Commissioner of Taxation v Qantas Airways Limited

[2012] HCATrans 36

[2012] HCATrans 036

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S332 of 2011

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

QANTAS AIRWAYS LIMITED

Respondent

Application for special leave to appeal

GUMMOW J
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 10 FEBRUARY 2012, AT 2.36 PM

Copyright in the High Court of Australia

MR A.H. SLATER, QC:   If your Honours please, I appear with my friends, MR J.O. HMELNITSKY and MR C.A. BURNETT, for the applicant.  (instructed by Australian Government Solicitor)

MS J.J. BATROUNEY, SC:   If the Court pleases, I appear with my learned junior, MR C.M. SIEVERS, for the respondent.  (instructed by PricewaterhouseCoopers)

GUMMOW J:   Mr Slater.

MR SLATER:   Your Honours, the factual context in which this application is brought is not really in contest.  During the tax periods in issue in the application Qantas received payments from customers under contracts made with the customers in relation to the provision of carriage by air or what is called in the reasons below “flights”.  The amounts received were calculated on the basis that GST was payable, that is, they were GST inclusive fares.  Of the flights with which those contracts were concerned, some were taken in the tax periods in which the payments were received, some were taken in later tax periods and some were not taken at all.  It is only the amounts paid under the contracts for those in the last class, that is, those not taken at all, that are in issue in the proceedings.

It was always in contemplation that there would be flights not taken at all.  Qantas had what they called a yield management practice overbooking its aeroplanes.  Of the sums received by Qantas in the periods in issue, under contracts of flights which were not taken, some amounts were applied to other flights at later times, some amounts were refunded and, just dealing briefly with those, refunds give rise to adjustments in the later tax periods in which the refunds are made under Division 19 and Division 29.  The adjustment for refunds is not in the period in which the amount is received but in that in which it is refunded. 

Going back to the amounts received, some amounts were retained although no flight was provided.  Qantas was entitled to retain those amounts under the flight conditions incorporated into the contract with the passenger.  Your Honours, relevant portions of the statute are in the bundle of materials which we have provided, that is the more slender bundle, and if I could take your Honours very briefly to some of the key provisions.  Your Honours will see that the bundle is marked with tabs.  Division 7, section 7‑1:

GST is payable on taxable supplies –

Section 7‑5:

Amounts of GST and amounts of input tax credits are set off against each other to produce a net amount for a tax period –

It is the net amount for the tax periods which is in contest ultimately in this application.  Into the next tab, Division 9, section 9‑5:

You make a taxable supply if:

(a)you make the supply for consideration –

Your Honours need not be bothered about the remaining paragraphs.  Section 9‑10(1):

A supply is any form of supply whatsoever.

If those words needed amplification, it is supplied by subsection (2):

Without limiting subsection (1) –

Over the page, paragraph (g):

an entry into, or release from, an obligation –

is deemed to be a supply, and paragraph (h):

any combination of any 2 or more of the matters referred to in paragraphs (a) to (g). 

Section 9‑15 at the foot of that page:

Consideration includes:

(a)any payment . . . in connection with a supply of anything –

I draw attention to the words “in connection with”.  It is not for.  Now, if I can take your Honours to Division 17, section 17‑5:

The net amount for a tax period applying to you is worked out using the formula:

GST    –       Input tax credit

where:

GST is the sum of all of the GST for which you are liable on the taxable supplies that are attributable to the tax period.

Subsection (2), the net amount can be increased or reduced by adjustments.  Division 19, which I do not think I need trouble your Honours with, deals with adjustment events.  Your Honours will see that section 19‑10 deals with what an adjustment event is.  Section 19‑40 provides for an adjustment in relation to an adjustment event.  Division 29, which perhaps is material, section 29‑5:

The GST payable by you on a taxable supply is attributable to:

(a)the tax period in which any of the consideration is received for the supply –

Your Honours will note that the asterisk there tells us that is a defined term which takes us back to the term I took your Honours to earlier.

GUMMOW J:   Now, what do you say, Mr Slater, about your opponent’s point on page 83 in paragraph 6 that your client is now taking a new course with entirely new lines of argument, it is said to be.

MR SLATER:   We say it is not so, your Honour.  We have given our reasons for doing that on pages 94 and 95 of the application book and we have given your Honours references to the submissions below.  I had not troubled your Honours with those submissions but they are all in our opponent’s bundle of materials, and I can take your Honours to them if that is convenient to the Court now.

GUMMOW J:   No.  Just look at paragraph 12, if you would, on page 95.  The last couple of lines:

the consequence is that at the end of that period, if the Full Court is correct, neither liability to GST, nor the extent of the taxpayer’s reporting and payment obligations, may be known.

