GST and the meaning of "supply" - FCT v Qantas Airways Limited

In a 4-1 majority decision, the High Court has allowed the Commissioner's appeal and held that Qantas was liable for GST on purchased airfares where the passenger did not turn up for the flight. In doing so, the majority found that the taxable supply for which the consideration was received was something less than the actual travel - namely, Qantas' contractual promise to use "best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline": FCT v Qantas Airways Limited^[1].

Background

In 2008, the Commissioner issued a GST private ruling to Qantas. The ATO ruled that where a passenger forfeits an airfare through cancellation of the booking or failing to check-in, there nevertheless is a supply for GST purposes and a GST liability in respect of that passenger. The Commissioner ruled on the basis that Qantas provides a number of things to passengers which meet the definition of supply in section 9-10 of the A New Tax System (Goods and Services) Tax Act 1999 (GST Act) in the form of the bundle of rights being provided to a passenger on booking a ticket rather than just a single supply of air travel.

The GST in dispute was some $34m said to be owed by Qantas and its subsidiary "Jetstar" over a 3-year period, and which Qantas had remitted to the Commissioner.

Previous decisions

• In Re Qantas Airways Ltd and FCT^[2], the AAT found for the Commissioner.
• On appeal, in Qantas Airways Ltd v FCT^[3], the Full Federal Court unanimously found in favour of Qantas. It held that there was no taxable supply when the fare was paid and that the relevant supply was the actual provision of the air travel. In particular, the Full Court concluded it was plain that "what each customer pays for" is carriage by air and the actual travel was the relevant supply, and if it did not occur, there was no taxable supply.

Issues

Before the High Court, Qantas argued that the Full Federal Court was correct because:

• the dealings between Qantas and passengers were such that there was no more than one projected "taxable supply", namely the supply of air travel;
• this supply did not come to pass; and
• no GST was exigible.

On the other hand, the Commissioner argued that the unused fares were received pursuant to the making of a contract between the airline and the customer under which the airline supplied rights, obligations and services in addition to the proposed flight and that these rights, obligations etc comprised a payment in connection with a supply.

High Court decision

The majority of the High Court agreed with the Commissioner. In doing so, they first examined the contractual arrangement between Qantas and its passengers (which emphasised that Qantas would "take all reasonable measures necessary to carry you and your baggage and to avoid delay in doing so") and the definition of "supply" in the GST Act^[4] as including, inter alia, "a supply of services", "a creation of any right", and "an entry into an obligation".

They then concluded that the contractual arrangement "did not provide an unconditional promise to carry the passenger and baggage on a particular flight. They supplied something less than that. This 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 airline. This was a 'taxable supply' for which the consideration, being the fare, was received."

In arriving at their conclusion, the majority dismissed Qantas' claim that the decision in FCT v Reliance Carpet Co Pty Ltd^[5] stood for the proposition that the sole candidate for a taxable supply was the flight, for which the fare was pre-paid. In particular, they found that the case provided no support for the argument that it was necessary to extract from the transaction between the airline and the prospective passenger the "essence" and "sole purpose" of the transaction.

ICAA comment: High Court decision changes the nature of GST^[6]

The High Court's interpretation of the core GST concept of a "supply for consideration" means that businesses may need to review contracts to take account of this changed nature of GST. Contractual terms may have to be rewritten to take account of previously unexpected GST liabilities. Recent commercial settlements should be revisited and possibly renegotiated.

The cornerstone of GST liability is that there must be a "supply for consideration" - in layman terms, the value provided, whether in cash or in kind. The High Court decision focuses on this term and the majority's reasoning does two things.

Firstly, it loosens the linkage between the consideration and the supply. The exchange of value doesn't have to drive the supply, as is the case in contract law. It merely needs to be connected or related to a supply, indeed, any supply.

Secondly, the High Court has multiplied the number of things which can be considered supplies. A promise to do one's best will be considered a supply. (It is not necessary to look at the substance of what the parties agreed to exchange.)

Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please:

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[1] [2012] HCA 41 (High Court, Gummow, Hayne, Heydon, Kiefel and Bell JJ, 2 October 2012, to be reported in ATR).

[2] (2010) 81 ATR 170.

[3] (2011) 81 ATR 816.

[4] section 9-10.

[5] (2008) 68 ATR 158.

[6] Paul Stacey, Tax Counsel, The Institute of Chartered Accountants in Australia.