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No flight means no supply: Qantas success to impact on GST in the services sector
- By Stephen O’Flynn
- Published 9/09/2011
- Moore Tax News
- Unrated
On 1 September 2011 Qantas Airways Ltd achieved a surprise win against the Commissioner of Taxation in the Full Federal Court of Australia[1]. The Court’s decision is likely to trigger a reassessment of the GST treatment of prepayments for goods and services which never eventuate.
Background
The key issue before the Court was whether Qantas or Jetstar made a taxable supply where:
The decision
The Full Federal Court has overturned the AAT decision, accepting Qantas’s argument that the only relevant supply was a supply of air travel. As this did not occur, no supply occurred; as such no GST liability was generated.
The Commissioner of Taxation had defended the AAT’s decision by arguing that the relevant taxable supply occurred when a passenger paid for a fare. He argued that what the passenger received for the payment of the fare was the reservation; the reservation was the supply and the fare was the consideration.
However the Court adopted a refreshingly practical approach to identifying the relevant supply. It found that the relevant supply was a supply of air travel, ‘nothing more or less’. This was both ‘the substance and reality of the transaction’. The Court also stated that the AAT had erred by ‘artificially splitting the transaction’ into other supplies.
Implications of the decision
Although the decision dealt with a specific set of facts, in our view it may have significantly wider implications for Australian service industries, beyond just the travel industry. It could potentially impact on any arrangement where a customer makes prepayments to a would-be provider of goods and services and the goods and services are never provided. Where a supplier retains the payment they will need to determine whether the ‘core’ supply has occurred. If it has not occurred, they may not incur any GST liability on the payment.
Business facing these situations will normally have remitted GST on the prepayments when they were received. However if no supply occurs they may be entitled to an adjustment to offset against their current period GST liability.
However businesses will need to be mindful of the special GST rules relating to forfeited deposits, which deem a supply to have occurred if a deposit is forfeited. For example, suppose a person books a function room at a hotel, and pays the purchase price in several instalments. However they subsequently default on the final payment and do not show for the booking. The hotel would need to determine whether any of the payments were deposits, which would be subject to GST, or pre-payments for a supply which has no occurred. Following the Qantas decision, the latter payments are arguably not subject to GST.
We note that the ATO is yet to decide whether it will appeal the decision to the High Court of Australia.
If you would like further information on the above case or advice on GST please contact Stephen O’Flynn or your Moore Stephens Relationship Partner.
Authors: Stephen O’Flynn and Olivia Baker, Moore Stephens Melbourne
[1] Qantas Airways Ltd v Commissioner of Taxation [2011] FCAFC 113.
Contact
Stephen O’Flynn
T +61 03 8635 1800
soflynn@moorestephens.com.au
www.moorestephens.com.au
Background
The key issue before the Court was whether Qantas or Jetstar made a taxable supply where:
- a person books and pays for domestic air travel, and
- cancels the booking or does not turn up for the flight, and
- does not collect a refund, either because no refund was available, or because they failed to collect a refund.
The decision
The Full Federal Court has overturned the AAT decision, accepting Qantas’s argument that the only relevant supply was a supply of air travel. As this did not occur, no supply occurred; as such no GST liability was generated.
The Commissioner of Taxation had defended the AAT’s decision by arguing that the relevant taxable supply occurred when a passenger paid for a fare. He argued that what the passenger received for the payment of the fare was the reservation; the reservation was the supply and the fare was the consideration.
However the Court adopted a refreshingly practical approach to identifying the relevant supply. It found that the relevant supply was a supply of air travel, ‘nothing more or less’. This was both ‘the substance and reality of the transaction’. The Court also stated that the AAT had erred by ‘artificially splitting the transaction’ into other supplies.
Implications of the decision
Although the decision dealt with a specific set of facts, in our view it may have significantly wider implications for Australian service industries, beyond just the travel industry. It could potentially impact on any arrangement where a customer makes prepayments to a would-be provider of goods and services and the goods and services are never provided. Where a supplier retains the payment they will need to determine whether the ‘core’ supply has occurred. If it has not occurred, they may not incur any GST liability on the payment.
Business facing these situations will normally have remitted GST on the prepayments when they were received. However if no supply occurs they may be entitled to an adjustment to offset against their current period GST liability.
However businesses will need to be mindful of the special GST rules relating to forfeited deposits, which deem a supply to have occurred if a deposit is forfeited. For example, suppose a person books a function room at a hotel, and pays the purchase price in several instalments. However they subsequently default on the final payment and do not show for the booking. The hotel would need to determine whether any of the payments were deposits, which would be subject to GST, or pre-payments for a supply which has no occurred. Following the Qantas decision, the latter payments are arguably not subject to GST.
We note that the ATO is yet to decide whether it will appeal the decision to the High Court of Australia.
If you would like further information on the above case or advice on GST please contact Stephen O’Flynn or your Moore Stephens Relationship Partner.
Authors: Stephen O’Flynn and Olivia Baker, Moore Stephens Melbourne
[1] Qantas Airways Ltd v Commissioner of Taxation [2011] FCAFC 113.
Contact
Stephen O’Flynn
soflynn@moorestephens.com.au
www.moorestephens.com.au
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