MR SLATER:   Yes, your Honour.  We say that is so.  If the liability to pay tax on a receipt is not knowable until it is known definitely whether the flight has been taken or is never going to be taken, that may happen up to 12 months later, what then does one do at the end of the month in which payment is due?  Payment is due on the 21st day after the end of the month.  Our friend’s case would, in our submission, cause all sorts of practical difficulties not just for the applicant, but for taxpayers as well.

Your Honour, the dispute between the parties is as to the net amount for the tax period of receipt, not for the tax period of repayment, not in the period in which a refund is made and not in the period in which a taxpayer, by customer, becomes ineligible.  It is for the time at which the money is

received.  The essence of the dispute between the parties is as to whether in the dispute of transactions – that is those where the passenger did not take the flight – Qantas made a supply of anything at all.  I took your Honours a moment ago to section 9‑10 – the words “any form of supply whatsoever” are deliberately and advisably, as broad as they could possibly be.  It is hard to imagine any broader form of words – and whether in the tax periods assessed Qantas received an amount in connection with the supply.  

We say that at the time that Qantas made its contract with its customers and received payment, it made a supply of rights under the contract and it was by force of those rights that it was entitled to retain the amounts which were paid to it, notwithstanding that the customer did not take the flight.  We say that that supply was one in connection with which the amounts were paid as fares, so that the requirements of section 9‑10 and section 9‑15 are met and there was a taxable supply. 

GUMMOW J:   We do not need to hear you any further, Mr Slater.  We will hear from Ms Batrouney.

MS BATROUNEY:   If the Court pleases, it is our submission that special leave ought not to be granted in this case because it is simply a characterisation case that turns upon its own facts.  There is no principle involved in this case which would act as a guide to characterisation in other cases.  In order to determine whether there has been a taxable supply in future cases, the Court will have to examine the precise terms of the arrangements that are made between the parties, be it a hotel booking, a train booking or a television services booking. 

In most cases, a contract will obviously involve the exchange of various rights and obligations.  Each of those rights will be a supply, but in each case the Court must determine whether or not there is a taxable supply and this Court emphasised that in the Reliance Carpet Case.  Could I briefly take you that at tab 4 in our book of authorities at page 346.  The Court said at paragraph 5:

The composite expression “a taxable supply” is of critical importance for the creation of liability to GST.  In the facts and circumstances of a given case there may be disclosed consecutive acts each of which answers the statutory description of “supply”, but upon examination it may appear that there is no more than one “taxable supply”.

So in order to determine whether or not a taxable supply has taken place, there must be a supply for consideration.  So this involves characterising the transaction or the arrangement as what the consideration has been paid for.  Here we have a 100 per cent prepayment for a promise to fly upon certain conditions.  No flight took place.  The Full Court took a pragmatic approach and held that the arrangement was such that the fare was consideration for the flight which did not take place and so there was no taxable supply.  The Tribunal took a narrower approach and held that the arrangement was such that the fare was paid as consideration for the booking, for the reservation, which did take place so that there was a taxable supply. 

Both approaches are open.  The difference in approach is simply a different way of characterising the anterior facts having regard, as the Chief Justice and Justice Hayne said in the Travelex Case to “the evident purpose of the transaction”.  Here the Administrative Appeals Tribunal found as a matter of fact that the carriage of the passenger was obviously the purpose of each reservation.  There has been no challenge to that finding of fact.  In any future case the result would similarly turn upon what was exactly the terms of conditions that the parties entered into.  If there was a deposit paid for the flight, the case would be on for all‑fours with Reliance Carpet.  If there was a MacRobertson Miller‑type case where there were no rights and obligations entered into, there would be no rights and no supply.  In our submission, there is no principle that can be applied to other cases and each will depend on its own facts.  The last thing I wish to mention to the Court ‑ ‑ ‑

GUMMOW J:   Were the Qantas conditions of carriage in evidence?

MS BATROUNEY:   Yes, they were, your Honour, and, indeed, the Jetstar conditions of carriage, but not the Tiger conditions, King Island Airlines conditions.  They are obviously all going to be quite different.  So if I could just ask the Court ‑ ‑ ‑

GUMMOW J:   They do not the MacRobertson Miller characteristic?

MS BATROUNEY:   One does not know.  There was no evidence about what other airlines terms and conditions are.

GUMMOW J:   These terms and conditions?

MS BATROUNEY:   Well, if your Honour pleases, we are content for the purposes of the special leave application to accept the Full Court’s finding that there was a contract made at the time of the reservation.  Does your Honour want me to take ‑ ‑ ‑

GUMMOW J:   Contract o do what and on what terms?

MS BATROUNEY:   A contract to convey the passenger from A to B.  It appears at application book 43, point 1.  The first line says:

The continuing analysis proceeds on the premise that a passenger entered into a contract with Qantas at the time of making the reservation (Qantas)/Booking (Jetstar), as the Tribunal found.  If that premise is wrong, then it merely fortifies our conclusion, based on the analysis which follows, that the Tribunal’s decision is equally wrong.

