IRD "Clarifies" GST Treatment Around Insurance Payouts

Inland Revenue has moved to "clarify" what it says is confusion held by some taxpayers as to whether or not payments to third party claimants by insurers create a GST output tax obligation on the third-party recipient. Additionally, it has confirmed that the insurer can get a corresponding input tax credit.

The main thrust of CS 20/01 is on the output tax obligation on the third-party claimant. On that front Inland Revenue says that the Commissioner’s longstanding position is that when a third party claimant, who is GST registered, receives payment in a settlement agreement from an insurer under a contract of insurance then that third party must pay GST output tax on the receipt.   This is the effect of s 5(13) of the GST Act.

Apparently, some taxpayers considered that if the amount was paid directly from the insurer to the third party the third party did not have to account for GST output tax. In this context, a third party is a person who is not a party to the contract of insurance.

Clarification has also been given as to what the word receives means in s 5(13). The view taken is that it merely means paid.

Inland Revenue says that the word “under” appearing in s 5(13) refers to the underlying insurance contract between the insured and the insurer. This is because the reason the payment is being made to the third party claimant from an insurer is that there is a policy in place between the insurer and the insured and that policy will have engaged.

While most settlements in this context do not admit liability the payments to the third party claimants are still under the policy of insurance.

However, tucked away in the example, there is also clarification on the input tax side. The statement clarifies that the insurer is entitled to an input tax credit when it makes a payment to a third-party claimant who is GST registered.

This is important because in some quarters advisors had been misinterpreting Southland Indoor Leisure Centre Charitable Trust v Invercargill City Council [2010] NZHC 1983 when it came to reinsurers reimbursing the insurer for payments to third party claimants.

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