BII policy in the case of a builder performing domestic building work. | Q2: If the response to Question 1 above is positive, is the insurer entitled to claim a decreasing adjustment on payments or supplies made under the BII policy under section 78-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) where the homeowner has an entitlement to input tax credits on the premium paid for the BII policy of less than 100%? | A2: Yes. The insurer is entitled to claim a decreasing adjustment on payments or supplies made under the BII policy where the homeowner has entitlement to input tax credits on the premium paid for the BII policy of less than 100%.

Relevant facts and circumstances: The insurer offers a range of insurance services including policies for home contents, travel, business and relevantly, BII. The insurer is registered for GST. The legal recipient of the supply of the BII policy is the home owner, not the builder, notwithstanding that it is the builder’s statutory obligation to apply for the policy prior to commencing the domestic building work. The policy document specifies that the policy is a legal contract between the insurer and the builder acting as agent for the homeowner The process of taking out a BII policy by a builder Below is a summary of the current process of the insurer issuing a BII policy: 1. The builder is contracted by the home owner for the domestic building work; 2. The builder applies for a BII policy with the insurer by completing the Builders Warranty Application for Job Specific Policy application form; 3. Once the application for the policy is approved by the insurer, the builder will pay the premium on behalf of the home owner by the due date; 4. The insurer will issue a Certificate of Insurance to evidence the insurer’s acceptance of the cover under the BII. The Certificate of Insurance is issued in the name of the home owner as the legal recipient of the insurance; 5. The insurer provides the Certificate of Insurance to the builder’s insurance broker; 6. The builder is required to provide a Certificate of Insurance to the homeowner and the local authority/council; 7. The homeowner reimburses the builder for the cost of the BII policy.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 11-10 | A New Tax System (Goods and Services Tax) Act 1999 section 78-10

Reasons for decision: Summary: ‘Acquisition’ is defined in section 11-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as any form of acquisition whatsoever but does include: ● an acquisition of money unless the money is provided as consideration for a supply of money or digital currency; or ● an acquisition of digital currency unless the digital currency is provided as consideration for a supply of digital currency or money. ‘Recipient’, in relation to a supply, means the entity to which the supply was made. ‘Supply’ is defined in section 9-10 of the GST Act as any form of supply whatsoever but does not include: ● a supply of money unless the money is provided as consideration for a supply of money or digital currency; or ● a supply of digital currency unless the digital currency is provided as consideration for a supply of digital currency or money. The relevant supply in this case is the supply of BII policy. The policy document provides that the BII policy is a legal contract between the insurer and the builder who acts as an agent of the person on whose behalf the work is done or is to be done, and any successor in title to that person. The document further provides that the builder must pay the premium on behalf of that person. This indicates that the supply of the BII policy is made to the homeowner who is liable to pay the premium. Accordingly, the homeowner makes the acquisition of the BII policy. Section 78-10 of the GST Act provides that an insurer has a decreasing adjustment if, in settlement of a claim under an insurance policy, the insurer makes one or more of the following: 1 a payment of money; 2 a payment of digital currency; 3 a supply. However, section 78-10 of the GST Act only applies if: (a) the supply of the insurance policy by the insurer was solely or partly a taxable supply; and (b) either: a. there was no entitlement to an input tax credit for the premium paid in relation to the period during which the event giving rise to the claim happened; or b. there was an entitlement to such an input tax credit, but the amount of the input tax credit was less than the GST payable by the insurer for the taxable supply; and (c) the insurer settles the claim for a creditable purpose; and (d) the insurer is registered or required to be registered; and (e) the settlement does not relate solely to one or more non-creditable insurance events. According to the policy document, the insurer will either make good the loss or damage or pay the amount of that loss or damage. This means that the insurer will make a supply or a payment of money. The supply of the BII policy is a taxable supply. The insurer is registered for GST and will settle the claim for a creditable purpose. The settlement will not relate to one or more non-creditable insurance events. Therefore, the insurer is entitled to claim a decreasing adjustment on payments or supplies made under the BII policy where the homeowner has an entitlement to input tax credits on the premium paid for the BII policy of less than 100%.