09 Dec 2010

Not flying but still supplying: forfeited airfares and GST

by Andrew Sommer

In a decision handed down by the AAT this week, GST was held to still be payable by Qantas on fares (for domestic travel) that are forfeited by passengers who fail to take their booked flight. Even though the passenger does not take the flight, the AAT found that there was still a supply by Qantas made in consideration for the forfeited fare (Qantas Airways Limited and Commissioner of Taxation [2010] AATA 977).

This result is consistent with the approach taken by the High Court in Reliance Carpet. However, in contractual terms there is a vast chasm of difference between a specifically enforceable contract for the sale of land (as was in issue in Reliance Carpet) and the rather tenuous rights possessed by the holder of an airline ticket.

Was there "supply" by Qantas if the passenger never flew?

The threshold for the imposition of GST is that there be a "supply" – if there is no supply, there is no taxable supply and no GST payable. In simple terms, if a passenger books and pays for a flight and never takes that flight, the intended supply has failed. In the Tribunal's words "there never was a supply of the service represented by the actual carriage of the passenger, although that was obviously the purpose of each reservation".

The trouble for Qantas seems to have been the extremely broad definition of "supply" under the GST law, which specifically includes the "creation, grant, transfer, assignment or surrender of any right" and the "entry into … an obligation … to do anything". As stated by the Tribunal:

"We do not understand Qantas to have argued that there was no contract. Such an argument, would, of course, impact on the asserted right of Qantas to claim cancellation fees and, in some cases, the forfeiture of the whole fare."

The High Court has previously held that where an airline had reserved for itself an absolute right to cancel the ticket or booking of any passenger without reason, there was no agreement between the parties which could be the subject of stamp duty. Did this affect the GST position?

No. The Tribunal distinguished that decision. Although Qantas did not promise to transport the ticketholder on any particular flight, at any particular time or in any particular seat, the Conditions of Carriage did provide that Qantas would "take all reasonable measures necessary to carry you and your baggage and to avoid delay in doing so". This rather vague obligation was nonetheless "a sufficient service to give rise to the imposition of GST".

Adjustment where there is a refund

The Tribunal drew support for its position from the refund that would have been available to Qantas under the GST law where Qantas refunded the fare to the passenger.

If under the Conditions of Carriage the passenger was entitled to a refund of the fare, Qantas would itself receive a refund (or "decreasing adjustment") of the GST that Qantas had paid in connection with that fare.

If however under the Conditions of Carriage, Qantas was entitled to retain the whole of the fare, the Tribunal could see no reason why Qantas should also be able to obtain a refund of the GST Qantas had paid in connection with that fare. Where only a "cancellation fee" was retained by Qantas and the balance refunded to the passenger, Qantas is entitled to a refund of GST for the portion refunded to the passenger. In the Tribunal's view, Qantas should not be entitled to a refund of the GST on the portion it retained as a cancellation fee.

Where does this leave the ATO's public ruling GSTR 2009/3?

The Tribunal's decision is consistent with the result sought by the Commissioner. However, the Tribunal does not seem to have adopted the terminology in the public ruling on cancellation fees, GSTR 2009/3. The Tribunal did not expressly consider the ruling and the distinction it draws between cancellation fees as consideration for:

  • the intended supply;
  • a supply of cancellation services; and
  • "different" supplies.

Hopefully, the Commissioner will reconsider GSTR 2009/3 in the light of the decision in this case and eliminate these unnecessary distinctions. There is no word yet on whether an appeal will be filed, but we think it would be highly likely.


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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.