Qantas and Jetstar went head to head with the Australian Tax Office (ATO) in a recent court case over the GST implications of non-refundable domestic airfares.
The issue concerns prospective passengers that book and pay for a flight but fail to show up. Qantas and Jetstar generally don't refund the prepaid fares. Both carriers had been accounting for GST to the ATO on the "no show" fares. They then changed their mind and sought a refund for GST they claimed had been incorrectly paid to the ATO. The carriers proposed GST on "no show" fares was not payable as no service had been provided.
The total GST collected by the carriers from July 2005 to June 2008 and paid to the ATO relating to "no show" fares was A$34.2 million (NZ$43.5m). This comprised forfeited fares of A$26.6m and fares where a refund was permitted but no claim to the refund had been made of A$7.6m.
The carriers challenged the inclusion of GST on "no show" fares and argued that there had been no supply at the time the passenger made the booking and therefore no GST should be paid on the non-refundable fare when the passenger cancels it or fails to take the purchased flight.
The High Court of Australia held that the carriers made a supply at the time the ticket was sold and were therefore liable to pay GST. The promise by the airline to use its best endeavours to carry passengers and baggage is a supply for which the airline fare was received.
In New Zealand the taxable supply is triggered by the sale of the ticket, meaning the airlines would return GST to Inland Revenue at that time. Inland Revenue's view on cancelled contracts is that no service has been supplied. It follows that where a prospective passenger fails to fly, the airline has not supplied the flight service and would be entitled to a credit for the GST previously paid when the ticket was sold.
Greg Harris is a specialist tax partner in the Hamilton office of Deloitte.
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