By Emre Ozgezici, Partner and Jeyda Karagozlu, Lawyer

Background

The matter arose from a motor vehicle collision where a vehicle owned by Cars Accident Rental Solution Pty Ltd (‘CARS’) was negligently damaged by Eray Yildirim. Following the subject collision, the CARS owned vehicle was deemed a ‘write-off’ on the basis that it was uneconomical to repair.

The following matters were agreed between the parties:

1. Damages were to be awarded to CARS in recognition of the loss of which would not have been sustained but for the negligence of the tortfeasor;
2. The subject vehicle was deemed a total loss of which would be calculated by assessing the market value less the salvage recoverable; and
3. Once compensated, CARS have the discretion of utilising the monies as they deem appropriate, inclusive of not purchasing a replacement vehicle.

The sole issue in dispute surrounded CARS’ entitlement to recover the total value of the subject vehicle inclusive of the Goods and Services Tax (‘GST’), despite being registered as a GST-registered entity which claims an Input Tax Credit (‘ITC’) pursuant to Australian laws.

Primary Decision

In the first instance, the Magistrates’ Court awarded damages inclusive of GST. This decision was reached as there was no evidence which would suggest that the Plaintiff had purchased a replacement vehicle and had claimed an Input tax Credit, thus, it ought not be assumed that the Plaintiff had benefitted by ‘double-dipping’ in this manner. It thereon follows that, in the absence of contrary evidence, CARS would only recover such portion once and were entitled to a judgement for the amount claimed, be that, inclusive of GST.

Appeal

Pursuant to section 109 of the Magistrates’ Court Act 1989 (Vic) the Defendant filed an appeal on a question of law arising from a final Order, specifically that the Magistrate had fundamentally misapplied the compensatory principle. The Appeal proceeded before Justice Gordon who allowed the appeal, finding that the Magistrate erred in his application of this principle.

Justice Gordon noted that an assessment of damages sought must only restore the claimant to the extent of their pre-tort position, making final orders that Mr Yildirim pay damages for the net GST market value.

The ruling highlighted that assessing damages whilst ignoring a party had sought a sum inclusive of GST where they would already be paid that GST component from the Australian Taxation Office (‘ATO’) would be to overcompensate a party and enable ‘double-dipping’ behaviour. The Court emphasised that the focus should not be on the replacement vehicle purchased (if at all) but rather the GST registered entities entitlement to an ITC if such a purchase were to be made. The outcome further confirmed the decision founded in the case of Millington v Waste Wise Environmental Pty Ltd, wherein it was determined that recoverable losses ought to be limited to the extent of actual economic loss, recognising that damages recovered cannot be a greater sum than loss suffered.

What does this mean for Insurers?

Ultimately, where a recovering party is a GST registered entity and is entitled to claim an ITC on a replacement or repair expense, the GST component does not comprise part of their loss, on such basis that it is recoverable from the ATO.  The Court will look to whether the Plaintiff would otherwise be entitled to an ITC, not whether they have actually purchased the replacement. Therefore, even in circumstances where a Plaintiff does not purchase an alternative vehicle, the compensatory principle continues to apply, limiting an insurers obligation to the genuine extent of loss which verily occurred less GST, as the remainder would be recoverable from the ATO.

Subsequently and in hoist, the ruling has drastic ramifications in the insurer space, encouraging insurers to dig deeper and confirm the GST registration status of claimants and their losses suffered prior to settlements, circumventing the overcompensation of tax components they would otherwise not be entitled to.