With alert level 4 restrictions forcing many businesses to close their doors, clients are turning to advisers for help around their insurance policies and taxes - including how the two may potentially relate to each other.
Rata Kamau, account manager at Inland Revenue (IRD) has explained that any money paid out under income protection policies is generally subject to Goods and Services Tax (GST), while personal sickness policies may be exempt - though he stressed a lot depends on each individual policy, and that clients and advisers should always refer to the policy terms first for information.
He also explained that businesses that have stopped operating may need to de-register from GST entirely, though the definition of ‘ceased operations’ will also vary case by case.
“If you make a claim for loss of income or similar insurance, the receipt of any insurance payout will be subject to GST, as it is a deemed supply under the GST Act,” Kamau explained.
“If a business shuts down due to COVID-19 level four, you may need to de-register from GST. If a taxable activity is ceased, the taxable person should seek de-registration within 21 days of cessation - however, whether or not a taxable activity has ceased will depend on the facts of each case.”
“Whether or not payments from an insurance policy are taxable will always depend on the exact terms of the policy,” Kamau continued.
“However, in most cases, the following applies. For income protection insurance, amounts paid out will be ‘income’ to the recipient.”
“Amounts paid out under personal sickness insurance policies will be ‘income’ only if they are income under ordinary concepts, but are generally exempt where the amount paid out is not calculated with reference to loss of earnings.”
Kamau said that for any business insurance policies, any insurance payment received is generally classed as ‘income’ and is taxable - however, he noted that if the payment was received prior to March 31, 2020, it may be possible to spread the tax into the 2020/2021 year.
“Recipients for insurance for loss of income are deemed to be in the furtherance of taxable activity, and are therefore subject to GST,” Kamau said.
“There is still a lot of work that we need to undertake to provide clarity and certainty to customers. We’ve received a lot of questions on a lot of different topics, and I would say that in the first instance, you should go to our website - there is a lot of good information on there.”
