High Court clarifies that the insuring of an identified risk is not a financial service and the premia paid are not exempt from tax pursuant to ss 3(1)(h) and 3(1)(l) of the Goods and Services Tax Act 1985.

Summary

The Court found that the premia paid in insurance policies where the policy covers an identified risk for a borrower’s loan repayments on the occurrence of a specified insured event, or a policy which covers the difference between the total loss-pay out received from a motor vehicle insurer and any outstanding loan where a car is written off, were not exempt from tax under the financial services exemption.

Impact

This decision clarifies the position that the insuring of an identified risk is not a financial service and the premia paid are not exempt from tax pursuant to ss 3(1)(h) and 3(1)(l) of the Goods and Services Act 1995 (“the GST Act”).

Facts

Provident Insurance Corporation Limited (“Provident”) is a specialist insurance company offering a range of products connected with the automotive industry. These products are designed to mitigate risk in relation to the repayment obligations for credit contracts for the purchase of motor vehicles, including:

1. the Credit Contract Indemnity (“CCI”) policy which covers a borrower’s loan repayments upon the occurrence of specified insured events; and
2. the Guaranteed Asset Protection (“GAP”) policy which, in the event a vehicle is written off in an accident, will cover the difference between the total loss pay-out received from a comprehensive motor vehicle insurer and any outstanding loan balance.

In addition to the CCI and GAP policies, Provident also offers mechanical breakdown insurance and comprehensive motor vehicle insurance. Provident accepts that GST is payable in respect of the premia it receives under these two types of policy. However, Provident asserts that the CCI and GAP policies fall within the financial services exemption set out in s 3(1) of the GST Act.

Preliminary matter – admissibility of expert evidence

Before the Court could consider the substantive issue at hand, a preliminary issue regarding the admissibility of a brief of evidence needed to be decided. The evidence consisted largely of expressions of opinion of an expert for Provident. The Court considered s 25 of the Evidence Act 2006 determines whether the evidence was admissible or not.

The Court noted that as there was no dispute of relevant fact in these proceedings, it did not need to “ascertain any fact”. The issue was whether the Court was likely to obtain substantial help from the opinions of the expert in relation to other evidence in the proceeding. The Commissioner of Inland Revenue (“the Commissioner”) also called an expert in tax policy, solely in case the Court held that the evidence of Provident’s expert witness was admissible.

The Commissioner submitted that the Courts have consistently expressed their disapproval of legal submissions being included in witness statements in similar proceedings, (Commissioner of Inland Revenue v BNZ Investments Ltd [2009] NZCA 47, (2009) 19 PRNZ 553 at [28]), and objected to the fact that the brief of evidence introduced into evidence a number of documents such as a GST commentary/guide prepared for the insurance industry (GST Co-ordinating Office Handbook on the Fire and General Insurance Industry (April 1986)), and three Government discussion documents on GST (Inland Revenue GST: A Review (March 1999); Inland Revenue GST and Financial Services (October 2002); and Tax Working Group Future of Tax: Interim Report (20 September 2018)). The Commissioner submitted that the Court only takes into account a limited number of sources of extrinsic materials such as Hansard, Bills, explanatory notes to Bills or reports from Parliament’s Select Committee. The Commissioner also referred to the disapproval expressed by the Supreme Court in Penny v Commissioner of Inland Revenue [2011] NZSC 95, [2012] 1 NZLR 433 at [32] (“Penny v Commissioner of Inland Revenue”) of the practice of including what are legal submissions in the brief of expert taxation witnesses.

The Court noted that there were no “facts of consequence” to the determination of these proceedings that were required to be ascertained. The Court did not accept that the decision in Lin v Commissioner of Inland Revenue [2017] NZHC 969, (2017) 28 NZTC 23-016 (“Lin v Commissioner of Inland Revenue”) is authority for the proposition that New Zealand Courts accept expert tax witnesses giving their opinions about the policy underpinning a provision in New Zealand tax legislation that the Court is required to interpret. The Court of Appeal in Lin v Commissioner of Inland Revenue followed the practice referred to in Commissioner of Inland Revenue v JFP Energy [1990] 3 NZLR 536 (CA) at 54 per Richardson J.

The Court held that the Australian case law referred to by counsel for Provident did not seem to relate directly to the type of evidence in issue here, and to the extent that there was any divergence in approach between the Australian and New Zealand Courts on this issue, his Honour preferred the approach outlined by the Supreme Court in Penny v Commissioner of Inland Revenue.

