ATO Interpretative Decision

ATO ID 2005/206

Goods and Services Tax

GST and acquisition of a salvaged motor vehicle on settlement of an insurance claim
FOI status: may be released

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is the entity, an insurer, entitled to an input tax credit under section 66-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when:

•: on settlement of a claim under an insurance policy, ownership of a salvaged motor vehicle transfers to the entity, and
•: the entity subsequently makes a taxable supply of the salvaged motor vehicle?

Decision

No, the entity is not entitled to an input tax credit under section 66-10 of the GST Act as the entity did not provide, and is not liable to provide, consideration for the acquisition of the salvaged motor vehicle.

Facts

The entity is an insurer and is registered for goods and services tax (GST).

An insured was involved in a motor vehicle accident and made a claim under their comprehensive motor vehicle insurance policy. The insured's motor vehicle was 'uneconomical' for the insurer to repair and so the entity settled the claim by paying out the insured for their loss. 'Uneconomic to repair' vehicles are referred to as 'salvaged motor vehicles'.

Under the insurance policy, property in the motor vehicle passed to the entity. The supply of the salvaged motor vehicle by the insured to the entity is not a taxable supply under section 78-60 of the GST Act.

The entity subsequently makes a taxable supply of the salvaged motor vehicle.

The entity does not make any other payment to the insured or perform any other act for the insured in return for the salvaged motor vehicle.

Reasons for Decision

The supply of the salvaged motor vehicle from the insured to the entity is not a taxable supply under section 78-60 of the GST Act.

Subsection 66-10(1A) of the GST Act states that the amount of the input tax credit for a creditable acquisition of second-hand goods is one-eleventh of the consideration you provide, or are liable to provide, when the consideration is $300 or less. Subsection 66-10(1) states when the consideration you provide is more than $300, the amount of the input tax credit is one-eleventh of the consideration you provide, or are liable to provide, or when that amount is greater than the GST payable on a taxable supply of the good you make, the amount of the input tax credit is limited to the amount of GST on that taxable supply. Subsection 66-10(3) of the GST Act provides that section 66-5 of the GST Act will have effect despite section 11-25 of the GST Act.

As the entity acquired the salvaged motor vehicle in carrying on its enterprise, the entity acquired the motor vehicle for a creditable purpose. The entity is registered for GST. The remaining requirement is that it provided, or was liable to provide consideration for the supply.

Although the entity paid the insured a sum of money to cover the insured's loss, this payment was made in settlement of the insured's claim under the insurance policy. Section 78-20 of the GST Act provides that a payment or supply by an insurer, in settlement of a claim under an insurance policy, is not treated as consideration for an acquisition made by the insurer. Therefore, the entity's payment to settle the claim is not consideration for the acquisition of the salvaged motor vehicle.

The entity does not make any other payment or perform any other act in return for the salvaged motor vehicle. Therefore, the entity does not provide consideration for the supply of the salvaged motor vehicle and its acquisition is not a creditable acquisition.

As such, the entity is not entitled to an input tax credit under section 66-10 of the GST Act for the acquisition of the salvaged motor vehicle.

Date of decision: 29 June 2005

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 11-5
   subsection 66-5(1)
   subsection 66-5(3)
   subsection 66-10
   subsection 66-10(A)
   subsection 66-10(1)
   subsection 66-10(3)
   section 78-20
   section 78-60

Keywords
Goods and services tax
GST insurance policy
Insurance settlement under an insurance policy
Salvage under an insurance policy
GST second hand goods
GST supplies & acquisitions
Creditable acquisition
GST consideration

Siebel/TDMS Reference Number: 4708490

Business Line: Indirect Tax

Date of publication: 15 July 2005

ISSN: 1445-2782

Copyright notice

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).