Decision impact statement

Commissioner of Taxation v Qantas Airways Ltd

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Court citation:
[2012] HCA 41
2012 ATC 20-352
83 ATR 1
(2012) 291 ALR 653
(2012) 247 CLR 286

Venue: High Court
Venue Reference No: S47/2012
Judge Name: Gummow, Hayne, Heydon, Kiefel and Bell JJ
Judgment date: 2 October 2012
Appeals on foot: No.
Decision Outcome: Favourable

Impacted Advice

Relevant Rulings/Determinations:

• GSTR 2001/8
• GSTR 2006/9
• GSTR 2009/3

Précis

Outlines the ATO's response to this case which concerned whether an airline made a supply for consideration where the airline passenger does not take a booked flight and any payment made by the passenger is not refundable or no refund is claimed.

Brief summary of facts

Qantas (and its subsidiaries, including Jetstar) provide domestic airline travel services. There are different classes of air travel with varying fare rules and conditions of carriage. Some prospective passengers who had booked a flight and made payment failed to take a flight. In accordance with the applicable conditions for these prospective passengers, some fares were forfeited while others were refundable on application within a stipulated period but no refund claim was made. The GST component of the fares for flights not taken was not refunded by Qantas to the prospective passengers.

Qantas sought a refund for GST that it claimed was incorrectly paid to the Commissioner in respect of unused fares in these circumstances. The Commissioner issued notices of assessment for which the net amount included the GST paid by Qantas in respect of the unused fares for the relevant tax periods.

The Administrative Appeals Tribunal affirmed the assessments. On appeal, the Full Federal Court held that what each customer pays for is carriage by air which is the essence and sole purpose of the transaction. The actual travel was the relevant supply and if it did not occur there was no taxable supply.

By special leave, the Commissioner appealed to the High Court.

Issues decided by the court

The issue in dispute was whether Qantas (and its subsidiaries, including Jetstar) had made a taxable supply when it received fares for flights booked but not undertaken by prospective passengers. The critical element of this was whether Qantas made a 'supply for consideration' under the definition of 'taxable supply' in s 9-5(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The High Court held, by majority, that Qantas did make a taxable supply and was liable to pay GST on the fares paid.

The majority stated at paragraph [14] that the word 'for' in the phrase 'supply for consideration', 'is not used to adopt contractual principles' but rather 'it requires a connection or relationship between the supply and the consideration'.

The majority considered the decision in Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) 236 CLR 342; [2008] HCA 22 (Reliance Carpet) and stated at paragraph [27] that it 'provides no support for the proposition adopted by the Full Court in the present case that it was necessary to extract from the transaction between the airline and the prospective passenger the "essence" and "sole purpose" of the transaction'.

After setting out the relevant terms of the Qantas and Jetstar arrangements the majority concluded at paragraph [33] that the 'conditions did not provide an unconditional promise to carry the passenger and baggage on a particular flight'. Rather, '[t]hey supplied something less than that'. The supply identified by the majority of the court 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 supply met the requirements of the GST Act and the fares were found to be consideration for that supply.

Justice Heydon provided a dissenting judgement. At paragraph [37], his Honour considered that conduct in reserving a seat for a passenger by setting it aside in an internal reservation system was an act of preparation for a supply, not a supply. Further, at paragraph [43], his Honour stated: 'In a sense the respondent supplied services or created a qualified right or entered a qualified obligation when it accepted the fare and made the reservation. But that stage of the transaction was incidental and preparatory to the central purpose, substance and object of the transaction - an actual air journey. What the intending passenger wanted was not so much a chose in action - a qualified promise to supply an air journey which it would be difficult to enforce legally. The intending passenger wanted the actual supply of an air journey.' His Honour concluded that the appeal should be dismissed essentially for the reasons given by the Full Federal Court (paragraph [48]).

ATO view of Decision

Essence or purpose

The key issue of principle was whether there could only be a 'supply for consideration' in circumstances where the 'essence or purpose' of the transaction was fulfilled (paragraphs [12] and [14]).

