Are you entitled to a GST refund?
If customers prepay you for your services and are not entitled to a refund if they ultimately don't take up the service, then a new court case opens the way for a potential GST benefit.
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, ultimately, the customer does not take up the service.
If this occurs, 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.
However a recent case involving Qantas 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. As they were not entitled to a refund of the fare, effectively Qantas received the consideration but did not make 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. When this did not occur there was no taxable supply and hence no GST liability.
Applying these principles to other situations, you may need to look closely at the arrangements you have entered into with your customers and also the agreements or contracts covering the pre-payments they make to you. 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. Before you get too excited it is worth noting that the Commissioner has applied for leave to appeal the decision to the High Court. So, there might be more to come on this.
In the meantime, if you accept prepayments from customers, it might be worth checking how the situation lines up with the Qantas decision. You should take professional advice on this – the devil will be in the detail. We can review your position with you. Keep in mind too that there is a time limit on seeking GST refunds. You have 4 years from the relevant tax period. After that, even if you are entitled to a refund, you are out of time.
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.
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