Private ruling: GST and decreasing adjustment
Date of advice: 16 January 2017
Published: June 2017
Ruling period: 1 July 2008 to 30 September 2011

Ruling: Q1: In which tax period are the decreasing adjustments in respect of claim payments made by the Health Insurance entity (the entity) under the Overseas Visitor Cover (OVC) insurance policies during the period from 1 July 2008 through to 30 September 2011 attributable? | A1: The decreasing adjustments are attributable to the tax period in which the entity made the claim payments to the insured party because the entity becomes aware of the adjustment at the time the relevant claim payments are made. As the entity has not given the Commissioner a notice under section 105-55 of Schedule 1 to the Taxation Administration Act 1953 in relation to the decreasing adjustments attributable to the tax periods from 1 July 2008 to 30 September 2011, the entity cannot now claim those decreasing adjustments.

Relevant facts and circumstances: ● The entity is a private health insurance company and is registered under the Private Health Insurance Act 2007 (PHIA). ● The entity provides health insurance cover to Australian residents as well as overseas visitors temporarily residing in Australia who are not permitted to access the Medicare system. ● The overseas visitor provides consideration for the overseas visitor cover (OVC) in the form of a premium which is inclusive of GST. ● The entity is registered for GST on an accrual basis and reports monthly. ● In respect of the OVC, the PHIA was amended from 1 July 2008 such that the new rules excluded OVC from the definition of 'health insurance business'. Accordingly, OVC became subject to GST from 1 July 2008. ● The entity amended its systems to account for GST on the premiums at this point in time, however, no amendment was made to its systems to account for decreasing adjustments in respect of claim payments made. ● In 201X, the entity conducted a review of its GST compliance with regard to the application of Division 78 of the GST Act. ● It was found that while the entity had remitted GST in connection with the premiums received for OVC policies, the entity had never claimed decreasing adjustments in relation to claim payments made under OVC insurance policies.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 29-20(1) | A New Tax System (Goods and Services Tax) Act 1999 section 78-10 | Taxation Administration Act 1953 section 105-55 of Schedule 1

Reasons for decision: Summary: Subsection 29-20(1) of the GST Act provides that an adjustment that you have is attributable to the tax period in which you become aware of the adjustment. The word 'adjustment' as used in subsection 29-20(1) of the GST Act is defined in section 195-1 of the GST Act to mean an increasing adjustment or a decreasing adjustment. The term 'decreasing adjustment' is defined to mean an amount arising under one of the provisions listed in the table in the definition. Item 4A in the table includes section 78-10 of the GST Act. It follows that a decreasing adjustment which arises under section 78-10 of the GST Act is attributable, in accordance with subsection 29-20(1) of the GST Act, to the tax period in which you become aware of the adjustment. Interpretative decision ATO ID 2007/72 - Goods and Services Tax - GST and attribution of an increasing adjustment for a recipient of a GST-free supply of a going concern , provides the following in relation to becoming aware: “The GST Act does not provide specific guidance in relation to when an entity becomes aware of an adjustment it has. However, in relation to adjustments which arise from an adjustment event, an entity becomes aware of the adjustment when it becomes aware the event has occurred. Generally, the time an entity becomes aware an event has occurred is when the event actually happens.” ATO ID 2007/72 states that - ● while an increasing adjustment for a recipient of a GST-free supply of a going concern is not strictly an adjustment which arises from an adjustment event as defined, the conditions which need to be satisfied for the adjustment to arise relate to a point in time at which the acquisition is made ● consistent with the treatment of adjustments which arise from an adjustment event, the adjustment is attributable to the tax period in which the entity acquired the enterprise. It is at this time that the entity forms the intention to make input taxed supplies, even though at the time, it incorrectly characterised those intended supplies as being taxable supplies ● the correct GST treatment of the intended supplies is not dependent on the entity's understanding of the GST law but is determined by the law itself. At the time the entity made the acquisition of the supply of a going concern, it was aware that it was the recipient of the supply and was aware of the supplies which it intended to make. Under the GST law, those intended supplies were supplies that, when made, will be input taxed. The Fuel Tax Act 2006 (FT Act) has a similar provision to section 29-10 of the GST Act, being section 65-10 of the FT Act, which provides that a fuel tax adjustment is attributable to the period in which you become aware of the adjustment. The Revised Explanatory Memorandum to the Fuel Tax (Consequential and Transitional Provisions) Bill 2006 provides the following test at paragraph 2.97: The test of when a taxpayer becomes aware that an adjustment is necessary is an objective test, rather than a test on the subjective understanding of the taxpayer. This means they will be taken to become aware of a fuel tax adjustment when all the facts necessary to make a reasonable person aware, are known to them. The question to ask is when does the entity become aware of a decreasing adjustment under section 78-10 of the GST Act? Similar to the test that applies to a fuel tax adjustment, the test in section 29-20 of the GST Act is an objective one, rather than a test on the subjective understanding of the taxpayer. This means that, for the purpose of section 29-20 of the GST Act, a taxpayer is taken to become aware of an adjustment when all the facts necessary for the adjustment to arise are known. Similar to an adjustment for a recipient of a GST-free supply of a going concern, the correct GST treatment is not dependent on the entity's understanding of the GST law but is determined by the law itself. An adjustment under section 78-10 of the GST Act arises if the conditions set out in the section are present. All of the conditions set out in section 78-10 of the GST Act relate to a point in time, particularly in relation to the making of a payment in settlement of a claim. The PHIA was amended from 1 July 2008. This change affected the entity in the following manner: ● OVCs became taxable supplies on which the entity was required to remit to the ATO 1/11 th of the premiums paid; and ● The entity became eligible to claim a decreasing adjustment for any claim payments made under OVC insurance policies. At the time when the PHIA was amended, the entity amended its systems to account for GST collected from OVC policies but failed to make the appropriate system changes to claim the decreasing adjustments on the claim payments made on OVC policies. When the entity makes a claim payment in relation to an OVC policy, the entity is taken to be aware that it has a decreasing adjustment under section 78-10 of the GST Act because all the facts necessary for the adjustment to arise are known at that time. In relation to the amounts of the decreasing adjustments, for the tax periods from 1 July 2008 to 30 September 2011, they are attributable to the tax period in which the claim payments were made to the OVC policy holders. As the entity has not given the Commissioner a notice under section 105-55 of Schedule 1 to the Taxation Administration Act 1953 in relation to the decreasing adjustments attributable to the tax periods from 1 July 2008 to 30 September 2011, it cannot now claim those decreasing adjustments.