A common question we are often asked is about GST on insurance claims. This comes about when clients are completing their insurance claim form, where there are questions as to the ability to claim Input Tax Credits (ITC).
The questions refer as to whether the business is registered for GST and if so, what percentage of the ITC the business is eligible to claim back. The reference to the ability to claim ITC is determined by the asset subject to the claim. There are three main categories that most clients will be concerned with:
- A 100% business use asset. For example; business plant and equipment or stock on hand. In this case, if the business is registered for GST, it would claim 100% of the GST applicable on these items and will be eligible to claim 100% of the GST on any replacement items acquired. So you would put down “100% of the ITC to be claimed”.
- Assets which are 100% private or where you are unable to claim any GST credits back. An example of this would be private assets covered under a business insurance package. In such situations when completing the form you would claim “0% of the ITC”. (This is probably the least likely to occur).
- Where the asset is part business and part private. The best example of this would be a motor vehicle which is partly used for business use. In such cases the GST claim would be a percentage based on the vehicle log book or other appropriate business percentage. When completing the insurance claim the percentage will be the same percentage used in claiming the GST on the purchase. In many cases without a log book the claim is 33%, therefore in such an example on the form you would enter “33% of the ITC to be claimed.”
So what is the reason for this? The idea of insurance is to put you back in the same position before your loss, not to gain. Therefore the Insurance Company will only reimburse you for your net cost. For example if you had an insurance claim on a 100% business asset worth $11,000 (incl $1,000 of GST), when you purchase a replacement asset you will be able to claim all the GST on the purchase back in your next BAS. Therefore the business will only be out of pocket the GST exclusive amount of $10,000 and this is the amount the insurance company will pay.
If you were not eligible to claim back the GST, you would be out of pocket the full $11,000.
The other side of this is that the amount received from the insurance company will not have GST in it. You enter the amount as GST Free when completing your BAS.
While on the topic of GST on insurance, a common error we find in reviewing GST entries is the claim on insurance premiums. In most cases insurance premiums include a stamp duty component. The Stamp Duty component does not include GST. A rule of thumb is that the stamp duty is 1/11th of the total premium, therefore treat that component as GST Free and the remaining 10/11th as GST inclusive.
If you have any questions regarding treatment of insurance proceeds contact you accountant for assistance.