Insurance Settlements and GST

Friday, 2 Dec 2016

In my role as a Claims Manager, at settlement of a claim by an insurer, one of the most common questions I am asked by clients is “why didn’t I get paid the GST portion?”

To answer that question, we need to have a quick look into GST legislation and how it works for GST registered businesses.

If you are registered for GST and hold an insurance policy for an asset you use for business purposes, you can claim an Input Tax Credit for the GST included in the premium. Usually this is 100% of the GST portion, however sometimes this can be a proportion of it depending on individual circumstances.

For example, if you pay a premium of $110 inc. GST for insurance on your commercial property, when doing your tax you may be able to claim the GST portion of $10.

Now when using that policy to make a claim, generally your insurer will only compensate you in respect of the actual loss incurred, not the GST portion and in proportion to the GST that you had claimed back when paying your premium or purchasing the asset that you are making a claim on.

Settlement of a claim under an insurance policy does not give rise to a GST liability for you; as long as you notify the insurer of the entitlement to GST credits on the premium when the claim was made.

Now for those of us who aren’t accountants, like myself, this was a bit confusing at first, and hard to explain to a client who in their mind have been short changed by their insurer.

The insurer will expect to cover you only for the actual loss – that is, the loss minus the amount of GST credits you can claim on the repair or replacement cost of the item insured. For example if you paid $110 to repair damage, your insurer would reimburse you $100 and you would be entitled to claim a $10 tax credit.

If you have not told your insurer your GST status and the proportion of GST credits you can claim, you may have to pay GST when your claim is settled, or when you do your tax. For example if you have not told your insurer you are registered for GST and make a claim for $110, your insurer may reimburse you $110, but this will give rise to a GST liability of $10 when doing your tax.

To avoid the GST liability when making a claim, the insurer can authorize the repairs directly with the repairer or supplier. In this situation, as the insurer has provided authority, they will pay the repairer directly, instead of reimbursing you and having you pass on the funds, along with the GST portion to the repairer.

The following examples explain further:

Vehicle is a total loss

  • Example 1: Sam
  • Sam holds and insurance policy with ABC insurance, uses his car for business purposes and can claim 100% GST credits. Sam’s car is deemed a total loss following a motor vehicle accident. ABC Insurance:
  • Agrees that the pre-accident value of the vehicle is $5,500.
  • ABC pays Sam $5000 in full and final settlement of the claim. Sam claims a GST credit of $500 ($5,500 x 1/11th) when he lodges his next activity statement. This is on the theory that when Sam goes to purchase another car, he will then claim the GST component back.

Insurer has no arrangement and no contact with the repairer

  • Example 2: Betty
  • Betty is registered for GST and holds a car insurance policy with ABC Insurance. She tells ABC she can claim a 100% GST credit.
  • Betty has a car accident and ABC insurance agrees the damage to her car will cost $5,500 (including GST) to fix. Betty pays repair costs of $5,500.
  • ABC Insurance pays Betty $5,000 in full settlement of her claim. Betty claims a GST credit of $500 ($5,500 x 1/11th) when she lodges her next activity statement.
  • Betty’s out -of-pocket expense is zero (that is, $5,000 from the insurer plus $500 GST credit).
  • Because Betty told ABC she could claim a GST credit for her insurance premium, she does not have a GST liability on the payment received from ABC in settlement of her claim.

Vehicle is a total loss

  • Example 3: Tom
  • Tom holds an insurance policy with ABC Insurance. He uses his car for business purposes and can claim 100% GST credits on the premium. When he damages the car, ABC Insurance:
  • agrees that the car can be repaired at a cost of $5,500 (including GST).
  • Pays a repairer to make the repairs.
  • ABC Insurance has a contract with the repairer to repair vehicles for their policy holders.
  • ABC Insurance pays the repairer the full $5,500 and claims a GST credit of $500. Tom does not make any payment to the repairer or receive any payments from ABC Insurance so does not need to claim a GST credit.
  • As you can see, example 3 is much simpler for the policy holder. This situation is most common when an insurer’s “Partner” or “Preferred” repairers are used.

Hopefully this has provided a bit more clarification next time you need to lodge a claim.

Even if you are not a current client of ours, if you have any questions or would just like to discuss a claims issue you are experiencing, please feel free to give our office a call and have a chat with our dedicated claims staff.


Andrew Nanos

Claims Manager | Austbrokers City State