Are you paying too much GST?

A large number of businesses, particularly those in the service sector, receive prepayments from customers for future services.

In some cases these could be deposits or in others they are a part or full payment of the anticipated service.

And the contract terms provide that there is no refund of the prepayment where ultimately the customer does not take up the service.

So what is the GST position where you receive a prepayment and the service is ultimately not delivered?

Historically, much of the thinking around this situation was that despite the fact that the service was not supplied the prepayment would still be in respect of a taxable supply and the vendor would account to the ATO for 1/11^th of the sale price. Certainly this is the ATO view.

A recent case involving Qantas has raised doubts over this treatment. The case related to non-cancellable, pre-paid airfares, and 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.

Applying these principles to other situations, you 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 pre-payment 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 may be still more to come on this.

In the meantime, and if you do accept pre-payments from customers, it might be worth having a look at your own business and see how it lines up with the Qantas decision.

You should take professional advice on this – the devil will be in the detail. This could affect your position going forward and you could also be entitled to a refund of some of the GST that you have paid.

Keep in mind too that there is a time limit on seeking GST refunds. You have four years from the relevant tax period. After that, you are out of time – even if you are entitled to a refund.

It makes sense to see whether you may 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. Before you do anything talk with your accountant and get their advice on your position.

Greg Hayes is a director of Hayes Knight and specialises in taxation & business planning advice.