A lot of issues are appearing with insurance claims and leaky homes settlements.
A recent bulletin from the Australian Tax Office is a good example of why it’s important to get it right.
The ATO’s bulletin deals with a situation where a home owner makes an insurance claim for damage to their house following floods. The insurance company disputes liability and says the insurance policy does not cover the claim. However, on a “no liability” basis the insurance company decides to make an “ex gratia” payment to the home owner in full and final settlement of their claim. The issue is whether the insurance company is entitled to a GST credit on the amount of the settlement payment.
The ATO decided the credit is available under the Australian legislation.
The same issue arises in New Zealand but our legislation is quite different. Also, the IRD are on record as saying out of court settlements without admissions of liability are often not subject to GST. This could create a problem here. The home owners of course will use the settlement money to pay for repairs which will be subject to GST. So the Government will collect GST on the payment. It is logical in my view to allow the insurance company a GST credit for the insurance payment because if no credit is allowed the GST becomes an added business cost of the insurance company. That is contrary to GST basic principles.
I hope the IRD and insurers get this right.