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In order to understand the complex relationship between TPD insurance GST and input -tax, you first have to appreciate the underlying legal aspects that relate to taxation of goods and services in Australia.
An overall definition of TPD insurance GST and input-tax is as follows:
(i) TPD insurance: This is a type of personal insurance cover that offers guaranteed lump sum payment in case you (the policy holder) suffer total and permanent disability.
(ii) GST: The Australian Government Treasury defines GST (Goods and Services Tax) as a type of value added tax (VAT) setup in order to collect tax on the added value from registered entities during every stage in the production chain.
(iii) Input-tax: This is an alternative to GST, which applies to supplies that are perceived to have valuation difficulties.
How GST Works
The Australian Taxation Office states that a 10% broad-based tax in the form of GST (Goods and services tax) applies to most services, goods and any other items consumed or sold in Australia.
Furthermore, the Australian Government Treasury provides a detailed explanation of how GST is applied to the price of goods and services:
- In the first place, a registered business includes GST within the overall price of all taxable supplies.
- Such a registered entity would then reclaim this GST component as a tax deduction while filing its tax returns to the Australian Taxation Office.
- Since only registered businesses are allowed to reclaim GST on the taxable supplies, the final consumer would be the one bearing the cost of GST.
The application of GST is generally what applies to all VAT setups. However, there are cases in which application of GST may be hard to do, due to valuation difficulties or policy reasons. Such valuation difficulties are likely to be encountered with insurance products, particularly life and TPD cover.
To solve these issues of valuation difficulties, the Australian Government Treasury applies various alternatives under GST:
(i) Input taxed (also known as exempt): Life insurance (includes term life, TPD and income protection cover) is input-taxed. Life insurance is much like a financial service and involves a significant component of saving. Hence, life cover is treated in the same way as other input taxed financial services.
(ii) GST-free (also known as zero-rated): This applies to private health insurance, which is consistent with overall treatment of other zero-rated health services.
Why GST Does Not Apply To TPD Insurance
Input tax is a common alternative for most OECD countries in tax treatment of supplies that have valuation difficulties. Such a valuation difficulty is quite evident with TPD insurance premiums which contain two distinct components:
A portion that goes to the pooled funds as an investment to cover insured risks. GST would not apply to this part
A portion that reimburses insurers as a fee for administering pooled funds. Based on the regulatory policy supporting GST, taxation should therefore apply to this part only. However, GST should strictly apply to the value added in offering this service based on the difference between premiums collected and payouts made. Considering that insurance works on pooled funds, determining such value addition for each individual policy is not possible.