GUMMOW J:   Have we got the Tribunal’s treatment?

MS BATROUNEY:   The Tribunal’s treatment, it is at page 10.

GUMMOW J:   Yes, there is quite detailed consideration there.

MS BATROUNEY:   At paragraph 16, the Tribunal simply distinguishes the MacRobertson Miller situation, and you will see at about line 30 they say:

Rather, the contrast between the conditions in that case, and those we have set out to above, serves to emphasise that the present Conditions of Carriage do give rise to relevant rights and obligations.

Your Honours, if I could go back to page 9, paragraph 9, you will see the Tribunal characterisations of the conditions of carriage.  At paragraph 9, page 9 they say:

The correct view of the Conditions of Carriage seems to us to be that they give rise to a contract enforceable at law between Qantas and each passenger.  The contract, in turn, creates rights and involves entering into obligations “to do anything”.  There is, accordingly, an argument that at the time of the creation of the rights and the entering into of the obligations, which will generally be at the time, or shortly after, a reservation is made, there is a supply.  Certainly it will be no later than the time of payment.  The mutual promises or the payment would provide consideration.

HAYNE J:   Was that view of the operation of the arrangement put in contest in the Federal Court?

MS BATROUNEY:   I believe that Qantas did argue that the terms of the contracts are more inline with the MacRobertson Miller terms and conditions.

HAYNE J:   I thought that to be so.  I think you said that for the purposes of leave you were content to argue on one basis.  That is a rather hedged‑about proposition.  If leave were to go, do you leave open the possibility of Qantas seeking to say that the ticket promises you nothing?

MS BATROUNEY:   I understand that that would be a possibility, your Honour.  In summary then, if I could take the Court to our book of authorities.  At tab 2 at page 17 you will see at the bottom of the page – this is the transcript of the special leave application in the Commonwealth of Australia v The Secretary of the Department of Transport – you will see the Chief Justice in concluding the application and refusing leave said:

The application involves challenging concurrent findings about the application of the GST Act to particular facts. We are not satisfied that the application, bearing as it does upon matters of characterisation, raises for consideration any general principle of public importance such as would warrant the grant of special leave.

If your Honours please, the submissions of the respondent are that our case falls squarely within that mantra.  If your Honours have no further questions.

HAYNE J:   Just before you sit down.  On your construction of the Act how would 29‑5 apply?

MS BATROUNEY:   Well 29‑5 of the Act would apply as it does today and that is that Qantas pays GST on all airline fares when it receives them, and that is the way the Act operates.  The Commissioner’s concern about ‑ ‑ ‑

HAYNE J:   Is that premised on there being a taxable supply at the time of payment, that there has been a taxable supply?

MS BATROUNEY:   Qantas would not concede that, but that is the way it does account for these fares.  It accounts for them in its accounts both for GST purposes and for income purposes, so that it pays GST on the fares as they receive any part of the consideration and it holds those amounts in unearned income accounts for income tax purposes until it has determined whether or not it has, in effect, earned the fare.  We do acknowledge that section 29‑5 is premised on there being a taxable supply and we do not concede that there is a taxable supply.  But for accounting purposes, that is what we do.  We pay GST on receipt of any part of the consideration.

GUMMOW J:   We do not need to hear from you any further, Mr Slater.  There will be a grant of special leave in this matter which will be a one‑day appeal, is that so?

MR SLATER:   Your Honour, I do not know how long it will be.  My learned junior who ran the case in the Full Court was on his feet for an hour.  His opponent was on his feet for the rest of the day.

GUMMOW J:   I do not know what to make of that.

MS BATROUNEY:   If the Court pleases, if the Court is mind to grant special leave in this case, for the reasons set out in the application immediately preceding, we would ask that it be conditional upon the same order and that is that the Commissioner pay the costs in this Court in any event and that the Commissioner would not seek to disturb the costs orders below on the very same grounds that were rehearsed in the immediately preceding application.  I do not need to go through them again, I am sure.

GUMMOW J:   They related to the personal circumstances of those litigants.  Your client’s personal circumstances are rather different.

MS BATROUNEY:   Yes and no, although the reason this was being granted is the matter of public importance and for those reasons, it does not seem right that Qantas should have to pay the costs.

GUMMOW J:   What do you say about that, Mr Slater?

MR SLATER:   Qantas is not quite in the same position as a struggling doctor who is facing bankruptcy, your Honour, and for what relevance it has to your Honours, the amounts that are here in stake are amounts which were collected from passengers and Qantas seeks to retain them as a windfall.

GUMMOW J:   Yes, indeed.  There will be no such condition.  Counsel and their solicitors should obtain from the Registrar the brief, precise and important directions for preparation of the appeal.  We will adjourn to reconstitute.

AT 2.56 PM THE MATTER WAS CONCLUDED