Goods and Services Tax Industry Issues
Insurance Industry Partnership

Subrogation - imbalance between sections 78-35 and 78-40

• Please note that the PDF version is the authorised version of this ruling.
  This publication is extracted from the Insurance Industry Partnership - issues register. See issue 4 of that register. This publication should be read in conjunction with the related content of that register where further context is required.

This publication provides you with the following level of protection: This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you.

Issue

1. Section 78-35 provides that a payment to an insurer in settlement of a claim made by an insurer in exercising its rights of subrogation is not to be treated as consideration for a taxable supply. As it is not consideration for a taxable supply, there is no taxable supply and therefore there cannot be an input tax credit available to the entity making the payment to the insurer. However, the effect of section 78-40 is to provide an increasing adjustment in the hands of the insurer in relation to that payment, effectively giving rise to a GST liability for the insurer. Is this imbalance a correct interpretation?

ATO view

2. Section 78-40 does provide an increasing adjustment where an insurer has had a decreasing adjustment under Division 78 and it recovers amounts in exercise of rights of subrogation.

3. Section 78-35 does have the effect that there is no input tax credit available to an entity making a payment to an insurer in settlement of a claim the insurer makes in exercise of its rights of subrogation.

References