Commissioner of Taxation v Qantas Airways Ltd

• Jurisdiction: Australia Federal only
• Judge: Gummow,Hayne,Kiefel,Bell JJ,Heydon J.
• Judgment Date: 02 October 2012
• Neutral Citation: [2012] HCA 41,2012-1002 HCA A
• Date: 02 October 2012
• Court: High Court
• Docket Number: S47/2012

[2012] HCA 41

HIGH COURT OF AUSTRALIA

Gummow, Hayne, Heydon, Kiefel and Bell JJ

S47/2012

Commissioner of Taxation

Appellant

and

Qantas Airways Limited

Respondent

Representation

A H Slater QC with J O Hmelnitsky and C A Burnett for the appellant (instructed by Australian Government Solicitor)

R C Cordara SC with C M Sievers for the respondent (instructed by PricewaterhouseCoopers)

A New Tax System (Goods and Services Tax) Act 1999 (Cth), ss 7-1, 9-5, 9-10, 9-15, 29-5(1)..

Commissioner of Taxation v Qantas Airways Limited

Goods and Services Tax — Taxable supply — Supply — Consideration — Overbooking — Attribution of tax period — Airfares that were non-refundable or refundable but unclaimed — Customer cancels or fails to take purchased flight — Promise by airline to use best endeavours to carry passengers and baggage — Whether a taxable supply under A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 9-5 — Whether airline liable to remit to Commissioner GST on nonrefundable or unclaimed refundable fares.

Words and phrases — ‘a supply for consideration’ ‘consideration’ ‘taxable supply".

ORDER

• 1. Appeal allowed with costs.

• 2. Set aside the orders of the Full Court of the Federal Court made on 1 September 2011 and in place thereof order that the appeal to the Full Court be dismissed with costs.

Gummow, Hayne, Kiefel and Bell JJ

Introduction

1 The respondent (‘Qantas’) and its subsidiaries, including Jetstar Airways Pty Limited (‘Jetstar’), provide domestic and international air travel but this litigation concerns only their domestic operations. Both Qantas and Jetstar supply classes of air travel with varying fare rules and conditions of carriage. They engage in ‘overbooking’, a practice of booking more passengers on a flight than there are seats available, in anticipation that not all of those booked will present themselves to board the flight. This is said by Qantas to be a practice common among airlines, and is a practice of long standing by Qantas.

2 At all relevant times Qantas acted under subdiv 48-A of A New Tax System (Goods and Services Tax) Act 1999 (Cth) (‘the GST Act’), as the representative member of the corporate group. Each month was a tax period and on that monthly basis Qantas remitted GST as the representative member.

3 The amount in contest in this appeal is the GST on fares received from prospective passengers who failed to take the flights for which reservations and payment had been made. In accordance with the applicable conditions, some fares were forfeited while others were refundable on application within a stipulated period but no refund claim was made. Division 19 of the GST Act makes special provision for ‘adjustment events’ such as a change in the consideration for a supply by reason of a refund of the fare, leading to a decreasing adjustment to the GST. But this dispute is concerned not with refunds but with cases where no refund was claimed or none was available. Qantas did not contend that Div 19 had any direct application.

4 Section 29-5(1) is an important provision in the legislative scheme. The GST is attributable to the tax period in which there is received ‘any’ of the consideration, being the fares paid, or, before that receipt, the invoice is issued.

5 The appellant (‘the Commissioner’) stresses that the effect of the GST Act is that with respect to any particular transaction the GST is payable only once, at the end of the attributable taxation period. In particular, GST is not payable more than once by reason that the consideration is received in connection with an executory contract which involves more than one supply. Thus, GST on the consideration received is not payable in each of the tax periods in which a series of events occur in performance of an executory contract; the GST is payable once, in the tax period of the first payment or invoice.

6 The fares were calculated to recover from the customer the GST payable on the amount of those fares. On payment of the fare the GST amount was recorded by the airline as a debt due to the Commissioner; the balance was credited to unearned income until the flight was taken or the fare was forfeited. The GST component of the fares for flights not taken was not refunded to customers. The assessments in evidence total $34,275,917; this comprises $26,604,347 in GST in respect of forfeited fares (divided between Qantas as to $16,717,019 and Jetstar $9,887,328) and $7,671,570 in GST in respect of fares where a refund was permitted but no claim to the refund had been made.

