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Are you Entitled to a GST Refund From the ATO?

A recent Federal Court decision may now allow for business operators in the accommodation industry – management rights, hotels, motels and caravan parks – to be exempt from paying GST on cancellation fees.

In addition, they may be eligible to claim GST refunds from the Australian Taxation Office by amending prior BAS returns.

A large number of small business operators, particularly those in the service sector, receive pre-payments from consumers for services to be provided at a future date. Often the contractual terms stipulated by the service provider state that these advance payments are non-refundable in circumstances where the consumer ultimately does not take up the service paid for.

Since the introduction of GST, the ATO has viewed these charges as a “taxable supply” regardless of the fact that the service (the provision of accommodation) was not actually supplied – therefore the small business operator was required to account for and remit 1/11th of the advance payment to the ATO in the form of GST collected.

This view was turned on its ear in September 2011 when a landmark decision in Qantas Airways Ltd v Commissioner of Taxation [2011] FCAFC 113 was handed down by the full Federal Court of Australia in relation to the GST status of funds retained by Qantas for domestic passengers who either cancelled their bookings, missed their flights or simply didn’t show up for their flights. Importantly, the airfares in question were either non-refundable or were refundable and a refund was not claimed by the passengers prior the stipulated expiry period.

In June 2008, Qantas lodged a GST refund notification with the ATO, claiming that it incorrectly paid GST in respect of pre-paid airfares for unused non-refundable airfares and unclaimed fully refundable airfares.

The full bench of the Federal Court held that GST is not payable in these instances. