On 1 September 2011 Qantas Airways Ltd achieved a surprise win
against the Commissioner of Taxation in the Full Federal Court of
Australia1. The Court's decision is
likely to trigger a reassessment of the GST treatment of
prepayments for goods and services which never eventuate.
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,
does not collect a refund, either because no refund was
available, or because they failed to collect a refund.
Qantas was appealing a decision made by the Administrative
Appeals Tribunal (AAT), which held that it did
make a supply in these circumstances. The AAT reasoned that Qantas
made a supply by holding itself ready to carry passengers in
accordance with its Conditions of Carriage. Consequently it
determined that Qantas made a supply even if it never provided air
travel to the person who booked a ticket.
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.
 Qantas Airways Ltd v Commissioner of
Taxation  FCAFC 113.
Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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