The litigation

7 Qantas contended that GST was not payable on the unused fares and that the GST which had been paid on them should be refunded by the Commissioner. To resolve the dispute the Commissioner issued assessments for the monthly tax periods from July 2005 to June 2008, including GST on fares received by Qantas in those months in respect of travel not undertaken. By Notice of Objection dated 31 July 2009, Qantas objected to the inclusion of the GST on unused fares. On 9 October 2009 the Commissioner disallowed the objection pursuant to s 14ZY of the Taxation Administration Act 1953 (Cth) (‘the Administration Act’). The objection decision was referred to the Administrative Appeals Tribunal (‘the AAT’) (comprising the President, Downes J, and Senior Member Mr S E Frost), for review under s 14ZZ of the Administration Act.

8 The AAT delivered its reasons on 6 December 2010 1 and affirmed the disallowance by the Commissioner of the objection by Qantas.

9 Qantas then pursued the matter by an ‘appeal’ under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) to the Federal Court of Australia. The appeal was heard by a Full Court (Stone, Edmonds and Perram JJ). There was no issue that the appeal raised questions of law sufficient to attract jurisdiction under s 44 2. On 1 September 2011 the Full Court set aside the decision of the AAT, together with the objection decision of the Commissioner, and allowed in full the Notice of Objection by Qantas.

10 By special leave the Commissioner appeals to this Court against the whole of the judgment of the Full Court. For the reasons which follow the appeal

should be allowed, the orders of the Full Court should be set aside and in place thereof the appeal to the Full Court should be dismissed.

The Full Court decision

11 Stone J agreed with the joint reasons of Edmonds and Perram JJ. Their Honours set out various provisions of the Qantas conditions of carriage as at September 2008 (‘the Qantas conditions’) and the Jetstar conditions of carriage as at February 2008 (‘the Jetstar conditions’). They concluded that it was plain that ‘what each customer pays for’ is carriage by air and continued 3:

‘This is the essence, and sole purpose, of the transaction. The prospective supply is of air travel, dare we say, in the face of [ Federal Commissioner of Taxation v Reliance Carpet Co Pty Ltd4], “nothing more or less'. Having recognised the actual travel had not been supplied, and that was the purpose of the booking, that should have been the end of the inquiry. The actual travel was the relevant supply, and if it did not occur there was no taxable supply. Instead, what the Tribunal did was to look for other “acts” satisfying the definition of supply. It erred in doing so, for even if the identified “acts” were capable of meeting the definition of supply, they were not “acts” for which the consideration was provided.’

12 This reasoning fixes upon the consideration ‘for’ which a ‘taxable supply’ was provided and identifies this by distilling from the arrangements between airline and customer the ‘essence and sole purpose’ of the transaction 5.

13 In this Court, Qantas relied upon this reasoning and claimed support for a ‘substantive approach’ to the legislation by analogy to the decision in Baltic Shipping Co v Dillon6. That litigation concerned an unsuccessful claim by a

passenger for return of that part of the fare she had paid which had not been refunded. The claim was for a total failure of consideration by the shipping company 7 when the ship sank after the eighth day of what was to be a 14 day cruise. Deane and Dawson JJ 8 approached the issue of total failure of consideration by asking ‘as a matter of substance’ what was the consideration promised by the shipping company. Baltic Shipping provides no analogy with situations in which the airline retains the fare in exercise of its entitlement to do so after the passenger does not board the flight; there has been no failure by the airline in its performance.

The legislation

14 The determination on this appeal of whether the process of abstraction by the Full Court is justified requires further attention to the operative provisions of the GST Act. The appeal turns upon the construction and application of those provisions. In particular, in the phrase ‘the supply for consideration’ (emphasis added), which appears in the definition of ‘taxable supplies’ in s 9-5(a) and is set out below, the word ‘for’ is not used to adopt contractual principles. Rather, it requires a connection or relationship between the supply and the consideration.

15 Section 7-1 of the GST Act is identified as a ‘central provision’. It relevantly states that GST is payable ‘on *taxable supplies’. The use of the asterisk is a device to alert the reader to the presence of a definition in the Dictionary to the Act. Division 9 (ss 9-1 — 9-99) is headed ‘Taxable supplies’. Section 9-5 answers a question ‘What are taxable supplies?" by stating that ‘you’ make such a supply if:

• ‘(a) you make the supply for *consideration; and

• (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

• (c) the supply is *connected with Australia; and

• (d) you are *registered, or *required to be registered.’

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