Goods and Services Tax Industry Issues
Insurance Industry Partnership

Subrogation - will section 78-15 prevail over section 78-35

• 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 5 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. Most subrogation payments are between insurance companies. Instances will exist where the 'entity that is not insured under the policy' (section 78-35) (third party) is another insurance company and the provisions of section 78-15 will allow that insurer to claim an input tax credit for the claim payment. Will section 78-15 prevail over section 78-35 to allow an input tax credit to the third party insurance company?

ATO view

2. There will be occasions where the payment made to the first insurance company (the one exercising its rights of subrogation) by the second insurance company (the 'entity that is not insured under the policy') is made by the second insurance company in settlement of a claim under one of its policies. In this instance, section 78-10 and section 78-15 could operate in relation to that payment.

3. Sections 78-10 and 78-15 provide for a decreasing adjustment, not an input tax credit. Section 78-35 only operates to deny an input tax credit that would otherwise be available under Division 11. In this way, sections 78-10, 78-15 and 78-35 are not mutually exclusive.

References