Every time you settle a claim, there are GST consequences for your business. The rules are contained within two divisions of the GST Act, Division 11 and Division 78, and the outcome depends on how you settle the claim and your insured’s GST registration status.
Getting the classification wrong means either leaving GST credits unclaimed or misreporting adjustments on your BAS. Here’s a summary of what your claims team needs to get right.
Two Paths: Division 11 vs Division 78
The GST outcome hinges on one question: do you have a binding obligation with the supplier, ie are you contracting and paying the supplier directly for the repair/replacement or are you paying the insured so that they contract and pay for the repair/replacement?
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Did you pay a supplier directly under a binding obligation? |
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Division 11 — Binding Obligation with Supplier
This applies when you contract directly with a repairer or supplier — for example, appointing a panel repairer to fix the insured's property. The key indicators:
- You enter into an agreement directly with the supplier
- The supplier issues a tax invoice to you
- You are liable to pay the supplier
- Claiming a decreasing adjustment when the insured has 100% ITC. This is the most common error — you get no adjustment when the insured is fully entitled to ITC on the premium.
- Treating payment arrangements as Division 11. If you pay a supplier on the insured’s behalf without a binding obligation, that’s Division 78, not Division 11. Division 78 does not create an ITC — only the decreasing adjustment formula applies.
- Claiming ITC on GST-free supplies under Division 11. Even when you have a binding obligation with the supplier, if the supply is GST-free there’s no GST in the price to credit.
- Forgetting the increasing adjustment on subrogation. If you claimed a decreasing adjustment on the original settlement, a subrogation recovery triggers an increasing adjustment you need to report at 7A.
GST result: Where the supply is taxable, you generally claim an Input Tax Credit (ITC) of 1/11th of the payment. Where the insurer makes a creditable acquisition under Division 11, it generally claims an ITC and does not get a Division 78 decreasing adjustment for that settlement payment. If the supply is GST-free (e.g., certain medical equipment), Division 11 still applies but no ITC arises.
Division 78 — Cash Settlements & Payment Arrangements
This covers cash payments to your insured, payments to suppliers without a binding obligation (payment arrangements), and compensation to injured third parties. Division 78 does not itself create an ITC, but it may provide a Decreasing Adjustment (DA) — which depends entirely on the insured’s ITC entitlement on the premium:
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Insured’s ITC on Premium |
Decreasing Adjustment? |
Example |
|
0% (not registered) |
Full: Payment ÷ 11 |
$11,000 payment → DA = $1,000 |
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Partial (e.g., 22%) |
Reduced per s78-15 formula |
$11,000 payment → DA = $780 |
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100% (full entitlement) |
None |
$11,000 payment → DA = $0 |
Same Claim, Three Outcomes
You settle an $11,000 property damage claim — the GST result changes entirely based on how you settle it and the insured's GST registration:
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You appoint panel repairer (Div 11) |
You pay insured — not GST reg'd |
You pay insured — 100% ITC |
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Division |
11 |
78 |
78 |
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Dollar amount paid |
$11,000 |
$11,000 |
$10,000 |
|
ITC claimed? |
$1,000 (= $11,000 ÷ 11) |
— |
— |
|
Decreasing adj? |
— |
$1,000 (= $11,000 ÷ 11) |
Nil |
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Your GST benefit |
$1,000 |
$1,000 |
$0 |
Same claim — but different settlement paths change both the dollar amount paid and the GST outcome. Your claims team needs to classify each settlement correctly to ensure accurate BAS reporting.
Other GST Consequences to Watch For
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Event |
GST Treatment |
BAS Label |
Watch Out For |
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Excess received from insured |
Increasing adj = excess ÷ 11 (Div 78 settlements only) |
7A |
Only applies to Division 78 settlements. Where the insurer receives an excess from the insured in a Div 78 scenario, an increasing adjustment under s 78-18 may arise. No such adjustment arises where the insurer settled under Division 11. |
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Salvage sale - when the insurer sells what's left of the damaged property after paying the claim. |
Taxable supply: GST = proceeds ÷ 11 |
1A |
Separate from subrogation
For example: a car is written off in an accident. You pay the insured the agreed value, take ownership of the wreck, and sell it to a wrecker for $2,000. That $2,000 is the salvage proceeds. Unlike subrogation, this is a taxable supply by the insurer, so GST of $2,000 ÷ 11 applies and goes to label 1A on the BAS. |
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Subrogation recovery - when an insurer pays out a claim, then goes after the person who actually caused the damage to get that money back. For example: your insured's warehouse is damaged by a negligent contractor. You pay the $50,000 repair bill. You then step into the insured's shoes and sue the contractor (or their insurer) to recover that $50,000. That recovery is the subrogation recovery.
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Not a supply, but increasing adj under s78-40 if Div 78 applied |
7A |
A subrogation recovery is not itself a taxable supply. If the insurer has previously claimed a Division 78 decreasing adjustment on the original settlement, the recovery may give rise to an increasing adjustment under s 78-40 and should be reported at BAS label 7A. This is generally only relevant where Division 78 applied to the original claim settlement. |
Common Mistakes We See
- Claiming a decreasing adjustment when the insured has 100% ITC. This is the most common error — you get no adjustment when the insured is fully entitled to ITC on the premium.
- Treating payment arrangements as Division 11. If you pay a supplier on the insured’s behalf without a binding obligation, that’s Division 78, not Division 11. Division 78 does not create an ITC — only the decreasing adjustment formula applies.
- Claiming ITC on GST-free supplies under Division 11. Even when you have a binding obligation with the supplier, if the supply is GST-free there’s no GST in the price to credit.
- Forgetting the increasing adjustment on subrogation. If you claimed a decreasing adjustment on the original settlement, a subrogation recovery triggers an increasing adjustment you need to report at 7A.
We can help
Every claim your team settles carries a GST decision, and most of them are straightforward once the classification is clear. If you have a settlement you are not sure how to treat, or you would like a second look at how your claims team is classifying them, talk to us before it reaches your BAS.
A short conversation now is far cheaper than an amendment later.
