Earlier this month the High Court handed down its decision on an appeal by the Commissioner of Taxation from a judgment of the Full Court of the Federal Court. This case has significant implications for Australian taxpayers, raising the fundamental question “what constitutes a taxable supply for Australian GST purposes?” The decision could be of significance for liquidators and other external administrators.
This case was primarily concerned with GST payable on fares received from prospective passengers who failed to take their flights which they had previously reserved and paid for. This dispute was concerned with instances where no refund was available.
The amount of GST in dispute was in excess of $34 million.
The Full Court of the Federal Court found that GST was not payable on airfares where the passenger did not take the flight. The Full Court's reasoning was that the relevant supply for which the fare was paid was the supply of the air travel and not the entry into the contract; if the passenger did not take the flight, a taxable supply was not made and a GST liability did not arise. The Commissioner appealed to the High Court.
The appeal turned upon the construction and application of the provisions of A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act), particularly the phrase “the supply for consideration” which is found in the definition of “taxable supplies”.1 Section 9-5 provides that a taxpayer makes a taxable supply if the taxpayer makes “the supply for consideration”.
The Commissioner argued that there had been a taxable supply (of a reservation and a conditional right to be carried) despite the fact that the customer never took the flight. He contended that “it is the payment of consideration which determines when, and how much, GST must be paid” and that the amount to be paid to the Commissioner is fixed by what is first paid or invoiced in the tax period and is not retrospectively reduced in a later tax period because one of the supplies has not been made. Essentially, his argument was that the GST liability arises at the time of entering into the contract.
Qantas contended that GST was not payable on the unused fares due to the fact that there was no taxable supply because the passengers never took their flights. Qantas’ argument was based on the premise that taxable supply in this context meant the actual provision, under contract, of an air journey.
A majority of the High Court (with Heydon J dissenting) found that GST was payable by Qantas on domestic airfares from passengers who failed to take their flight, for one reason or another.
They found that the supply was “… at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline.”
Significance for liquidators and other external administrators
The potential significance of this decision for liquidators and other external administrators relates to contracts that a company has entered into but has not yet completed at the time of appointment.2
There is an argument that the Qantas judgment could mean that GST liability for contracts entered into by the company prior to the appointment may fall to the company itself, rather than with the liquidator or other external administrator who later completes the contract.3
“Representatives” are defined in the GST Act to include inter alia a trustee in bankruptcy, liquidator, administrator and receiver.4 Division 58 of the GST Act states that representatives of “incapacitated entities” are liable to pay GST that would be payable by the entity, to the extent that the taxable supply is made in the course of the representative’s responsibility.
It is the usual, prudent practice of insolvency practitioners to pay GST on taxable supplies made under contracts finalised during the course of their appointment. An unintended consequence of the High Court’s decision may be that a taxable supply occurs on entry into a contract prior to the appointment. It might be argued that in those circumstances it is open to liquidators and other external administrators to complete those contracts entered into prior to their appointment without incurring personal liability for GST.5
Lavan Legal comment
Although the High Court approved the notion that GST liability can arise on entering into a contract rather than the actual supply of a service, the judicial reasoning in Qantas makes it clear that this particular finding was dependent on the words of the contract (and thus the facts of the particular case). Careful consideration always needs to be given to the words of the contract when considering when the taxable supply occurs for the purposes of GST liability.