By Alison Robertson, Partner and Safiyya Khan,
Earlier this month the High Court handed down its decision on an
appeal by the Commissioner of Taxation from a judgment of the Full
Court of the Federal Court. This case has significant implications
for Australian taxpayers, raising the fundamental question
"what constitutes a taxable supply for Australian GST
purposes?" The decision could be of significance for
liquidators and other external administrators.
This case was primarily concerned with GST payable on fares
received from prospective passengers who failed to take their
flights which they had previously reserved and paid for. This
dispute was concerned with instances where no refund was
The amount of GST in dispute was in excess of $34 million.
The Full Court of the Federal Court found that GST was not
payable on airfares where the passenger did not take the flight.
The Full Court's reasoning was that the relevant supply for
which the fare was paid was the supply of the air travel and not
the entry into the contract; if the passenger did not take the
flight, a taxable supply was not made and a GST liability did not
arise. The Commissioner appealed to the High Court.
The appeal turned upon the construction and application of the
provisions of A New Tax System (Goods and Services Tax) Act
1999 (Cth) (GST Act), particularly the phrase
"the supply for consideration" which is found in the
definition of "taxable supplies".1 Section 9-5
provides that a taxpayer makes a taxable supply if the taxpayer
makes "the supply for consideration".
The Commissioner argued that there had been a taxable supply (of
a reservation and a conditional right to be carried) despite the
fact that the customer never took the flight. He contended that
"it is the payment of consideration which determines when,
and how much, GST must be paid" and that the amount to be
paid to the Commissioner is fixed by what is first paid or invoiced
in the tax period and is not retrospectively reduced in a later tax
period because one of the supplies has not been made. Essentially,
his argument was that the GST liability arises at the time of
entering into the contract.
Qantas contended that GST was not payable on the unused fares
due to the fact that there was no taxable supply because the
passengers never took their flights. Qantas' argument was based
on the premise that taxable supply in this context meant the actual
provision, under contract, of an air journey.
A majority of the High Court (with Heydon J dissenting) found
that GST was payable by Qantas on domestic airfares from passengers
who failed to take their flight, for one reason or another.
They found that the supply was "... at least a promise
to use best endeavours to carry the passenger and baggage, having
regard to the circumstances of the business operations of the
Significance for liquidators and other external
The potential significance of this decision for liquidators and
other external administrators relates to contracts that a company
has entered into but has not yet completed at the time of
There is an argument that the Qantas judgment could mean that
GST liability for contracts entered into by the company prior to
the appointment may fall to the company itself, rather than with
the liquidator or other external administrator who later completes
"Representatives" are defined in the GST Act to
include inter alia a trustee in bankruptcy, liquidator,
administrator and receiver.4 Division 58 of the GST Act
states that representatives of "incapacitated entities"
are liable to pay GST that would be payable by the entity, to the
extent that the taxable supply is made in the course of the
It is the usual, prudent practice of insolvency practitioners to
pay GST on taxable supplies made under contracts finalised during
the course of their appointment. An unintended consequence of the
High Court's decision may be that a taxable supply occurs on
entry into a contract prior to the appointment. It might be argued
that in those circumstances it is open to liquidators and other
external administrators to complete those contracts entered into
prior to their appointment without incurring personal liability for
Lavan Legal comment
Although the High Court approved the notion that GST liability
can arise on entering into a contract rather than the actual supply
of a service, the judicial reasoning in Qantas makes it clear that
this particular finding was dependent on the words of the contract
(and thus the facts of the particular case). Careful consideration
always needs to be given to the words of the contract when
considering when the taxable supply occurs for the purposes of GST
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
This Update highlights two recent cases that considered circumstances where liens could take priority over a registered security interest.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).