Warranty payments paid by overseas manufacturers of motor vehicles to importers not exempt from GST
2005 case note - warranty payments from overseas motor vehicle manufacturers to importers not exempt from GST - contracts of insurance, supply, repair services.
Warranty payments paid by overseas manufacturers of motor vehicles to importers to reimburse them for amounts paid to dealers for repair services on faulty motor vehicles before 1 August 2002 are not exempt from GST as contracts of insurance within section 5(13) of the GST Act.
The appeal and cross-appeals concerned the imposition of GST on certain warranty payments in relation to imported cars. All respondents ("the car companies") purchase cars for import into New Zealand from overseas manufacturers. The car companies receive warranties from the manufacturers. The car companies on-sell the cars to dealers, and in turn provide their own warranties to the retail purchasers. When repairs are carried out on the cars under the warranty provided by the car companies, the dealers claim the cost from the car companies, who in turn claim either the full cost, or a portion of it, from the overseas manufacturers pursuant to the warranty from the manufacturer.
The subject matter of these proceedings was whether GST applies to payments received by the car companies from the overseas manufacturers pursuant to such warranties, prior to a legislative change exempting payments from 1 August 2002.
Venning J found in favour of the car companies. He concluded the arrangements between the car companies and their manufacturers did amount to insurance contracts. He noted the car companies took on the obligation of the manufacturers to meet the manufacturer's warranty in New Zealand, and the arrangement had other features similar to an insurance contract. For instance the cars would not necessarily need repairing, so it was not certain any claim would be made. The Commissioner appealed.
Decision under appeal
The Court of Appeal (McGrath Hammond and William Young JJ) allowed the Commissioner's appeal, for differing reasons. William Young J considered that section 5(13) was a red herring, as both sides agreed the subsection does not literally apply. His Honour considered the key question was whether there was a supply for the purposes of section 5(1), and rested his decision on a finding there was a supply of repair services, even though this issue had not been raised at first instance, rather than on whether or not the transactions were contracts of insurance within section 5(13).
McGrath and Hammond JJ found that the contracts before the Court were not contracts of insurance. Their Honours considered it is of great significance that the transactions are expressed to be "warranty" transactions, and that they operated as warranty claims, and not in line with procedures used in insurance claims. The court accepted that at a general level there was "indemnification" but noted that features one would expect to see in an insurance contract were distinctly absent. For instance, no policy was issued, and no premium was distinctly identified. No fund was created to meet future claims. There was no transfer of risk.
All members of the court dismissed the taxpayer's cross appeals. It was accepted the High Court had correctly found there was no contractual justification for the contention that the warranty payments were a refund of part of the purchase price paid for the motor vehicles.
Goods and Services Tax Act 1986