Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 7 - Goods and services tax amendments relating to compulsory third party schemes
Outline of chapter
7.1 Schedule 7 to this bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that the goods and services (GST) insurance provisions apply as intended to transactions undertaken by operators of compulsory third party (CTP) schemes.
Context of amendments
7.2 Amendments have previously been made to the GST Act to apply the insurance provisions to transactions undertaken by operators, including insurers, of CTP schemes. Division 79 introduced new provisions and modified others under Division 78 of the GST Act, that apply to CTP transactions. In addition, Division 80 introduced provisions that apply to CTP settlement sharing arrangements.
7.3 Some of the new and modified insurance provisions do not operate as intended. As a result, some operators of CTP schemes are unable to apply the law to some of their transactions. It is therefore necessary to amend the relevant provisions to ensure they operate as intended.
Summary of new law
7.4 This bill will amend several GST insurance provisions to ensure that they apply as intended to transactions undertaken by operators of CTP schemes.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| A contributing operator's payment received by a managing operator pursuant to a settlement sharing arrangement, is not treated as a recovery made by the managing operator under the general insurance provisions. | A contributing operator's payment received by a managing operator pursuant to a settlement sharing arrangement may also be treated as a recovery made by the managing operator under the general insurance provisions, resulting in more than one increasing adjustment for the operator. |
| Where an operator satisfies the premium selection test, and claims a decreasing adjustment on settlement of a claim under the insurance policy on the basis that the entity that acquired the policy was not entitled to an input tax credit for the premium, the operator has an increasing adjustment if it later became or becomes aware that the entity has such an entitlement. | Where an operator satisfies the premium selection test, and claims a decreasing adjustment on settlement of a claim under the insurance policy on the basis that the entity that acquired the policy was not entitled to an input tax credit for the premium, the operator has an increasing adjustment if it later becomes aware that the entity has such an entitlement. |
| An operator that makes a sole operator election will make a single election to apply the average input tax credit fraction in the calculation of all of its decreasing adjustments arising from settlements of claims under insurance polices. | An operator that makes a sole operator election may need to make a separate election to apply the average input tax credit fraction in the calculation of decreasing adjustments for each settlement it makes of a claim under an insurance policy. |
| A payment or supply made by an operator in connection with, but not under, a CTP insurance policy that commenced before 1 July 2003, can be treated as a CTP hybrid payment or supply made under the relevant CTP insurance policy. | A payment or supply made by an operator in connection with, but not under a CTP insurance policy that commenced before 1 July 2003, may in some circumstances, be treated as a compensation payment or supply. |
| An operator that charges a CTP premium, that is not consideration for a taxable supply made by the operator, is not entitled to a decreasing adjustment for any CTP compensation or ancillary payment or supply it makes under the CTP scheme. | An operator that charges a CTP premium, that is not consideration for a taxable supply made by the operator, may be entitled to a decreasing adjustment for any CTP compensation or ancillary payment or supply it makes under the scheme. |
| A payment or supply an operator receives in settlement of a claim it makes as an insured under an insurance policy it holds in respect of a CTP compensation or ancillary payment or supply is not treated as a general recovery under the CTP scheme. | A payment or supply an operator receives in settlement of a claim it makes as an insured under an insurance policy it holds in respect of a CTP compensation or ancillary payment or supply is treated as a general recovery under the CTP scheme. |
| Where an operator is exercising its rights to recover from another entity in respect of a CTP compensation or ancillary payment or supply it has made, and it receives a payment or supply made in compliance with a judgement or order of a court, the payment or supply is treated as made in settlement of the operator's claim. | Where an operator is exercising its rights to recover from another entity in respect of a CTP compensation or ancillary payment or supply it has made, and it receives a payment or supply made in compliance with a judgement or order of a court, the payment or supply is not treated as settlement of the operator's claim. |
| An operator that has made an election to apply the average input tax credit fraction, in the calculation of any decreasing adjustment arising from payments or supplies it has made in settlement of claims made under CTP insurance policies, will use the fraction relevant to the financial year in which the incident occurred. | An operator that has made an election to apply the average input tax credit fraction, in the calculation of any decreasing adjustments arising from payments or supplies it has made in settlement of claims made under CTP insurance policies, cannot determine the relevant fraction that applies in the calculation. |
| Under any settlement sharing arrangement, the operators are parties to the arrangement because the person(s) involved in the incident was, or was not, covered by an insurance policy. | Under various settlement sharing arrangements, the operators are parties to the arrangement depending upon whether the driver, or in other cases the owner or driver, involved in the incident was, or was not, covered by an insurance policy. |
Detailed explanation of new law
Contributing operator payments and recovery provisions
7.5 Under sections 80-30 and 80-70 of the GST Act, a managing operator may have an increasing adjustment where it receives a contributing operator's payment pursuant to a CTP settlement sharing arrangement. A contributing operator is an operator that makes a contribution (contributor's payment) to settlements of claims made by a managing operator under a CTP settlement sharing arrangement.
