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.Kirk Wilson, Thomson Reuters
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.
Before the High Court, Qantas argued that the Full Federal Court was correct because:
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.
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 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 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.
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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  HCA 41 (High Court, Gummow, Hayne, Heydon, Kiefel and Bell JJ, 2 October 2012, to be reported in ATR).
 (2010) 81 ATR 170.
 (2011) 81 ATR 816.
 section 9-10.
 (2008) 68 ATR 158.
 Paul Stacey, Tax Counsel, The Institute of Chartered Accountants in Australia.
Paul is a Special Counsel in the Maddocks Commercial team with particular expertise in commercial agreements for the supply of goods and/or services, the Personal Property Securities Act 2009, the National Consumer Credit Protection Act 2009 and the National Credit Code and the Australian Consumer Law.
Paul's key areas of practice include:
Before joining Maddocks, Paul was employed for 13 years with the Victorian Department of Justice, principally as a Deputy Registrar in the Victorian Magistrate's Court, but also as a legislation, policy and project officer for the Department.
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