What happens to the GST when a passenger buys an airline ticket, later cancels or fails to board the plane and is not entitled to a refund? 

Obviously, the airline keeps the cash but what about the GST component of the ticket's purchase price?

Qantas, in a recent Full Federal Court case, argued that as there had been no supply at the time the passenger made the booking, no GST should be paid on non-refundable tickets when the passenger was a ‘no show'. Big money is at stake here - imagine how many ‘no shows' on non-refundable tickets Qantas,  Jetstar and other airlines have every year.

So what was the outcome? Here we discuss the court decision and some of the implications for other businesses, from those with multi-billion dollar turnovers through to SMEs.

We understand that the origin of the dispute between Qantas and the Tax Office occurred when Qantas requested a Private Binding Ruling from the Commissioner in 2008. In the PBR request, Qantas asked the Commissioner to confirm several positions regarding fare forfeiture in different circumstances. By and large, the Commissioner's view was:

• The definition of ‘supply' is wide and includes "any form of supply whatsoever"
• There are a number of features specifically included in the definition of supply including rights created and obligations entered into
• Where an arrangement between parties cannot proceed, a cancellation fee may be consideration for a different supply such as a facilitation supply or a cancellation supply. In this case, all things that a supplier does to facilitate the supply is a supply

In the Tax Office's view, Qantas, by holding itself ready to carry the passenger and their baggage to the intended destination after issuing the ticket, was clearly making a supply under one of the positive heads above, even though the passenger did not dispose of all of his or her rights under the contract.

In the Administrative Appeals Tribunal, Justice Downes (President) and Senior Member Frost agreed with the Tax Office's position, focusing on the part of the definition of ‘supply' which includes the "creation, grant, transfer, assignment or surrender of any right" and "an entry into, or release from, an obligation:

i)        to do anything; or

ii)      to refrain from an act; or

iii)    to tolerate an act or situation".

In particular, the tribunal stated that Qantas makes a supply even when a passenger cancels or is a no-show. In this case, the supply could be the transfer or surrendering of rights that were formed at the time the booking was made or the release from an obligation to do something (i.e. carrying the passenger to his or her destination).

The tribunal also left open the possibility that there was "an ordinary supply" at the time the booking was made. The possibility of an ‘ordinary supply' comes from the part of the definition of supply which includes "any form of supply whatsoever". This was based on the decision in Commissioner of Taxation v Reliance Carpet Co Pty Ltd [2008] HCA 22 where the High Court held that the vendor in a land sale that obtained a forfeited deposit from a potential purchaser made a supply at the time the contract was entered into because the vendor entered into specific contractual obligations at that time.

As the decision in the AAT was made by the AAT President and a Federal Court Judge, on appeal the matter proceeded directly to the Full Federal Court. Here, the court  left open whether a contract had been entered into between Qantas and the passenger at the time of making the reservation, but nonetheless proceeded with an analysis that assumed that Qantas and the passenger had done so. The court came to the conclusion that there was no supply of rights at the time the contract was made (if a valid contract had been entered into at this time). It came to this conclusion on the basis that:

• where the intended supply had failed it was erroneous "to search for and identify some other anterior supply as the ‘taxable supply'", notwithstanding that this was ostensibly the High Court approach in Reliance Carpet
• however, Reliance Carpet was concerned with forfeited deposits which is covered specifically by Division 99 of the GST Act and requires  the deposit to be treated as ‘consideration' for a ‘supply' if and when the deposit was forfeited
• as Qantas was not about forfeited deposits, Division 99 did not apply to mandate this search for an alternative supply.

In addition, and having regard to the purpose of the transaction, its direct object, its substance and reality, the court found that the relevant supply was the contemplated domestic air travel, and as that supply failed, there was no "taxable supply" and no GST liability was incurred.

The  Tax Office has appealed the decision in this case and, at the time of writing, has sought special leave.

What are the implications for Qantas?

Qantas lodges its BAS monthly. If Qantas wins any final appeal, its GST refund notice for 'several' monthly periods between 2006 and 2008 will be upheld. On this basis it may be looking forward to a very healthy refund. Moreover, its financial position may be greatly improved into the future because 1/11^th of the total price paid for forfeited tickets may not have to be remitted to the Tax Office.

And the implications for other businesses?

Potential GST refunds are also available for enterprises which have accounted for GST on money they received for goods/services they expected to supply, but did not end up supplying. Examples of the types of businesses affected include:

• Leisure accommodation such as hotels, motels, resorts and youth hostels where full payment is received and no-shows occur
• Other tourism and travel supplies (eg, CountryLink, Red Balloon, BridgeClimb) where there is payment in advance and no-shows occur
• In retail where  goods are paid for but not collected, eg, bespoke suits, furniture, white goods
• In liquidation cases where a supplier can no longer perform under a contract to supply goods/services but has held payment in advance
• Potentially all forms of cancelled contracts
• Where customers are entitled to get their money back but did not actually claim the amounts

If you believe you may be affected, talk to your WHK Tax adviser today. Importantly, you may wish to protect your entitlements to a refund and fix your 4-year refund period from now, pending the outcome of any appeal.