Life Insurance And Gst: What's The Connection?

Life insurance is a financial product that provides peace of mind and security for individuals and their loved ones. While the topic may seem complex, understanding the tax implications of life insurance is essential for policyholders. In New Zealand, life insurance premiums are fully exempt from Goods and Services Tax (GST), offering significant savings for individuals. This exemption is outlined in the country's tax legislation and stands in contrast to other types of insurance, such as fire and general insurance, where GST may apply. While life insurance payouts are generally tax-free, there are exceptions when the policy owner is not an individual but a trust, company, or investment, leading to more intricate tax considerations. Understanding these nuances is crucial for policyholders, and consulting with tax professionals or financial advisors is always recommended to navigate the complexities of life insurance and its tax implications effectively.

Life insurance premiums are exempt from GST in New Zealand

Pursuant to sections 3 and 14 of the Goods and Services Tax Act 1985, life insurance premiums are exempt from GST. This is further explained in Inland Revenue's Tax Information Bulletin, Volume 13, Number 7.

In New Zealand, GST forms a large part of the total tax paid by the average person. According to Government financial statements, more is paid in GST each year than in PAYE income tax. While individuals have little control over PAYE deductions, they can reduce their overall tax burden by spending more on goods and services that are exempt from GST, such as life insurance.

While life insurance premiums are exempt from GST, GST is charged on premiums for some income protection policies. Additionally, GST is charged on trauma cover and income protection policies, and GST-registered individuals may be able to claim this back.

It is important to note that the tax implications of life insurance can be complex, and it is always recommended to seek advice from a qualified tax adviser or accountant to ensure compliance with tax laws and to make informed financial decisions.

GST applies to additional benefits like trauma and income protection cover

In New Zealand, most life insurance cover, including life, mortgage, and funeral cover, is fully exempt from Goods and Services Tax (GST). However, GST is charged on premiums for certain additional benefits, such as income protection policies. This means that if you have a standalone income protection policy or one that is bundled with other types of cover, you will need to pay GST on the premiums for this specific component of your insurance. It is important to note that GST rates in New Zealand have been steadily increasing over time, starting at 10.0%, then rising to 12.5%, and currently sitting at 15.0%.

In contrast, income protection insurance is exempt from GST in Australia, as it falls under the classification of 'financial supplies'. According to the Australian Taxation Office (ATO), financial supplies are considered input-taxed sales and do not include GST in their pricing. This means that if you are an Australian resident and have income protection insurance, you will not be charged GST on your premiums.

It is worth noting that while income protection insurance premiums are GST-free in Australia, you are still required to include any payments received through this type of insurance as income when filing your taxes. On the other hand, if you are a GST-registered individual in New Zealand with income protection insurance, you may be able to claim the GST amount back. However, it is crucial to consult a qualified tax advisor before making any decisions, as incorrect claims can result in future tax implications.

The tax treatment of additional benefits, such as trauma cover, can vary depending on the country and specific legislation. While this response focuses on the GST implications of income protection insurance in New Zealand and Australia, it is important to consult local tax laws and regulations, or seek advice from a tax professional, to understand the specific tax treatment of trauma cover in your jurisdiction.

GST rules for insurance payouts to third parties

The GST Act includes special rules for applying GST to general (non-life) insurance. Insurers pay GST output tax on premiums they receive and claim GST input credits on the total amount of their pay-outs. If the insured party is a GST-registered person who is insuring their taxable activity, they can claim deductions for GST input credits in relation to the GST charged on their insurance premiums.

Section 5(13) of the GST Act requires GST-registered recipients of an insurance payout to return GST on these pay-outs. This applies even if the recipient is a third party to the insurance contract, and the loss is incurred in the course and furtherance of their taxable activity. This means that a GST-registered recipient of an insurance payout must return the GST output tax, regardless of whether they are a party to the insurance contract.

However, there are circumstances where you do not have to pay GST on an insurance settlement. For example, if you inform the insurer before making the claim about the proportion of the premium for which you can claim GST credits, you may not have to pay GST when your claim is settled. This is because you can claim GST credits on the part of the premium that relates to business purposes.

In some cases, insurers may conceal their involvement in a dispute to lower the third party's expectations of a large settlement. This can result in a revenue loss for the tax authorities and a corresponding cost saving for the insurer. As a result, there have been discussions about potential policy changes to address this issue and improve compliance with GST on insurance payouts to third parties.

Insurers pay GST output tax on premiums and claim GST input credits on pay-outs

In New Zealand, insurers pay GST output tax on premiums they receive and claim GST input credits on the total amount of their pay-outs. This is outlined in the GST Act, which includes special rules for applying GST to general (non-life) insurance.

If the insured party is a GST-registered person who is insuring their taxable activity, they can claim deductions for GST input credits in relation to the GST charged on their insurance premiums. This is particularly relevant for businesses insuring assets used for their business operations.

For instance, if a business has insured an asset used for taxable activities and suffers a loss, the GST-registered business can claim deductions for the GST charged on the insurance premium. When the insurer makes a pay-out to the business, they can claim GST input credits on the total amount paid.

In Australia, a similar process applies. If you are registered for GST and have taken out general insurance for business purposes, you can claim a full or partial credit for the GST included in an insurance policy premium covering a business asset. It is important to notify your insurer of your GST registration to avoid any unexpected GST liabilities on claim settlements.

Life insurance is treated differently as it is considered a 'financial product'

Life insurance is treated differently from other types of insurance in terms of GST because it is considered a financial product. This means that life insurance premiums are fully exempt from GST in New Zealand. There are very few goods or services that are exempt from GST, but life insurance is one of them. This is specified in sections 3 and 14 of the Goods and Services Tax Act 1985.

The fact that life insurance is exempt from GST translates to significant savings for policyholders, especially considering that GST rates have been steadily increasing over time. When GST was first introduced, it was set at 10.0%. It has since been increased to 12.5% and then to 15.0%, which is 50% higher than the initial rate. Furthermore, there is no guarantee that GST rates will not continue to rise in the future.

The exemption of life insurance premiums from GST is particularly beneficial because GST forms a significant portion of the total tax paid by the average person, often exceeding the amount paid as PAYE income tax. By strategically allocating a larger portion of their income towards goods and services that are exempt from GST, such as life insurance, individuals can effectively reduce the overall amount of tax they pay.

While life insurance premiums are exempt from GST, it is important to note that GST may still apply to additional benefits associated with life insurance policies. For example, GST is applicable to benefits like trauma cover and income protection cover. In these cases, life insurance is considered to provide tangible goods or services to policyholders in the event of an accident or illness. Therefore, while life insurance as a standalone product is exempt from GST, certain add-ons or supplementary benefits may attract GST.

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