Special arrangements
Warranty
A warranty is a promise to repair or replace goods if they fail. Selling an extended warranty is generally a taxable supply, while GST on warranty repairs depends on who pays.
A warranty is an assurance by a seller or manufacturer that goods will work as promised and will be fixed or replaced if they fail within a period. Some warranties come free with the product, and others are sold separately as extended warranties. Under Australian consumer law, consumers also have guarantees that exist whether or not a warranty is offered, but those are separate from the GST questions here.
The GST treatment depends on what is being supplied. A manufacturer's warranty included in the price of the goods is part of the overall sale, and GST applies to the whole price of the goods in the ordinary way. No separate GST arises just because a warranty is included. The business does not report a separate amount for the warranty itself.
An extended warranty that a customer buys separately is a different matter. The sale of the extended warranty is generally a taxable supply by the business that provides it, and GST at 10% is included in the price. The customer, if registered and buying for a business use, can claim a credit with a tax invoice. Retailers that sell warranties on behalf of another company, such as an insurer or warranty provider, may be acting as an agent, so who is the supplier needs to be clear.
When a repair is done under warranty, there are generally three parties to consider: the customer, the warranty provider and the repairer. If a repairer fixes an item and the warranty provider pays for the repair, the repairer's supply is generally to the warranty provider, and GST applies to the repair charge in the usual way. The warranty provider may then claim a credit if it has a tax invoice. The customer typically pays nothing and does not claim a credit.
Replacing goods under warranty is another situation. If a business replaces a defective item at no charge, there may be no new sale for GST purposes, because the replacement is part of satisfying the original sale. However, if the customer receives a refund, the price is reduced, and an adjustment to GST may be required for the original sale.
It is important to distinguish warranties from insurance. Some products sold as extended warranties are structured like insurance policies, and the label does not settle how GST applies. The nature of the promise and the party giving it can affect whether the supply is taxable or something else, and the person selling the product should check the position before assuming how it is taxed.
Because arrangements vary, this page is general information only. Confirm your position with the ATO or a registered tax professional.
Worked example
An appliance store sells a washing machine for $1,100 including GST, with a standard manufacturer warranty included at no extra charge. GST is $100 on the sale. The customer also buys a separate three-year extended warranty for $330 including GST, which carries GST of $330 divided by 11, equal to $30. The store reports $130 GST in total for the two sales.
Practical tips
- Do not charge extra GST for a standard warranty already included in the price of the goods.
- Treat the separate sale of an extended warranty as a taxable supply unless the ATO guidance for your arrangement says otherwise.
- Be clear who the supplier is when selling a warranty provided by another company.