Commissioner of Taxation v Qantas Airways Ltd
For many people, making a reservation for air travel is as simple as logging in to an airline’s website and choosing the flight that suits their needs. But how many people actually understand (or, for that matter, read) the terms and conditions associated with their reservation; does the average person know what they are buying when they enter their credit card details at the end of the transaction? One might assume that the airline, in accepting a booking, is making a promise to carry the passenger and baggage on a particular flight.
However, the High Court, in delivering its recent decision in Commissioner of Taxation v Qantas Airways Limited, determined that Qantas’s terms and conditions actually promised something less. While the decision might be mildly troubling from the passenger’s perspective, the main issue the case highlights is the importance of carefully considering what rights and obligations are established under a contract when determining whether a taxable supply has occurred for the purpose of the GST law.
The case arose from a GST refund notification that Qantas lodged with the Commissioner of Taxation. The refund related to GST Qantas had paid in respect of pre-paid fares for unused travel, in circumstances where the passenger either failed to board, or cancelled their booking and did not receive a refund. Ultimately, the matter came before the AAT, which was called upon to consider whether a supply had actually been made, in circumstances where Qantas has not provided the passenger with air travel. The AAT agreed with the Commissioner in finding that the contract between Qantas and each passenger created rights and obligations which meant that, upon making a reservation, a supply had been made for GST purposes.
Qantas appealed successfully to the Full Federal Court against the AAT’s decision, claiming that the air journey was the relevant supply contemplated under the contract and that, as the journey did not occur, no supply had been made and therefore no GST liability could arise. The Full Federal Court accepted Qantas’s argument and ruled that, although the contract involved a number of rights and obligations, the relevant supply was the actual travel and, where this did not occur, no supply was made.
The Commissioner then appealed to the High Court, which, by a 4-1 majority, concluded that Qantas had made a supply for consideration, despite no travel being undertaken by the customer. The High Court relied heavily on the specific provisions within Qantas’s terms and conditions that gave Qantas the right to amend the passenger’s flight details in certain circumstances such as flight cancellations and inclement weather. Accordingly, the High Court was satisfied that the relevant supply for which each passenger paid their fare was the supply of Qantas’s promise to use best endeavours to carry the passenger and their baggage.
The ATO’s Decision Impact Statement in relation to the decision, explains the Commissioner’s response to the case. One of the Commissioner’s main points in response is that 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 of the provision of those rights, even if the further contemplated supply is not ultimately made.
Consequently, a taxpayer may be taken to make a taxable supply at the time payment is received and not at the point when the rights and obligations under the contract are later fulfilled. This means that the GST treatment of a payment may be determined by the particular terms of the contractual arrangements (in the Qantas case, the promise to use best endeavours), rather than by reference to the supply ultimately contemplated under the contract (i.e. the air travel), insofar as the GST treatment depends on the character of the relevant supply.
Further confusion results from the fact that the Commissioner maintains (in the Decision Impact Statement) that the creation of rights and obligations under a contract should sometimes be construed as part of a composite supply that includes the performance of those obligations.
Unfortunately, the inconsistency between the two positions expressed by the Commissioner in relation to the identification of a taxable supply and the ascertainment of its character will surely lead to greater uncertainty for taxpayers seeking to comply with their obligations under the GST law.
One point that the Commissioner makes, with which I agree, is that in all cases where a payment is made, due consideration must be given to the particular facts and circumstances to determine whether anything is supplied and whether the payment has a sufficient nexus to be consideration for what is supplied.
Finally, GST payers entering into contracts that have conditional provision of rights and the potential for payments to be forfeited should have the contracts reviewed by an experienced GST professional in light of the High Court’s decision.