Article – The High Court on GST in Qantas – What it may mean for Liquidators and other external administrators

** I first posted this article on 2 October 2012. It was subsequently republished with my permission in CCH’s online Insolvency and Bankruptcy news service in the week commencing of 5 November 2012 -—-What-it-may-mean-for-Liquidators-and-other-external-administrators&ID=38989&Type=F

This morning the High Court handed down what is perhaps the most important Australian judgment yet in the area of GST law, in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41; (2012) 291 ALR 653. It addresses a question which is the most fundamental issue in GST law – what is a “taxable supply”, so as to trigger liability to pay GST under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). I will come to the potential significance of this decision for liquidators and other external administrators in a moment.

This was an appeal by the Commissioner from a judgment of the Full Federal Court which had found in favour of Qantas (link). It concerned whether GST was payable by Qantas on airline tickets which it had sold to passengers who, for whatever reason, had not taken their flight – specifically the appeal concerned non-refundable tickets, and tickets where the passengers had a right to claim a refund which they had not pursued. Significant sums of GST were involved – in excess of $34m.

Put simply, the argument before the High Court boiled down to this – what is a “taxable supply”? In the context of airline tickets, is it the air journey, as argued by Qantas (and accepted by Heydon J)? Or is it the entry into obligations under the contract – here the conditional promise by the airline to use its best endeavours to carry the intending passenger and his or her baggage, as argued by the Commissioner? The majority found in favour of the Commissioner.

For liquidators and other external administrators who take appointment, the potential significance of the decision is with respect to contracts that a company has entered into but has not yet completed, at the time of appointment. Today’s judgment in Qantas may mean that the GST liability triggered by those contracts, which had previously been thought to fall upon the liquidator or other external administrator who completes the contract, may now fall upon the company itself. In the case of a liquidation, that would leave the Commissioner to prove in the liquidation for that GST liability, rather than be able to look to the liquidator personally for the GST.

Division 58 of the GST Act makes “representatives” (defined to include inter alia a trustee in bankruptcy, liquidator, administrator and receiver) of “incapacitated entities” 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.

However in the wake of Qantas, if the taxable supply (which triggers GST liability) occurs upon the entry into obligations under a contract, rather than upon the actual supply of the goods or service or other obligation which is the core object of the contract (or to use the words of Heydon J, “the bargain”), then it may be open to liquidators and other external administrators to complete contracts entered into prior to their appointment, without incurring personal liability for the GST triggered by the transaction.

I suggest that this is a perhaps unintended consequence of the High Court’s decision. The majority’s judgment does not appear to confine itself, in its conclusions as to what is a “taxable supply”, to particular types of contracts such as those which are not completed.

For completeness, I note that this issue that I now raise, was addressed last year by the AAT in The Trustee for Naidu Family Trust and Commissioner of Taxation [2011] AATA 910. In that case a mortgagee in possession had contended that it was not required to pay GST on the sale of real property because the supply occurred at the time of the company’s entry into the contract of sale, rather than at the mortgagee in possession’s completion of the sale.  In finding against the mortgagee in possession, the Tribunal held that the taxable supply occurred at settlement, when the sale was completed, not when the vendor executed the contract of sale. I suggest that, in light of the decision of the majority of the High Court that Qantas made a supply at the time of contract, and subject to other complexities, the Tribunal’s decision may now be doubted.

* I must thank junior counsel for Qantas for drawing this important GST case to my attention.

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