Following years of legal arguments and court proceedings in the ‘Qantas Airways Limited v. Commissioner of Taxation,’ 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 on October 2, the Court 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) $34 million that the airline collected in GST from passengers who failed to fly.
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.
Impact on businesses
The case potentially applies to any business, which has 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
In the ‘Qantas Airways Limited v Commissioner of Taxation’ case, the Federal Court, in its September 2011 verdict, had 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.
The key question in Qantas is ‘What is supplied?’
The HCA was prepared to answer this by saying, it was not the flight, rather it was some lesser rights.
Nonetheless, it is strongly arguable that 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.’
Practical difficulties
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?
The travel brochures and websites certainly do not 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 should issue some guidance about the practical implications.
Implications here
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 New Zealand GST is 26 years old; our case law principles in this area are more developed.
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 that 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 do not go to the hairdresser or miss their appointment.
The same applies to air travel – if you do not fly how can there be a supply of travel?”
Eugen Trombitas is Partner and GST expert at PricewaterhouseCoopers based in Auckland.
