Contracts of Carriage by air are a peculiar kind of contract because the carrier/airline can forfeit the air fare of the passenger  who does not ‘turn up’ for the flight.

The question is, can the airline also keep the GST paid on the unused air fare?

The High Court of Australia has recently examined the legal rights of the airline to keep the GST paid on unused air fares in the decision of Commissioner of Taxation v Qantas Airways Limited [2012] HCA 41 (the Qantas decision) which was handed down on 2 October 2012.

How is the GST paid on air fares?

The Qantas decision was a revenue case – it concerned an application by Qantas for a refund of GST paid on unused air fares for domestic flights in Australia.

This is the GST process - When an air fare is paid to Qantas, the airline issues a Tax Invoice / Receipt to the passenger which includes GST (Goods and Services Tax, known elsewhere as VAT). Qantas remits the GST collected to the Commissioner of Taxation monthly as collected, rather than holding the GST for payment in the month when the flight is conducted. The monthly remission is a legal requirement.

How do air fares come to be unused?

This is how air fares come to be unused - Not all passengers who have air tickets take the flight they book. Some cancel their booking before the flight. Others transfer their booking, if the fare rules permit, but do not end up using the new booking. Yet others are a no-show – they do not ‘turn up’.

In all cases, Qantas was ready and willing to fly the passenger, had they ‘turned up’.

The Qantas decision concerns GST paid on unused air fares. There are two kinds of unused fares. If the unused fare was a discount or restricted fare, then the fare rules allow the unused air fare (and the GST paid on it) to be forfeited to the airline. If the unused fare was a max or fully flexible fare, the fare rules allow the passenger to claim a transfer or a refund of the fare. But if no refund or transfer is requested, the fare rules provide that the unused fare (and the GST paid on it) is forfeited to the airline.

Why did Qantas think it was entitled to a refund of GST on unused air fares?

Qantas claimed that it was entitled to keep both the unused air fares and the GST collected on those unused air fares. Qantas had paid the GST to the Commissioner of Taxation and therefore claimed a refund.

Qantas argued that the substantial or essential purpose for which the fare was paid was the air travel. Because the air travel had not been supplied, the purpose had failed, and the GST that had been paid on the unused fare should be refunded to it.

The amounts of GST paid on the unused fares that Qantas claimed should be refunded to it were substantial - $26,604,347 for forfeited fares where no refund was available and $7,671,570 for forfeited fares where a refund was available but no refund claim had been made, in the period from July 2005 to June 2008.

Why did the High Court of Australia decide that the Commissioner of Taxation was entitled to keep the GST paid on the unused air fares?

The High Court decided by a 4-1 majority that the contract of carriage for air travel was to be read as follows –

the making of a reservation or booking (and payment of the air fare) gives rise to a promise [by the airline] to use best endeavours to carry the passenger and baggage created sufficient legal rights for the passenger, and / or amounted to the entry of sufficient legal obligations for the airline, to give rise to a taxable supply as defined in the GST Law, at the time when the air fare was paid. GST was payable regardless of whether or not the air travel was supplied.

The High Court concluded that the Commissioner of Taxation was entitled to keep the GST paid upon the air fares, even though the air tickets were for unused fares. Therefore Qantas failed in its claim.

What are the implications of the Qantas decision for the travel and hospitality industry in Australia?

The Qantas decision means that the point of time at which a legally binding contract of carriage by air arises, and the point of time at which a taxable supply arises under the GST Law, is aligned as being the time at which the air fare is paid, which is in the booking process.

The Qantas decision has implications for other suppliers.

  • In the travel industry, airlines, cruise operators, coach operators, rail operators and water transport operators all require full payment of the fare to be made in advance of the travel. Payment is made when a booking is made, or before boarding the airline, ship, coach, train or ferry. Therefore, they are all in the same position as Qantas. They are not entitled to a refund of the GST they pay (or must pay) to the Commissioner of Taxation on the unused fare, if they forfeit the fare of a traveller who is a no-show or who decides not to travel. But if they refund all or part of the unused fare to the traveller, they may apply for an adjustment (effectively, a refund) of the GST.
  • In the hospitality industry, a reservation fee is paid by credit card when the booking is accepted.  If the guest is a no-show, the hotel / resort will forfeit at least one night’s tariff. They are in the same position as Qantas. They are not entitled to a refund of the GST they pay (or must pay) to the Commissioner of Taxation on the unused reservation fee, if they forfeit the fee paid for the reserved room (as opposed to a seat).