Australian GST Qantas case has significant implications

Tuesday 2 October 2012

News Release

Landmark Australian GST Qantas case has significant implications for wide range of businesses

Following years of legal arguments and court proceedings in the Qantas Airways Limited v. Commissioner of Taxation, Australia’s highest court - the High Court of Australia (HCA) has just ruled in relation to what happens to the GST component of a non-refundable pre-paid domestic airfare, when the passenger is a no show.

In its decision today, the HCA has overturned the Federal Court, and held that under the Australian definition of 'supply', GST can apply even though no actual supply (travel) takes place.

The result now means Qantas has to pay the Australian Tax Office (ATO) the $34 million the airline collected in GST from passengers who failed to fly.

PwC New Zealand Partner and GST expert Eugen Trombitas says, “This is the most significant case in Australia on the meaning of 'supply' for GST purposes, and will have important implications for many businesses and GST practice.

“The case potentially applies to any businesses which have cancellation/forfeit fees or where the customer does not exercise a refund claim (if the actual supply of goods or services does not take place). This affects a wide range of businesses, not just airlines. The key issue is: should GST apply if the actual supply of goods/services has not taken place?”

Flight versus right - what is the Qantas case all about?

In Qantas Airways Limited v Commissioner of Taxation, the Federal Court in its September 2011 verdict unanimously agreed with the airline that GST was not payable by Qantas when a person booked and paid for domestic air travel but subsequently cancelled the booking or did not turn up for the flight, and did not receive a refund.

At the heart of the litigation was the Australian GST definition of 'supply', which includes the creation of 'rights' or the entry into an obligation to do anything.

But the HCA has ruled (4-1 majority) that 'rights' has to be read literally and some rights (i.e. a promise) were supplied by Qantas. These rights included ‘at least a promise (by Qantas) to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline.’ The taxpayer's argument that there had to be an actual flight was dismissed.

Mr Trombitas says, “The key question in Qantas is "What is supplied?". The HCA was prepared to answer this by saying, it's not the flight, rather it's some lesser rights. Nonetheless, it is strongly arguable the concept of 'rights' is only intended to apply to those types of rights if they are the dominant (or essential) object of the transaction i.e. incidental rights should be disregarded. This was essentially the approach of the sole dissenting Judge (Heydon J) who focused on the fact that the traveller wants ‘an actual air journey.’

The case raises some practical difficulties for businesses in Australia. If a transaction gives rise to many and varied rights - even though there is one actual supply (travel) - how are those rights to be valued and what is the proper GST accounting treatment?

Mr Trombitas adds, “The travel brochures and websites certainly don't advertise different 'rights' for sale - and these would be either worthless or difficult to price because nobody buys air travel just for the rights without the flight.”

On the HCA reasoning, there is a further complicated question about whether the customer supplies rights to the supplier i.e. the right to be serviced. The ATO will need to issue some guidance about the practical implications.

New Zealand implications
Qantas is a landmark case on the characterisation of payments and the ambit of supply under the Australian GST law. The Australian GST is 11 years old whereas the NZ GST is 26 years old - our case law principles in this area are more developed.

Yet, Mr Trombitas says, “New Zealand businesses will no doubt be following this case with some interest.

“Unlike the Australian GST legislation, the New Zealand GST Act does not define supply to include rights and obligations. New Zealand case law has traditionally given 'supply' a practical meaning. We think it is likely New Zealand courts would follow the Federal Court reasoning and that of the HCA minority i.e. there would be no supply, as no travel took place. This means the deposits kept by Qantas would not be consideration for a supply (as no travel took place) and no GST would apply.

“For a supply to take place there must be mutuality between the parties. For example, a person cannot receive a haircut (or hairdresser services) if they don't go to the hairdresser or miss their appointment. The same applies to air travel – if you don’t fly how can there be a supply of travel?”
-ends-

Notes to editors: The decision by the HCA is the latest chapter in numerous proceedings.
The Commissioner had previously succeeded in the Administrative Appeals Tribunal (AAT) and Qantas appealed.
The AAT held that payments retained by Qantas in “no show” situations (i.e. where no travel took place because the passenger did not turn up) were consideration for a supply. The decision of the AAT turned on the meaning of supply in the Australian legislation, which refers to the creation of “rights” and the entry into an obligation to do anything. According to the AAT the promise to carry and the making of an airline reservation for a passenger met both the statutory definition of supply and the ordinary concept of supply (of a service) even though no travel took place.

The Federal Court disagreed finding, that what each customer pays for is carriage by air, describing this as “the essence, and sole purpose of the transaction”. The actual travel was the relevant supply, and if it did not occur, there was no taxable supply. The court also held that the AAT had erred in looking for other ‘acts’ satisfying the definition of supply (such as the booking), because even if the identified ‘acts’ were capable of meeting the definition of supply, they were not ‘acts’ for which the price was paid without the flight.

Now, the HCA has ruled (4-1) that 'rights' has to be read literally and some rights (i.e. a promise) were supplied by Qantas. These rights included ‘at least a promise (by Qantas) to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline.’

© Scoop Media