7.6 The receipt of a contributing operator's payment, by a managing operator, may be treated as a recovery under the insurance recovery provisions. This may result in an increasing adjustment arising for the managing operator under more than one provision of the GST insurance provisions. Therefore, the GST Act has been amended to include new subsections 78-40(2) and 79-70(2) to ensure that a contributing operator's payment is not treated as a general recovery. [Schedule 7, item 1, subsection 78-40(2); item 6, subsection 79-70(2)]
7.7 Under paragraph 79-10(2)(c) of the GST Act if an entity has selected a CTP premium offered to it on the basis that it has no input tax credit entitlement for the premium, and the operator later becomes aware that the entity did have an entitlement to an input tax credit for the CTP premium, the operator may have an increasing adjustment. The adjustment arises where the operator has previously claimed a decreasing adjustment in respect of a payment or supply made in settlement of a claim made under the policy.
7.8 Paragraph 79-10(2)(c) is amended to apply the same test as that contained within paragraph 79-10(1)(b), to ensure the provision applies where the operator became or becomes aware of the input tax credit entitlement of the entity that selected the premium. [Schedule 7, item 2, paragraph 79-10(2)(c)]
7.9 Where a CTP scheme has an operator that has sole responsibility for the issue of insurance policies under the scheme, the operator may elect to apply the relevant scheme's average input tax credit fraction in the calculation of any decreasing adjustment arising from the settlement of claims made under CTP insurance policies.
7.10 It was intended that subsection 79-15(4) of the GST Act operate to require the operator to make a single election to apply the average input tax credit fraction in its calculations. The election is to apply to all payments or supplies made by the operator in settlement of claims made under CTP insurance policies.
7.11 However, it is possible that subsection 79-15(1) operates to require an operator to make a separate election to apply the average input tax credit fraction for each payment or supply it makes in settlement of a claim under each policy. This is contrary to the intended operation of the provision.
7.12 Therefore, subsection 79-15(4) has been amended to ensure that, where an operator makes a single election to apply the average input tax credit fraction, it will apply to all payments or supplies it has made in settlement of claims. [Schedule 7, item 3, subsection 79-15(4)]
Policies commencing prior to 1 July 2003
7.13 Under section 79-25 of the GST Act, a payment or supply made by an operator that is connected with, but not made under, an insurance policy is referred to as a CTP hybrid payment or supply. A CTP hybrid payment or supply is treated as a payment or supply made in settlement of a claim under an insurance policy.
7.14 However, under subsection 79-25(2) certain payments or supplies made in settlement of claims that would otherwise be a CTP hybrid payment or supply, are treated as payments of compensation. This means that the operator is required to apply the average input tax credit fraction in the calculation of any decreasing adjustment arising from payments or supplies it makes in settlement of a claim. Where an operator makes a payment or supply in settlement of a claim that relates to, but is not made under, a CTP policy that commences before 1 July 2003, the operator should be entitled to treat the payment or supply as a CTP hybrid payment or supply. Such treatment will ensure that the operator is able to claim a full decreasing adjustment for any payment or supply made in settlement of a claim in relation to that policy.
7.15 New subsection 79-25(2A) ensures that subsection 79-25(2) does not apply to a payment or supply that is made by an operator in relation to, but not under, a CTP insurance policy that commences before 1 July 2003. [Schedule 7, item 4, subsection 79-25(2A)]
Entitlement to decreasing adjustments
7.16 Under section 79-50 of the GST Act, an operator may be entitled to claim a decreasing adjustment for a CTP compensation payment or supply or a CTP ancillary payment or supply. However, an operator should only be entitled to claim a decreasing adjustment in relation to such payments or supplies if the operator imposes or charges a CTP premium that is consideration for a taxable supply made by the operator.
