Accounting and GST Treatment Of A Car Insurance Payout

Q&A Tax

Question :

VIP Pty Ltd is registered for GST. In FY2018, the company purchased a Mercedes Benz and claimed
GST up to the cost limit ($5,234 GST credit in FY2018). The company also engaged a comprehensive
insurance policy with Mercedes.

However, the car was destroyed after 10 months of the purchase. Under the insurance policy, the
company was entitled to receive a replacement vehicle in the same model.

What would be its accounting treatment and GST treatment of the replacement car?


Answer :

According to the ATO Fact Sheet: You do not have to pay GST on an insurance settlement, provided
you tell the insurer before making the claim what proportion of the premium you can claim GST credits
for. (You can claim GST credits on the part of the premium that relates to business purposes.)

If you do not tell your insurer before making the claim, you may have to pay GST when your claim is
settled and you lodge an activity statement.

The insurer will expect to cover you only for the actual loss – that is, the loss minus the amount of GST
credits you can claim on the repair or replacement cost of the item insured.

This means that the company should not generally be required to pay any GST to the ATO in relation to
the new replacement car received, given the company has informed the insurer that the company can
claim GST credit on the premium.

The company’s accountant could just include the difference between the carrying amount of the old car
and the market price of the new car into a revenue account, and increase the balance of car on the
Balance Sheet to match the market price of the new car.

For more information on GST and insurance settlement, please refer to GSTR 2006/10.

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