26 November 2011
A large number of businesses, particularly those in the services sector, receive prepayments from customers for future services - in some cases these are deposits and in others, part or full payment for the anticipated service. Often the contract terms provide that there is no refund of the prepayment if the customer does not take up the service.
If the customer does not ultimately take up the service, what is the GST position on the prepayment?
Historically, much of the thinking was that despite the fact that the service was not ultimately supplied, the prepayment would still be in respect of a taxable supply and the vendor would account to the ATO for 1/11th of the sale price. Certainly this is the ATO view.
A recent case involving Qantas however has raised doubts over this treatment. The case related to non-cancellable pre-paid airfares where the customer did not turn up for the flight.
In this case, they were not entitled to a refund of the fare so effectively Qantas received the consideration but never made a supply to the customer. Qantas applied for a refund of the GST from the ATO on the basis that no taxable supply had been made. The ATO disagreed with the position and the matter ended up in court.
In September this year, the Full Federal Court found in favour of Qantas. The court ruled that the supply for which the customer made the payment was for air carriage – the seat on the plane to be taken to their destination. Where this did not occur, there was no taxable supply, and hence no GST liability.
Customer arrangements with pre-paid services or supply
Applying these principles to other situations business owners need to look at all arrangements made with customers, including agreements, contracts and general terms and conditions, with particular focus on services to be delivered.
Where these agreements are that the service for which the prepayment is made is non-cancellable and there is no right of refund, and if subsequently the customer does not take up the service and the prepayment is forfeited, you may have a similar situation to Qantas. If there has been no taxable supply then perhaps no GST is payable.
There are a lot of scenarios and supplies to which this could apply.
If you accept prepayments from customers, it might be worth having a look at your own facts and see how it lines up with the Qantas decision and whether you may be entitled to GST refunds. Opportunities also exist if sales terms and conditions and cancellation policies can be amended without commercial risk to take advantage of this decision.
Before you get too excited it is worth noting that the Commissioner has applied for leave to appeal the decision to the High Court. This may represent a large revenue leakage to the government and if the appeal process is unsuccessful you could expect new law to remedy this issue.
In the meantime, it’s wise to seek professional advice on this situation – the devil will be in the detail. Keep in mind too that there is a four-year time limit on seeking GST refunds. It makes sense to see whether you might have an entitlement, and then based on the advice you receive, give notice to the Commissioner of an intention to seek a GST refund.
It is unlikely that the ATO will act on any requests until the legal position is finally resolved. Once they are on notice though, your position is protected. Contact Bates Cosgrave on 02 9957 4033 if you believe you think there is an opportunity for your business to benefit from this.
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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.