Commissioner publishes draft Addendum to ruling on cancellation fees and two ATO IDs

Yesterday the Commissioner published a draft Addendum to GSTR 2009/3 dealing with cancellation fees plus two ATO IDs dealing with the supply and transport of goods into Australia and increasing adjustments for unredeemed vouchers.

Draft Addendum GSTR 2009/3DA states that it amends GSTR 2009/3 to take account of the decision of the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41, which considered the GST treatment of fares received for flights booked but not undertaken by prospective passengers. The High Court found that the fares were consideration for a taxable supply.

The thrust of the addendum can be found in proposed paragraphs 176A and 176B, which provide as follows:

176A. When an airline ticket is issued and the terms and conditions of the ticket are accepted by the customer, the supplier (usually the entity operating the airline service) enters into a contract with the customer.

176B. Accordingly, where a fare is paid to secure an airline ticket governed by contractually binding conditions of carriage in which the airline promises (subject to exceptions) to transport the passenger, it is considered that the airline makes a supply for consideration even if the passenger is subsequently a no-show.

Comments on the draft addendum are invited by 22 May 2013.

In ATO ID 2013/20 – GST and supply of goods and the transport of those goods into Australia the Commissioner takes the view that where a non-resident supplies goods to a recipient in Australia, that entity is not making a GST-free supply of international transport under paragraph (b) of item 5 in subsection 38-355(1) when it delivers those goods to the recipient in Australia. Rather, the supplier is making a composite supply of delivered goods to the recipient in Australia.

This ATO ID provides a guide as to the Commissioner’s application of his views in GSTR 2001/8 regarding mixed or composite supplies. The Commissioner’s approach was as follows:

If the delivery services are integral, ancillary or incidental to the supply of goods, the supply is a composite supply of delivered goods. A composite supply of delivered goods is treated as a single supply and takes its GST status from the dominant part of the supply, being the goods. If this is the case then Item 5 of the GST Act will not be relevant and therefore will not apply.

However, if the supply of goods and delivery has separately identifiable parts that require individual recognition due to their relative significance in the supply, the supply is a mixed supply…If the supply is a mixed supply then the delivery services can be considered separately to determine if that part of the supply meets the requirements of being GST-free under Item 5 of the GST Act.

The Commissioner took the view that the delivery of the goods was integral, ancillary or incidental to the dominant supply of goods.

In ATO ID 2013/24 – GST and increasing adjustments for unredeemed vouchers the Commissioner takes the view that an entity has an increasing adjustment under s 100-15 where it writes back to current income the unredeemed stated monetary value of expired gift vouchers. The Commissioner found that this was the case notwithstanding that historical data showed that some of these unredeemed vouchers could have been redeemed for GST-free supplies.

Commissioner issues Decision Impact Statement for Qantas

On Friday the Commissioner issued his Decision Impact Statement for the decision of the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41.

Some highlights from the Commissioner’s views in the statement include:

  1. The decision does not cause any significant change in the way the Commissioner approaches ‘supply’ or the nexus between supply and consideration.
  2. 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 of at least the provision of those rights (and entry into the corresponding obligations), even if the further contemplated supply is not ultimately made
  3. 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.
  4. 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.

The views of the Commissioner in the Decision Impact Statement will likely cause much discussion.  For my part, I am not sure that matters 2, 3 and 4 sit comfortably together.

High Court allows Commissioner’s appeal in Qantas

Today the High Court handed down its decision in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41.  By a majority of 4:1 (Heydon J dissenting) the Court allowed the Commissioner’s appeal and found that Qantas was liable to pay GST with respect to fares for travel which was not taken by passengers.

In summary, the view of the majority was that upon entry into the contract with passengers, Qantas made a taxable supply for consideration (being the fare) and GST was payable and attributable to the tax period in which the fare was received.  At [33] the majority said as follows:

The Qantas conditions and the Jetstar conditions 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 endeavourrs to carry the passenger and baggage, having regad to the circumstances of the business operations of the airline.  This was a “taxable supply” for which the consideration, being the fare, was received.

My initial comment is that while this case involved the GST implications of a transaction which did not proceed to completion, the majority’s conclusion would appear to apply to all contracts, regardless of whether those contracts complete or not.  Accordingly, whenever a party enters into a contract and receives consideration (or provides an invoice), that party makes a taxable supply, with the supply being the entry into the obligations and or the provision of rights to the recipient.  This may raise a number of difficulties going forward.

In his dissenting judgment, Heydon J essentially approved of the reasons given by the Full Court.  In doing so, his Honour found that the expression “supply for consideration” connoted a bargained-for exchange of value for performance and identified the flight as what the passenger paid for. His honour also found that an interpretation of s 9-5 fastening on the latter supply (ie, the flight) conforms more closely to practical reality.

News Flash! High Court to hand down Qantas decision on Tuesday morning

The High Court email notification service shows that the Court will hand down its decision in the Qantas case on Tuesday morning at 10.15am.  The decision involves the GST treatment of fares paid by passengers who did not show for the flight.  The Commissioner appealed against the decision of the Full Federal Court that no GST was payable (the Full Federal Court having allowed Qantas’ appeal against the decision of the Tribunal that GST was payable).

The decision should appear on the High Court website and austlii during the day.


Qantas wins Full Federal Court appeal on “no-shows”

In a dramatic development, the Full Federal Court has allowed the appeal by Qantas with respect to its liability to pay GST on forfeited airfares.

In Qantas Airways Limited v Commissioner of Taxation [2011] FCAFC 113, the Court (Edmonds and Perram JJ, with Stone J agreeing) allowed the appeal from the decision of the Tribunal and found that GST was not payable by Qantas where the passenger had paid the far, but cancelled or did not show for the fare and no refund was available or claimed.  The Court identified the air travel as the taxable supply, and as no travel took place there was no taxable supply.

The Court also found that there was no relevant distinction between fares which were non-refundable and fares which were fully refundable (but no claim for a refund was ever made).

This decision is arguably the most important GST case to date and the decision has ramifications far beyond the airline industry, with implications for all suppliers who may enter into transactions that do not complete.  Further, the decision is in direct conflict with the views of the Commissioner in GSTR 2009/3 ‘Goods and services tax: cancellation fees’.

The Commissioner has lodged an application for Special Leave to appeal to the High Court.