The Full Federal Court has unanimously allowed an appeal by Qantas Airways Ltd against an earlier AAT decision that the airline makes a supply for GST purposes when a passenger cancels his or her flight booking or doesn't show for the flight and no refund was either available or claimed: Qantas Airways Ltd v FCT [2011] FCAFC 113 (Full Federal Court, Stone, Edmonds and Perram JJ, 1 September 2011).

Background

The genesis of the dispute between Qantas and the Tax Office was a GST private ruling made by the Commissioner for Qantas in 2008.

Broadly, in the circumstance where a passenger forfeits an airfare through cancellation of the booking or failing to check-in (a no-show), Qantas considers there to have been no supply and therefore no GST liability in respect of that passenger. This view relies on the concept of a supply being a single thing, in this instance the right to a seat on a flight to a particular destination. Hence, if that right is not taken up by the passenger, there has been no supply made.

The Tax Office has never agreed with that proposition. For example, Edited Private Ruling No 91050 states that "it is clear that [the taxpayer] provides a number of things to the passengers which meet the definition of supply in s 9-10 of the GST Act. We consider that this is true of all [the taxpayer's] fares." That view relies on the concept of a bundle of rights being provided to a passenger on booking a ticket rather than a single supply.

Further, and as explained by the Ruling, "the supply of these things together is considered as one composite supply of facilitating air travel for the passenger.... Therefore, as [the taxpayer] does all the things necessary to put itself in a position to make the intended supply, [the taxpayer] has made a supply ..."

Earlier Tribunal decision

By means unclear at the time, the dispute between Qantas and the Tax Office was heard by the Administrative Appeals Tribunal in 2010. (At the relevant time, objection rights against GST private rulings did not exist.) Despite neither Qantas nor the Tax Office placing any emphasis on s 9-10(2)(e) or (g), the Tribunal "could see no reason why, in the present case, the arrangements made with passengers do not fall within both s 9-10(2)(e) and(g)." Thus, the Tribunal held that Qantas does make a supply when a passenger cancels a booking or is a no-show, which furthermore was a taxable supply: AAT Case [2010] AAT 977, Re Qantas Airways Ltd and FCT.

In reaching that conclusion, the Tribunal specifically referred to the authority of the High Court's decision in FCT v Reliance Carpet Co Pty Ltd (2008) 68 ATR 158. But it also decided that a second question may arise as to whether the ordinary meaning of "supply" meant there was a supply "when a passenger makes a reservation even though the object of the reservation is not fulfilled".

The Tribunal justified giving priority to s 9-10(2)(e) and (g) over the ordinary meaning of "supply" on the basis that UK VAT cases are more concerned with its ordinary meaning because the UK VAT legislation "does not define a supply of services to include an obligation to provide them or a right to have them" (para 13).

The appeal of the Tribunal's decision went straight to the Full Federal Court because it had been made by the President (and a Senior Member). The Full Federal Court's judgment was delivered by Edmonds and Perram JJ, with Stone J concurring, and it included the information that Qantas had lodged a GST refund notification with the Tax Office in 2008 which precipitated notices of assessment for several monthly tax periods in 2006 and 2008 on the basis that no such entitlement existed. Qantas's objections had then been disallowed in full, and it was those decisions the Tribunal had reviewed.

Full Federal Court decision

Before the Full Federal Court, the Commissioner appears to have distanced himself from the Tribunal's reasoning in arguing there was only one relevant question - was there a taxable supply when payment of the fare was made? When put in those terms, it was much easier to argue that at that time, the passenger had been provided with a reservation and that was the thing supplied. In making that his primary argument, the Commissioner also referred to the High Court's decision in Reliance Carpet, that is, "the fact that the parties bargain for an outcome which does not come to pass does not mean that nothing was supplied."

For Qantas it was submitted the Tribunal misconstrued s 9-5 (the definition of taxable supply) and made contradictory findings as a result, and had ignored distinctions between refundable fares and non-refundable fares. There "was only one taxable supply in contemplation, namely, the flight, and that failed." Qantas's fall-back position was that if entering into the contract was a relevant supply, there were other supplies as well, meaning the dispute would have to go back to the Tribunal to determine an apportionment of the consideration.

Firstly, the Full Federal Court immediately had problems with the Tribunal's approach in determining the issue, as the Tribunal "did not say why the United Kingdom VAT legislation was relevant, nor did it refer to any United Kingdom cases and, with respect, the Tribunal's approach seems to us to be back to front" (para 5).

In relation to the Commissioner's reliance on Reliance Carpet, the Court noted that "as that case manifestly illustrates, it all depends on the subject matter of the contract ..., the taxable event... and the legislative context ...". Further in that regard, the Full Federal Court was critical of the Tribunal in referring to only some of the ticketing conditions of the relevant contract and cited several other conditions which, in its view, were "equally significant".

Despite that criticism, the Full Federal Court proceeded on "the premise that a passenger entered into a contract with Qantas at the time of making the reservation ... as the Tribunal found." But what the Tribunal also did which the Full Federal Court disagreed with, was to "search for and identify some other anterior supply" as representing the taxable supply when the supply paid for doesn't happen. In such a circumstance, the Full Federal Court stated there was no warrant to do so, statutory mandate aside. That was where reliance on Reliance Carpet was misplaced because in that case there was a statutory mandate, being s 99-5 of the GST Act.

According to the Full Federal Court, the correct reliance on Reliance Carpet was to recognise that the High Court made it clear that in that case, absent the mandate of Div 99, the relevant supply would not have been the entering into of the contract for the sale of the real property, but would have been the conveyance of the property. Thus, in the circumstances of Qantas, the relevant supply was the flight not the reservation, and since that did not happen, there was no supply and hence no taxable supply. The Court did not consider it necessary to address the refundable/non-refundable argument.