The Court also noted that the evidence of Provident’s expert witness was, in large part, legal submission and that no exception could have been taken to it if the evidence had been presented by counsel.

The Court held that the evidence of both Provident and the Commissioner’s expert witnesses amounted to legal submissions. His Honour was accordingly unable to place any weight on it and held it to be inadmissible.

Decision

The Court held that Provident had not shown that, on the balance of probabilities, the Commissioner’s assessments were wrong. The Court held as follows:

1. The purpose of the GST Act is to levy a consumption tax on the widest possible range of goods and services with as few exceptions as possible.
2. Payment of interest and principal are not payments for the supply of goods and services and were intended to be exempt. As a consumption tax, the purpose of GST was not to tax savings, resulting in the exemption of, for example, life insurance policies, retirement schemes and the like.
3. To reduce the “self-supplier of services” bias that could be included within an exempt interest charge, the definition of financial services was drafted so as to include services in the nature of brokerage and intermediary services provided other than by financial institutions. However, the reasons behind that exemption do not apply in relation to an insurance policy that is separately priced and provided by a different party to the party who charges interest under the credit contract.
4. Apart from brokerage and intermediary services, it was not the purpose of Parliament to exempt services connected with the provision of financial services but not themselves financial services.
5. There is no identifiable policy underlying s 3(1) of the Act that differs from the overall policy of the Act set out above.
6. The nature of a supply for GST purposes is determined by the contractual relationship between the supplier and the recipient of the supply. The fact that the services supplied may benefit another party in relation to a contract of financial services did not transform what were, in this case, insurance services provided pursuant to a contract of insurance into exempt financial services.
7. In its natural sense, a contract of indemnity is between two parties, one of whom contracts to make good the losses sustained by the other as a result of loss caused by a third party. This is fundamentally different to a contract of insurance where the insurer agrees, for the payment of a premium, to pay money to, or for the benefit of, the other party to the contract in the event of the happening of an insured event, see Chitty on Contracts (33rd ed, Sweet and Maxwell, London, 2015) Vol 2 at [44-001].
8. If Parliament had intended the use of the word “security” in a very general sense such as “something that secures or makes safe” or “anything that makes the money more assured in its payment or more readily recoverable”, then the words surrounding it in s 3(1)(h) of the GST Act (guarantee, indemnity and bond) would be unnecessary as they could all be described as something “that makes money more assured in its payment or more readily recoverable”.
9. The word “security” is clearly capable of bearing the meaning “security over real or personal property”. Placement of the word in the context of words such as guarantee, indemnity and bond support the interpretation that the narrow or particular meaning of “security” in accordance with the Black’s Law Dictionary definition was intended.
10. The principles articulated by the Court of Appeal in Wilson & Horton Ltd v Commissioner of Inland Revenue [1996] 1 NZLR 26 (CA) at 33, were determinative. The financial service in question was the provision of a contract of insurance. The parties were the insurer and the insured. A contract of insurance was not a credit contract. Although the financier may have had certain claims against the insurer pursuant to the Contract and Commercial Law Act 2017, that was a different issue as to whether the insurer was party to the credit contract. The credit contract was solely between the financier and the insured. The insurer obtained no rights in respect of it. There was no contract of indemnity between the insurer and the financier, and the fact that the financier might have benefited as a result of the provision of insurance services to the insured did not result in the insurer supplying exempt services to the financier.
11. In analysing whether or not the service provided by Provident amounted to the payment of interest or principal pursuant to ss 3(1)(ka) and 3(1)(l), it was necessary to reflect on the nature of the insurance contracts. The premium was payable by the insured at the commencement of the insurance contracts. It was that premium that was subject to GST. There was no further or additional premium payable if an insured event occurred. In many, perhaps most, of the policies, there would not be any insured event and there would be no payment by Provident on behalf of the insured to a finance company. The service being provided was insuring the identified risk, which was not a financial service. In that respect, the service provided by Provident under the CCI and GAP policies was identical to the service it provided under its other policies.
12. Just as in Commissioner of Inland Revenue v Databank Systems Ltd [1990] 3 NZLR 385 (PC), the supplier of the service that is connected to, or involved in, a financial service provided by someone else is not itself the supplier of a financial service.