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The most significant case in Australia about the definition of “supply”

The recent High Court of Australia (HCA) decision Commissioner of Taxation v Qantas Airways Limited (“the Qantas case”) is perhaps the most significant case in Australia on the definition of “supply” for GST purposes to date. As this decision can no longer be appealed it is the final instalment of a long line of proceedings, where both parties have seen their case won but then overturned on appeal. 

The amount in contest was the GST on fares, totalling A$34 million, received from prospective passengers who failed to take the flights for which reservations and payment had been made. Some fares were forfeited while others were simply not claimed back. By a majority of 4-1, the HCA found in favour of the Commissioner of the Australian Tax Office (ATO) and held that the amount received from a prospective passenger who failed to take the flight is subject to GST.

The majority decision found that it was sufficient that the taxable supply for which the consideration was received was for a promise to use best endeavours to carry the passenger and baggage and that was sufficient to trigger the GST obligations for the airline.

The minority took a more practical view on the definition of "supply". To the minority a supply by a taxpayer implies that the taxpayer has supplied something to someone. The intended supply was the flight, therefore when a passenger books and pays for his or her seat but does not arrive at the airport and makes no journey by air, nothing has been supplied for consideration.

Implications for New Zealand

What about its implications for New Zealand? The definition of “supply” in the New Zealand GST legislation is slightly different to its Australian counterpart. The definition of “supply” in the Australian GST legislation includes “a creation…of any right.” The New Zealand GST legislation, on the other hand, defines supply more generally and includes all forms of supply, but does not specifically list creation of any right as a supply. As such, whether the full effect of the Qantas decision will be felt in New Zealand is questionable.

It is our opinion that, should a similar case arise in New Zealand, the courts are more likely to adopt the approach of the minority in the Qantas case. 

Offering some support for this view is a publication by Inland Revenue where it was confirmed that forfeiture of deposit in a sale and purchase agreement of property is not subject to GST as the deposit is in the same nature as liquidated damages, and therefore does not amount to a supply.

The Qantas case raises some interesting issues about the definition of supply. While its implications in New Zealand are not entirely clear, the HCA decision will unlikely affect the pre-existing understanding of the definition of supply in New Zealand.

Tax Alert November 2012 Contents:

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