Should a business pack policy holder include GST in their sums insured?
The answer is unfortunately inconsistent and often hidden in the small print.
Goods and Services Tax or GST as its more commonly known is, according to the Australia Tax office, a “broad based tax of 10% on most goods, services and other items sold or consumed in Australia”. Generally speaking a business (typically one with $75,000 or more in annual sales) registered for GST will “include GST in the price of sales to their customers, and claim credits for the GST included in the price of their business purchases” (https://www.ato.gov.au/business/gst/).
Under a large number of brokered (BUT NOT ALL) business packs the policy includes a GST Notice that explains the treatment of said tax and generally speaking, the sums insured / declared values are to be recorded net of GST. LMI Policy Comparison as at 28th August 2014 with over 180 Business Packs under comparison shows’ that nearly 70% of all policies (including by way of additional comparison both MkIV and MkV ISR policies) do not require a GST registered business to include the additional 10% GST in their declared values.
Interestingly, a large number of the remaining GST inclusive policies are those issued by the direct insurance market who are, by their own admission “xx% cheaper”. So the next time you find yourself in competition with an internet quote using the same sum insured, check the policy and see if the client is mistakenly under declaring their insured values!
Whilst the treatment of GST is inconsistent on declared values what is not inconsistent is the net impact to the insurer. Let us apply this to a commercial business insurance claim and assume the Insured is GST registered and say owns a building worth $1,000,000 plus GST i.e. a total value of $1,100,000.
Assuming the building is completely destroyed, liability has been accepted, and the building is fully insured, then the insurer will take one of two courses of action.
The first is they will authorise reinstatement of the building and, as the Invoice is made out to the Insurer, will pay $1,100,000 to the builder and then claim back the $100,000 GST proportion as an Input Tax Credit on their next Business Activity Statement (“BAS”).
The more likely scenario however, is that the insurer will advise the Insured that they have no objection to the client authorising repairs and, as a result, the Invoice is made out to the Insured. They in turn, lodge the claim to their insurer and the insurer issues a cheque for $1,000,000 (i.e. net of GST) and forwards it to the Insured. The Insured then claims the $100,000 GST in their BAS as an Input Tax Credit and with this amount, the client is fully indemnified.
In both cases the insurers net loss is $1,000,000 and we leave you to decide therefore whether a GST inclusive declared value is an equitable starting point for premium assessment.
Remember always check the policy terms and conditions as no single rule applies to insurance policies as regards the treatment of GST on declared values.