New Zealand has one of the most comprehensive GST regimes in the world. It imposes a 15 percent tax on the supply of most goods and services, including most forms of insurance. The main exclusions from GST are the supply of residential accommodation and some supplies of financial services. Anyone who carries on an activity and makes supplies exceeding NZD60,000 per year is required to register for GST.
Anyone who is registered for GST is entitled to claim GST input tax on the GST charged on their insurance premiums. Conversely, a registered person that receives proceeds under their insurance policy relating to a loss incurred in the course of their GST activity is required to account for GST output tax on the receipt.
However, there are cases where insurance receipts may not be subject to GST:
It is common for multi-storey buildings to be managed by a body corporate that represents individual property owners within the building. some owners are GST registered, as their units are used for commercial purposes, and some are not, as their units are used for residential purposes. The body corporate themselves are normally registered for GST as they supply management services to the building owners.
The body corporate will normally arrange the property insurance. However, there has been confusion over the correct GST treatment of insurance proceeds and, in particular, whether the body corporate is required to account for GST on the insurance proceeds, even though some of its members are not registered for GST.
In most cases, the body corporate will not be receiving the insurance proceeds in its capacity as a GST registered person, but as agent for the property owners. Therefore, the body corporate should pass on the gross insurance proceeds to property owners. GST will only need to be returned to the extent the proceeds are received by GST registered property owners.
In some cases, insurance proceeds have been received by a person who carries on an activity, but who hasn’t registered for GST as their annual supplies are below NZD60,000. This has created uncertainty for persons receiving insurance proceeds (whether in a lump sum or over a period of time) that exceed NZD60,000, and whether they are required to register for GST and account for GST output tax on the proceeds. In most cases, however, the answer is no.
This is because, firstly, the insurance proceeds are not received in relation to a GST registered activity (because the person was not registered at the time of the damage). Secondly, a person is not required to register for GST if they exceed the NZD60,0000 threshold merely because a person is ending or reducing their activity, or because the person is replacing a capital asset.