If a business is insured and suffers a loss, then that business may receive an insurance payout for their loss. For example, a piece of machinery may be stolen from a business and the business makes an insurance claim on their insurer. This support note deals with accounting for insurance settlement amounts.
The amount that the insurer pays to the insured for their loss (settlement amount) is determined in accordance with the terms and conditions of the relevant insurance policy. Note that taxation laws do not provide for the amount or how to determine the amount of an insurance payout that is, the payout is not determined according to the taxation legislation. Thus the ATO cannot advise whether the amount of the payout is correct.
How does GST impact on insurance settlements?
There is no goods and services tax (GST) payable on insurance settlements as long as the business that paid the insurance premium informs the insurer of its entitlement to an input tax credit on the premium at (or before) the time a claim is made.
When an insurer pays out a cash settlement on a claim, it is common practice for them to reduce the settlement amount by 1/11th if the insured is entitled to a full input tax credit. The reason for this is that the insurer considers they are only required to indemnify the insured for the actual loss incurred. If the insured is entitled to claim a full input tax credit on the replacement item, the insurer may consider that the business s loss is less than it would have been if they could not claim an input tax credit.
If, on the other hand, the insurer contracts with a supplier to provide a service to the insured, and undertakes to pay the settlement monies direct to the service provider in full settlement of the account, the insured is not entitled to claim an input tax credit for those payments by the insurer to the service provider. For this to apply, the insurer must meet the other requirements set out in paragraph 6 of Goods and Services Tax Ruling GSTR 2000/36 (or subsequent ruling).
In the examples below, it is assumed:
- the insured is registered for GST and is entitled to 100 per cent of the input tax credit for the GST paid, and
- the insured item is a piece of machinery.
These are examples only. Always check with your accounting advisor for the best solution for your circumstances.
The insurer agrees the damage to the asset is $2200 including GST and pays out $2000 to the insured in full settlement of the claim. The insured pays repair costs of $2200 or spends $2200 acquiring a new asset and claims an input tax credit of $200 ($2200 x 1/11th).
The insured's out of pocket expense is zero; that is, $2000 from the insurer plus $200 input tax credit.
To enter the $2000 received from the insurer, the insured would enter a Receive Money transaction with the allocation account being an income account such as Insurance recoveries or similar. The tax code should be entered as N-T as the $2000 does not have to be reported on the BAS, as the insurer will have already taken care of any reporting obligations.
After you receive the insurance claim amount
Once you have received the insurance claim amount back from the insurance company, the below example shows how to enter a transaction to pay for repair work to your damaged asset.
If you need to infact acquire a replacement asset, the GST or GCA tax code (as applicable) should be used in the Purchase or Spend Money transaction so that an input tax credit can be claimed. The allocation account of this transaction would typically then be your Asset account (1-XXXX).
The insurer agrees that the machinery can be repaired at a cost of $2200 (including GST) and contracts with the repairer to do so, and otherwise meets the requirements of GSTR 2000/36. The insurer pays the motor vehicle repairer $2200 and claims an input tax credit of $200.
The net payment from the insurer is $2000 which is, $2200 less the $200 input tax credit. There is no payment from the insured to the repairer and thus no input tax credit for the insured.
The insurer agrees that the machinery can be repaired at a cost of $2200 including GST and contracts with the repairer to do so, and otherwise meets the requirements of GSTR2000/36. The insurer pays the repairer $2000 instead of $2200 and instructs the repairer to claim the remainder from the insured.
The insured pays the $200 balance to the repairer and is entitled to an input tax credit of $18.18 (1/11th of the $200 it paid).
In this case, the insured would enter a Purchase or Spend money transaction with a GST tax code so that an input tax credit is claimed.
If you pay an excess to your insurer, you do not include the amount of the excess at G11 on your BAS. One way of accounting for the excess would be to subtract it from the gross payment (that is, the insurance pay out figure before the excess is deducted by the insurer) and allocate it to an expense account with an N-T tax code in a Receive Money transaction.
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