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GST threatens to hit insurance claims

Businesses face a huge GST slug just for making an insurance claim.

According to the Australian Tax Office, a business claiming an input tax credit for GST on its insurance premium is liable for GST payable on any claim paid out.

The GST bill issue is already in effect on policies spanning the GST introduction date of 1 July 2000.

For example, a business with an insurance bill of $40,000 faces a GST bill of $4,000.

If the business makes a claim and the payout is, say, $1 million, the business is liable for a GST tax bill of $100,000.

However, if the business does not claim the input tax credit for the premium, the liability disappears.

Curtin Business School Small Business Unit executive director Tim Mazzarol said it appeared insurance had not been factored into the GST system.

“It means most people should not claim input tax credits on their premiums,” Dr Mazzarol said.

He said the GST liability even hit companies claiming on workers’ compensation insurance.

“With workers’ compensation, as we understand it, the business has to cover the GST liability on the claim even though the payout goes to the injured worker,” Dr Mazzarol said.

“GST is supposed to be revenue neutral but we have people suggesting companies hold back on input tax credits for fear of a bigger slug later.”

Insurance Council of Australia corporate affairs manager Rod Frail said, as it stood at the moment, companies had to pay GST on a claim if they had claimed input tax credits.

“There have been amendments to tidy up the provision on compulsory insurance,” Mr Frail said.

After 1 July, insurers will not be able to claim an input tax credit for workers’ compensation payouts.

Businesses will be able to claim input tax credits for GST paid on workers’ compensation but will not be slugged with GST on any claims.

With third party injury insurance, there is a transition period until July 2003. After that date, businesses will not be able to claim an input tax credits for third party insurance premiums nor will they pay GST on payouts.

These amendments are currently before Federal Parliament.

The Bookkeeping Network’s Alex Polglaze said Treasury had led him to believe insurance companies would add 10 per cent to claim payouts and claim it back as an input tax credit.

“All money going into a business has to draw GST. It’s like the sale of a product,” Mr Polglaze said.

“If a business gets more GST money in than it paid out it gives it to the tax office. If it gets less GST money in than it paid out, it claims it back.”

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