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The Federal Court has unanimously held that goods and services tax (GST) was not payable when a person booked and paid for domestic air travel but subsequently cancelled the booking, or did not turn up for the flight, and did not receive a refund.

This landmark decision on the meaning of ‘supply’ under GST law has various implications for a wide range of businesses.

The Court held that each customer pays for carriage by air. The Court describes this as ‘the essence, and sole purpose of the transaction’. The mere payment of the deposit was not capable of meeting the definition of supply as without the flight there was no ‘act’ for which the consideration was provided. Therefore, the payment of the deposit was not a taxable supply for GST purposes.

This decision will be significant for many taxpayers, who should review the GST treatment of all payments received by them for an intended purpose which does not take place. This includes cancellations, forfeitures and prepayments where GST has previously been collected and paid.

Given the difficulty in obtaining GST refunds on amounts overpaid, businesses will need to determine to what extent the decision can be applied retrospectively to reclaim any overpaid GST.

Should you wish to understand in more detail the impact of this decision please contact Murray Howlett of our Taxation Services Division.