Council has reimbursed a claimant for an excess payment on a vehicle smash repair. What are the GST implications for Council of the reimbursement?
A claimant has lodged a reimbursement claim with Council for an excess payment on a vehicle smash repair.
To support their claim, a tax invoice issued by the repairer to the claimant has been provided. The tax invoice includes the following information:
|Total payable including GST||$750|
Note: the excess is the only charge on the invoice.
On the basis that an amount of GST has not expressly been noted on the invoice, should Council assume GST was included? Or is GST not claimable by Council on the reimbursement on the basis that the repairer is acting as agent for the insurer and, therefore, GST is not applicable as indicated by the following comments from the ATO website:
You can’t claim GST credits on any excess that you pay to your insurer.
If you pay an excess to someone other than your insurer you can claim a credit on any GST paid if:
- the party you pay is not acting as an agent for your insurer;
- you receive a tax invoice.
There are special rules relating to GST and insurance, and this easily gets confusing depending on whether the insured entity is GST-registered (or not) and whether they can claim a GST credit for the premium paid (or not). Your example adds further complication due to Council’s payment being a reimbursement.
In responding to your query below, we have assumed that:
- the claimant: is an employee of Council, is the insured entity, and is not GST-registered; and
- Council: is GST-registered, and is reimbursing the employee is accordance with Council’s employment policies/agreements.
The ATO website wording you provided is a summary of how the GST rules work. However, we have included below the ATO’s more detailed explanation of the rules as set out in GSTR 2006/10 (paragraphs 104 to 115):
Excess paid directly to insurer
- If the insured entity is required to pay an excess in respect of an insurance claim directly to the insurer, it is not consideration for a supply by the insurer to the insured. The insurer is entitled to an input tax credit for the GST payable on the full cost of the repairs. The insurer will also have an increasing adjustment in respect of the amount of the excess received.
Excess paid to repairer at the direction of insurer
- Similarly, if, at the direction of the insurer, the insured pays the excess to the repairer, and the repairer is acting as agent of the insurer in respect of this payment, the payment of the excess is not consideration for a supply made to the insured. In these circumstances, the payment of the excess is treated as part of the consideration paid by the insurer for the supply of repair services made by the repairer to the insurer.
- As a consequence, the insurer is entitled to an input tax credit for the GST payable on the full cost of the repairs. The corollary is that the insured is not entitled to an input tax credit in respect of the excess paid to the repairer. The insurer will also have an increasing adjustment in respect of the amount of the excess received from the insured.
Excess paid directly to repairer
- If, on the other hand, the insured is liable under the policy to pay the excess to the repairer, and the repairer is not acting as agent of the insurer, the excess will be consideration for the supply the repairer is making to the insured. This is consistent with the UK Court of Appeal decision in Brown & Davis Ltd v. Galbraith where it was held that, although the primary contract was between the insurance company and the repairer for a supply of repair services, there was a second contract between the insured and the repairer requiring the insured to pay for the repairs only to the extent of the excess under the policy.
- The payment of the excess by the insured is consideration for the supply of repair services to the value of the excess by the repairer. The insured, if registered for GST, may be entitled to an input tax credit. In this circumstance, the repairer will be required to provide a tax invoice in respect of the services made to the insured if requested.
- The insurer is entitled to an input tax credit for the GST payable to the extent that the insurer pays, or is liable to pay, for the supply of the repairs made to it.
Example 9: Excess paid to repairer
- Billy has a motor vehicle insurance policy with Excello Insurance Co (Excello). The vehicle is a utility which Billy uses 80% for business purposes. Billy has a minor accident. The GST inclusive cost of the repairs, as agreed between Fixitup Smash Repairs (Fixitup) and Excello, is $5,500.
- Under the insurance policy, the insurer’s obligation is limited to the extent of the repairs less the excess of $110. Excello’s liability to Fixitup for the cost of the repairs is $5,390, while Billy’s liability to Fixitup is for the excess ($110).
- Excello is entitled to claim an input tax credit of $490 (1/11th of $5,390) in respect of its payment to Fixitup. Billy is making a creditable acquisition of repair services and is entitled to claim an input tax credit of $8 (80% of 1/11th of $110) in respect of his payment to Fixitup.
Example 10: Excess paid to insurer
- Assuming the same facts from Example 9, except that Excello is liable under the agreement with Fixitup for the total cost of the repairs ($5,500), and Billy is required to pay the excess ($110) to Excello. Excello is entitled to an input tax credit of $500 (1/11th of $5,500). Billy has no entitlement to an input tax credit because neither Excello nor Fixitup has made a supply to Billy for which the excess is consideration.
- Excello also has an increasing adjustment in respect of the excess paid by the insured to Excello. The increasing adjustment is 1/11th of $110, or $10, meaning that the insurer will have a net input tax credit of $490.
- The same result will apply if the insured is required to pay the excess to the repairer at the direction of, or on behalf of, the insurer.
As you have indicated that a tax invoice has been issued to the claimant, and the wording states ‘Total payable including GST’, it appears that the amount being charged includes GST (it would be misleading for an entity to state that an amount includes GST if no GST was applicable). This appears to be consistent with the statement in paragraph 108 of GSTR 2006/10. If this is the case, the reimbursement by Council of this amount would give rise to a GST credit to Council.
If Council has any doubts, then it may be prudent to contact the insurer (or the repairer) to clarify which situation from GSTR 2006/10 applies to the this situation. We recommend the insurer be contacted in the first instance as they should be more aware of the specific application of the GST rules to the policy.
This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. It is not intended to be, nor should it be relied upon as, a substitute for professional advice. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use.