Goods And Services Tax Amendment Act (No. 2) 1987

This commentary item was published in Public Information Bulletin Volume 170, February 1988

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Part II

Sections 1, 2 and 3

The Goods and Services Tax Amendment Act (No. 2) 1987 makes two amendments in respect of the treatment of indemnity payments made or received under a contract of insurance that indemnifies a person for loss of earnings.

The amendments relate to:

1. Section 5(13) of the Goods and Services Tax Act 1985 which provides that any indemnity payment under a contract of insurance is a taxable supply when it is received by a registered person and relates to a loss incurred in the course of making taxable supplies. Where the supply of the contract of insurance is not a taxable supply this provision does not apply (the proviso to this subsection); and
2. Section 20(3)(d) of the Goods and Services Tax Act 1985 which provides that in calculating the tax payable in any taxable period, a registered person is entitled to claim one-eleventh of any payment made under a contract of insurance to indemnify any other person as an input tax credit. There are a number of provisions that limit the application of section 20(3)(d).

Background

In relation to contracts of insurance that provided indemnity cover for loss of earnings, there was a loss of revenue where the indemnity payment was paid to a third party. This arose for example when an employer paid a levy to the Accident Compensation Corporation (ACC) to cover employees for loss of earnings. The levy was subject to GST which meant the employer may have been entitled to an input tax credit whilst the ACC accounted for output tax. When an employee made a claim for loss of earnings, section 20(3)(d) of the Goods and Services Tax Act 1985 allowed the ACC to claim an input credit in relation to that payment. However, as that indemnity payment was made to the employee who was not a registered person, there was no requirement for the employee to account for output tax on that payment.

Whilst this revenue loss did not occur in all cases where a person was indemnified for loss of earnings, the amendment applies to all indemnity payments made or received to indemnify a person for loss of earnings. This is because there would have been increased compliance costs if registered persons were required to distinguish between payments made to third parties and others.

Amendments

To overcome this loss of revenue the amendment adds a further subparagraph to the proviso to section 20(3)(d) of the Goods and Services Tax Act 1985 to deny an input credit where an indemnity payment is made to indemnify a person for loss of earnings.

As a consequence of the above amendment denying an input tax credit, section 5(13) has also been amended to exclude such indemnity payments from being a taxable supply when received. The amendment to section 5(13) of the Goods and Services Tax Act adds a further subparagraph to the proviso to exclude from a taxable supply those indemnity payments received which indemnify a registered person for loss of earnings.

This amendment applies to all contracts of insurance that provide an indemnity cover for loss of earnings such as earnings related compensation payable under the Accident Compensation Act 1982 and accident policies issued by Insurance Companies that indemnify a person for loss of earnings.

For the purpose of this amendment, "earnings" has the same meaning as the Accident Compensation Act 1982. Section 52 of the Accident Compensation Act includes in the meaning of "earnings":

1. all wages, salary, allowances, commissions, etc., paid or payable to a person in respect of employment as an employee; and
2. in relation to a self-employed person, the assessable income of that person derived from the carrying on of a business.

3. The above is a guideline and it is suggested that either the Accident Compensation Act 1982 or Technical Rulings Chapter 9 Part II is used as a reference as to what is included in and excluded from the meaning of "earnings". Please note that Chapter 9 Part II is based on the 1972 Act but the provisions are similar to those in the 1982 Act.

   It should also be noted that the supply of a contract of insurance to provide cover for loss of earnings is still a taxable supply, i.e., the levies imposed by the ACC are a taxable supply.

   This amendment applies to all such indemnity payments made or received on or after 23 September 1987. This is the date that the Minister of Revenue announced that there would be an amendment in respect of indemnity payments for loss of earnings.

   Section 1 - Short Title

   Subsection (1)

   provides for this Act to be read together and be deemed part of the Goods and Services Tax Act 1985.

   Subsection (2)

   deems this Act to have come into force on 23 September 1987 and applies to all supplies made on or after that date.

   Section 2 - Meaning of the term "Supply"

   Subsection (1)

   repeals the previous proviso and substitutes a new proviso to exclude the following indemnity payments from the meaning of taxable supply when received by a registered person in the course of making taxable supplies:

   1. Received under a contract of insurance, where the contract of insurance is not a taxable supply (this is the same proviso that was repealed); or
   2. Received under a contract of insurance that indemnifies that person for loss of earnings.

   Subsection (2)

   repeals section 5(5) of the Goods and Services Amendment Act 1986 which introduced the proviso. This is a consequential amendment.

   Section 3 - Calculation of Tax Payable

   Section 3 adds to the proviso subparagraph (v) that limits section 20(3)(d) of the Goods and Services Tax Act 1985 from applying in respect of indemnity payments made to indemnify a person for loss of earnings.