The majority implicitly reject this proposition. Instead, they accept that consideration could be in connection with more than one supply (see paragraphs [5] and [19]) but emphasise that the GST would only be payable once. It is apparent from the majority approach that in establishing that there is a 'supply for consideration', it is sufficient for just one of the supplies, to which the consideration is connected, to occur. In the case, it was the promise by Qantas to use 'best endeavours' to carry the passenger and their baggage. There is no need for the 'essence or purpose' of the transaction to be fulfilled.

In cases where a payment is made on entry into a contract which secures rights (whether conditional or not) to a further supply, the Commissioner considers that the payment will be consideration for a supply consisting at least of the provision of those rights (and entry into corresponding obligations), even if the further contemplated supply is not ultimately made (see GSTR 2009/3, paragraph 24).

The decision does not cause any significant change in the way the Commissioner approaches 'supply', or the nexus between supply and consideration. Obviously, it is necessary in any case where a payment is made to consider the particular facts and circumstances to determine whether there is anything supplied, and if so whether the payment has a sufficient nexus to be consideration for what is supplied.

Characterisation

The majority made reference to earlier cases concerning the characterisation of supplies, including the High Court's own decision in Travelex Ltd v Commissioner of Taxation (Travelex) and the decision of the Full Federal Court in Saga Holidays Ltd v Commissioner of Taxation (Saga Holidays). The court disagreed (at paragraph [21]) with Qantas' submissions that the approach of the courts in those cases, which involved various specific provisions, lent support to Qantas' construction of 'the supply for consideration' in s 9-5(a) of the GST Act.

The decision does not cast any doubt on the correctness of those earlier decisions, but confirms that they are not of assistance in answering the question of whether there is any 'supply for consideration' at all . The majority decision suggests (at paragraphs [21] and [22]) that the process of characterising a supply is only required where it is necessary to determine whether the supply meets the description in a particular statutory provision that may be in issue in a particular case. An example is where it is necessary to determine whether a particular supply meets the requirements of a particular provision that would make it GST-free or input taxed (as was the case in Travelex).

The Commissioner considers that observations in earlier cases concerning how to characterise supplies continue to be relevant where such characterisation is necessary to apply the statute in any particular case.

There is nothing in the Qantas decision that would suggest that supplies need to be 'dissected' into their component parts, or that the focus of GST should be on contractual rights and obligations instead of performance.

The Commissioner maintains the view, as recognised in his public rulings, that in many cases, the entry into contractual obligations and corresponding creation of rights should be construed, where relevant, as part of a composite supply that includes the performance of those obligations. See particularly GSTR 2009/3, at paragraph 103, which draws on the Full Federal Court decision in Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (Westley Nominees). We note that paragraph 9-10(2)(h), emphasised at paragraph [18] of the majority's judgment in Qantas, makes specific reference to a supply including 'any combination' of the matters referred to in the definition of supply.

More broadly, the Commissioner maintains the views expressed in public rulings in respect of characterisation issues. See particularly GSTR 2001/8 at paragraphs 19 to 20 and at paragraphs 40 to 63, where reference is made to a number of court decisions, including those of the Full Federal Court in Saga Holidays, Westley Nominees and Commissioner of Taxation v Luxottica Retail Australia Pty Ltd.

Even where goods or services contemplated by the contract are not supplied, it does not mean that the GST treatment of the transaction will necessarily be affected. First, as the High Court points out, GST is paid once and attribution does not depend on the time of making the supply. If in a subsequent tax period there is a refund of the consideration paid, this may give rise to an adjustment.

Secondly, the Commissioner's view, as set out in GSTR 2009/3 at paragraph 30, is that if there is a supply of a right for the customer to receive a further supply and that further supply would have been GST-free or input-taxed, then the supply of rights would be GST-free or input-taxed as appropriate (pursuant to paragraphs 9-30(1)(b) or 9-30(2)(b)). Thus, for these purposes there is consistent GST treatment between a right to receive a supply and the subsequent satisfaction of that right. The Commissioner does not consider that this analysis is affected by the mere fact the relevant rights might be conditional in some way.

