A split decision of the High Court in Australia has held that GST was chargeable on non-refundable air fares retained by Qantas when passengers either cancelled their bookings or didn't show for their flights.
This decision will have obvious ramifications for the Australian airline industry. It may also be relevant to other Australian industries and to GST practices in New Zealand.
The dispute was closely fought and the debate about the classification of payments as consideration for taxable supplies is unlikely to be settled any time soon.
As with many high profile tax decisions, the issues raised by the Qantas decision illustrate the potential for GST issues to arise for transactions that might not otherwise be thought of as controversial. This decision should serve as a reminder of the need to anticipate the possibility of unexpected or changed GST outcomes when drafting transaction documents.
We discuss the High Court judgement and its consequences in more detail below.
The decision concerns the GST treatment of domestic airfares paid in advance to Qantas (or its subsidiary, Jetstar). Different categories of airfares were available to passengers – in some cases the fares were non-refundable in the event of the passenger not showing for travel, while in other cases a refund or credit against future travel was permitted.
Qantas considered that the only supply contemplated by the parties was air travel. Passengers paid fares in the expectation that travel was to be provided and accordingly in the absence of such travel there could not be any taxable supply. Any ancillary or preparatory acts relating to the travel were only supplied as part of the potential supply of travel.
The Commissioner's view was that at the time of paying the fare a contract existed between the parties in relation to the promise to provide travel in the future. The fare paid by passengers was consideration for that promise and it was irrelevant that the nature of the supply actually provided differed to what was originally contemplated. The Commissioner eschewed any argument that there were multiple supplies, but instead argued that the entire airfare represented consideration for the supply of a right akin to a reservation. Accordingly GST was payable by Qantas, irrespective of whether travel was ultimately provided.
Administrative Appeals Tribunal (AAT)
The dispute was initially brought before the AAT which decided in favour of the Commissioner, holding that GST was payable on the retained fares. The AAT concluded that in exchange for the fare, Qantas had held itself ready to carry the passenger in accordance with its Conditions of Carriage and this was itself a supply of services on which GST was imposed.
The AAT considered that its approach was consistent with the High Court's reasoning in Federal Commissioner of Taxation v Reliance Carpet Co Pty Ltd. In that case the High Court considered the GST treatment of a deposit forfeited under a contract for the purchase of real property and held that the deposit was consideration for a supply of services. In reaching this conclusion the High Court had focused on GST legislation relating specifically to security deposits but also observed that the payment of a deposit resulted in a number of enforceable rights being provided from the vendor to the purchaser. In this sense a forfeited deposit could be seen as consideration for a service that was distinct from the property being purchased.
Full Federal Court
Qantas successfully appealed to the Full Federal Court which disagreed with the AAT's retrospective identification of the relevant supply. The Full Federal Court distinguished Reliance Carpet saying that the GST legislation dealing with security deposits had no relevance to the present case.
Qantas cited two indirect tax cases as authority for applying a "substance and reality" test to determine the nature of a particular supply. The Full Federal Court agreed with this purposive approach and concluded:
"it is plain that what each customer pays for is carriage by air. This is the essence, and sole purpose, of the transaction".
Accordingly, with that transaction cancelled there was no taxable supply provided by Qantas (or Jetstar) to passengers which had never been provided with travel.
The Full Federal Court also referenced aspects of Qantas' terms and conditions to emphasise the connection between the payments and the travel, including the statement: "Your fare covers the flights(s) for you and your Baggage Allowance".
The High Court Decision
In a 4 to 1 majority decision, the High Court upheld the Commissioner's appeal, finding that GST was payable by Qantas on the non-refunded airfares.
The majority rejected the Full Federal Court's focus on the "essence and sole purpose" of the transaction and in doing so, referred back to the contrary approach taken in Reliance Carpet. Although Qantas had not provided an unconditional promise to carry its passengers, Qantas had still provided a promise to use best endeavours and this was itself capable of being a taxable supply for GST purposes.
In reaching this conclusion the majority considered the core provisions of the Australian GST legislation and held that contractual principles should not be adopted to attribute a payment to a particular supply. Rather, a causal connection or factual relationship between payment and supply was sufficient.
Heydon J's minority judgement noted that Qantas' activities prior to a flight were incidental and preparatory to a supply rather than being a supply in its own right. Preferring a practical interpretation of the GST legislation, he concluded that a passenger would only have paid a fare for the purpose of obtaining air travel as opposed to a highly qualified promise. Further, the ATO's position would result in an anomaly when travel was not provided but the type of ticket booked allowed a refund - in such cases the same service of "best endeavours" would have been provided but without any GST liability.
Decision Impact Statement
On 9 November the ATO responded to the High Court's judgement by way of a decision impact statement. This statement endorses the approach taken by the High Court and makes a number of observations, notably:
- Where a payment is made under a contract which secures rights to future goods or services (whether conditional or not), that payment will be consideration for at least the supply of such rights, regardless of whether the future supply is made.
