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Insurance Claims and GST

The treatment of settlements for GST purposes depends on whether or not the insured is registered for GST and their entitlement to claim a full or partial Input Tax Credit on the premium paid. 

A registered insured is entitled to an Input Tax Credit on a premium to the extent that it is acquired for a taxable purpose. If the insured is entitled to an ITC in respect of the premium, it must notify the insurer of the percentage that it is entitled to claim. This must be done at (or before) the time of a claim.

The insurer will generally request ABN details from the client by asking three questions:

• Are they a registered business;
• What is their ABN;
• What percentage of GST in the policy premium did they claim as Input Tax Credits for the period in which the claim occurred.

The client is required to provide this information to enable the insurer to correctly determine the settlement amount.

Assuming that the percentage notified by the client to the insurer is correct, the insured will have no GST liability on a settlement received under the policy.

Where the insured is partially input taxed an insurer will be able to claim a decreasing adjustment on the settlement amount (using the Decreasing Adjustment Mechanism (DAM)) to the extent that the client was not entitled to an Input Tax Credit on the premium. For example, if the client was entitled to claim 85% of the GST paid on the premium, the insurer would be entitled to claim as a decreasing adjustment, 1/11th of 15% of the gross amount of a settlement made under the policy.

Effectively the operation of the DAM ensures settlements made to registered businesses that can claim full Input Tax Credits will be for the “net of GST price of the item insured”.
Settlements where a registered business can claim a partial Input Tax Credit will be for an amount somewhere between the GST exclusive and the GST inclusive price (depending on the entitlement).

An unregistered client is not entitled to claim an Input Tax Credit on the premium and has no liability to pay GST on the settlement. The insurer can claim a DAM adjustment equal to 1/11th of the gross payment made.  Settlements to non-registered entities will be for the “GST inclusive price of the insured item”.