In the context of connection with Australia, there is a similar provision (paragraph 9-25(5)(c)), though it may be noted that the question of whether there is a right to acquire another thing that is connected with Australia, only arises where the 'thing' is not done in Australia and the supply is not through an enterprise the supplier carries on in Australia.

Supply of services

The decision of the majority does not provide any direct views on the Tribunal's conclusion that there was a supply in the ordinary meaning in the sense of the airline holding itself ready to fly the passenger. The majority note at paragraph [13] that there has been no failure by Qantas in its performance. However, the majority did not address whether any performance by Qantas of the contract was or was not part of what it supplied.

Adjustments

The court considered that there was a supply in this case consisting of the promise to use best endeavours to transport the passenger and their baggage. The court also observed that there was no failure by Qantas in its performance.

Although there was not a direct argument about the application of the adjustment provisions in this case, the Commissioner considers that the mere failure of a ticketholder to utilise their rights to transport or of entry to an event would not have the effect of cancelling a supply that is made on sale of the ticket.

Administrative Treatment

Following the decision of the Full Federal Court, a number of notification of entitlement to refund forms were lodged with the Commissioner, concerning possible refund claims based on the reasoning in that decision. The Commissioner will now write to the entities concerned to ask whether they still intend to pursue a refund claim notwithstanding the High Court decision.

In the meantime, those entities that no longer intend to pursue a refund claim may also write to the Commissioner at PO Box 3524 ALBURY NSW 2640 or per fax 1300 139 031, with reference to the Notification of entitlement to GST refund form lodged, and advise that they will not be pursuing the refund claim referred to in the notice and that the notice is withdrawn.

Implications for ATO Precedential documents (Public Rulings & Determinations etc)

The Commissioner considers that there is nothing in the High Court decision that is inconsistent in a material way with existing ATO views.

While the decision supports the conclusions about airline tickets in GSTR 2009/3, which concerns the GST implications of cancellation fees, the Commissioner will review and update the ruling to take into account the reasoning of the High Court.

The Commissioner will consider whether minor updates to other rulings, including GSTR 2001/8, are warranted to make reference to the High Court decision, particularly the observations at paragraphs [21] and [22].

Implications for Law Administration Practice Statements

None

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
7-1
9-5
9-10
9-15
29-5(1)

Taxation Administration Act 1953
Sch 1 105-65

Case References:
Commissioner of Taxation v Luxottica Retail Australia Pty Ltd
[2011] FCAFC 20
(2011) 191 FCR 561
2011 ATC 20-243
79 ATR 768

Commissioner of Taxation v Reliance Carpet Co Pty Ltd
[2008] HCA 22
(2008) 236 CLR 342
2008 ATC 20-028
68 ATR 158

KAP Motors Pty Ltd v Commissioner of Taxation
[2008] FCA 159
(2008) 168 FCR 319
2008 ATC 20-007
68 ATR 927

Re Qantas Airways Ltd and Commissioner of Taxation
[2010] AATA 977
2010 ATC 10-165
81 ATR 170

Qantas Airways Ltd v Commissioner of Taxation
[2011] FCAFC 113
(2011) 195 FCR 260
2011 ATC 20-276
81 ATR 816

Saga Holidays Ltd v Commissioner of Taxation
[2006] FCAFC 191
(2006) 156 FCR 256
2006 ATC 4841
64 ATR 602

TAB Ltd v Commissioner of Taxation
[2005] NSWSC 552
2005 ATC 4512
59 ATR 430

Travelex Ltd v Commissioner of Taxation
[2010] HCA 33
(2010) 241 CLR 510
2010 ATC 20-214
76 ATR 329

Westley Nominees Pty Ltd v Coles Supermarkets Pty Ltd
[2006] FCAFC 115
(2006) 152 FCR 461
2006 ATC 4363
62 ATR 682