- Any supply of rights relating to future performance should be considered a single composite supply which includes both the supply of rights and the future performance. That supply will have the same characteristics as the future performance for the purpose of determining whether GST is chargeable – e.g. a supply of rights relating to international travel would be treated as GST-free (Australia's zero rated equivalent) even if no international travel is provided.
- The failure of a passenger to utilise their rights to travel does not mean that the supply to the passenger has been cancelled. Accordingly the GST provisions dealing with "adjustment events" for cancelled supplies would not apply to reverse the GST charged to the passenger.
Both the Full Federal Court and High Court decisions have been received with considerable interest in Australia. However, the High Court's conclusion creates significant uncertainty as to the wider ramifications for other transactions where a payment is made in advance of contractual performance.
Some commentators initially queried whether the High Court decision would lead to uncertainty when determining the correct GST treatment for a particular supply. For example, the supply of international travel would normally be GST-free, while the alternative 'service' of a promise or reservation would be subject to different GST provisions and potentially chargeable with GST. As noted above, the ATO's decision impact statement has considered this point and concluded that any initial supply of rights would have the same characteristics as the future performance. However, it is not clear whether this interpretation is compatible with the framework of the Australian GST legislation which treats contractual rights and promises as distinct supplies in their own right.
Qantas appears to have conceded two possible alternative arguments which were mentioned at the lower court levels but were not raised before the High Court. First, that the failure to carry passengers constituted an "adjustment event" for GST purposes and therefore any GST liability should have been reversed. As noted above, the ATO's decision impact statement reached a different conclusion and found that a failure to carry passengers does not result in the "cancellation" of a supply and a subsequent adjustment event. However, Qantas might have been able to take this argument further had the decision been considered under the equivalent New Zealand legislation, which provides for an adjustment to GST chargeable on a supply where "the nature of that supply of goods and services has been fundamentally varied or altered". That wording might be sufficiently broad to include situations where a supply has not been physically received.
The second alternative argument was that the fare represented consideration for multiple supplies and that any value attributable to the reservation component would be relatively insignificant. However, case law suggests that the identification of multiple supplies can be difficult when the contractual documentation does not clearly segregate a transaction into separate parts. Qantas may have been able to gain greater traction from this argument if the relevant terms segregated a portion of the fare as a "reservation fee" and emphasised that as separate from the fare for the flight itself.
What is uncertain is whether the High Court decision (read alongside the decision impact statement) would have any bearing on a GST registered passenger's ability to claim input tax credits for unused travel. While the usual position is that GST should not represent a financial cost to most business transactions, input tax credits are only available where there is a sufficient relationship between the good or service acquired and the recipient's own taxable supplies. Based on the High Court majority's reasoning, a passenger would need to establish that the airline's promise to use best endeavours was something that was itself utilised by the passenger in carrying on its own taxable activity.
The Position in New Zealand
Given the potentially wide ambit of the majority's decision in Qantas, it is possible that the High Court decision will influence New Zealand GST jurisprudence. There might also be implications that extend beyond the airline industry to transactions involving any type of forfeited or non-refundable payment.
While the question of cancelled airline fares has not been considered by New Zealand Courts, the Taxation Review Authority (TRA) has dealt with the similar issue of forfeited payments. Case W11 considered the entitlement of a taxpayer to claim input tax credits in relation to a deposit forfeited under a discontinued property sale. The TRA held that this deposit could not be treated as separate consideration for a supply of rights because the only relevant supply was the transfer of the property and that had been cancelled. Accordingly no input tax credit or GST liability arose from the forfeited deposit.
A subsequent Inland Revenue TIB concludes that no secondary supply takes place as a consequence of the cancellation of a property sale. Further, any forfeited deposit represents compensation for the purchaser's failure to settle, rather than consideration for a supply and accordingly no GST is payable on that deposit. The TIB acknowledges that while GST might have previously been triggered by the receipt of the deposit, the cancellation of the sale would result in any previous GST liability being effectively reversed.
A more recent TIB considered whether the payment of a deposit can trigger a time of supply and a consequential GST liability on the total purchase price. That statement prefers the position taken by New Zealand and European Courts and concludes that a deposit is part payment of a purchase price rather than separate consideration. This is consistent with Inland Revenue's position on out of court settlements which is that compensation payments may lack the necessary reciprocity to be treated as consideration for any supply.
Most of these sources are concerned with the treatment of deposits paid under land sales rather than wider categories of payments such as booking fees, early payments etc. Depending on the facts of each case, it might be open for a Court to conclude that deposits are sufficiently distinct from other contract payments and that accordingly decisions such as Case W11 might be distinguished in favour of the majority's judgement in the Qantas decision.