7.17 Under section 79-50, an operator that does not make taxable supplies may be able to access decreasing adjustments merely because another operator under the same scheme has a CTP premium that is consideration for a taxable supply. Section 79-50 has been amended to ensure that an operator's CTP premium must be consideration for a taxable supply made by the operator before it is entitled to claim a decreasing adjustment in relation to any CTP compensation or ancillary payment or supply it has made under the scheme. [Schedule 7, item 5, paragraph 79-50(2)(a)]
7.18 The CTP recovery provisions operate to apply to recoveries made by operators exercising any rights to recover settlement amounts from another party. This means that where an operator has claimed a decreasing adjustment in respect of a payment or supply it has made in settlement of a claim under an insurance policy, it will have an increasing adjustment when it recovers any part of the settlement amount from another party. However, any amount received by an operator in settlement of a claim made by it under a policy of reinsurance it holds is not treated as a recovery.
7.19 Operators also acquire policies of insurance in respect of their risk to make CTP compensation or ancillary payments or supplies under a CTP scheme. If an operator receives a payment in settlement of a claim made by it under a contract of insurance, the operator will have to treat the amount as a general recovery. This treatment is inconsistent with the treatment that applies to payments received by operators under contracts of reinsurance.
7.20 New subsection 79-70(3) ensures that payments received by operators in settlement of claims they have made as insureds under policies of insurance, are not treated as general recoveries. [Schedule 7, item 6, subsection 79-70(3)]
7.21 A payment or supply may be made by another party in compliance with a judgement or order of a court, to an operator that is exercising its rights of recovery in respect of a settlement it has made under a CTP scheme.
7.22 However, section 79-90 does not apply as intended to a payment or supply made by a third party to an operator that is exercising its rights of recovery in respect of a settlement it has made under a CTP scheme. This is because a payment or supply made by the third party would not, as currently required, have been in absence of the court judgement or order, a CTP compensation payment or supply or a CTP ancillary payment or supply. The payment received by an operator is a payment made in settlement of the operator's claim against the third party.
7.23 Section 79-90 has been split into new subsections 79-90(1) and 79-90(2), that operate to ensure that recoveries made from third parties involving a judgement or court order are treated as intended under Division 79 of the GST Act. [Schedule 7, item 7, subsection 79-90(1); item 8, subsection 79-90(2)]
Application of the average input tax credit fraction
7.24 Section 79-15 of the GST Act permits a CTP operator, that is the sole operator that issues CTP policies of insurance under a CTP scheme, to elect to apply the applicable average input tax credit fraction in the calculation of decreasing adjustments for payment or supplies made in settlement of claims made under the insurance policies. Section 79-95 of the GST Act sets out how to work out decreasing adjustments using the applicable average input tax credit fraction. However, the section did not provide a rule to allow an operator to determine which applicable average input tax credit fraction applies in the calculation of a decreasing adjustment relating to a payment or supply made in settlement of a claim under a CTP insurance policy.
7.25 Therefore, paragraph (c) has been added to the definition of applicable average input tax credit fraction in subsection 79-95(2) to provide that the operator uses the fraction that applies for the financial year in which the accident, or incident, occurred to which the claim relates. [Schedule 7, item 9, subsection 79-95(2)]
7.26 In calculating the amount of a decreasing adjustment using the average input tax credit fraction, the operator must first calculate the payment or supply amount to which the fraction is applied. Subsection 79-95(3) of the GST Act sets out a method statement for the calculation of the payment or supply amount. Step 3 in the method statement has been amended to correct its reference in that step from applicable average input tax credit percentage to that of applicable average input tax credit fraction. [Schedule 7, item 10, subsection 79-95(3)]
7.27 Paragraphs 80-5(1)(b), 80-40(1)(b) and subparagraph 80-80(1)(b)(ii) of the GST Act set out part of the test to be satisfied in determining whether a CTP settlement sharing arrangement exists. Although each of these provisions should apply the same test to determine if a relevant arrangement is in operation, two of the provisions refer to circumstances involving owners or drivers while the other refers only to a driver. In order to ensure the consistency in interpretation of the provisions, each has been amended to refer to either person or persons. [Schedule 7, item 11, paragraph 80-5(1)(b); item 12, paragraph 80-40(1)(b); item 13, subparagraph 80-80(1)(b)(ii)]
Application and transitional provisions
7.28 The amendments apply, and are taken to have applied, in relation to the net amounts for tax periods starting on or after 1 July 2000. The application date is consistent with the commencement of the general CTP insurance provisions. [Schedule 7, item 14]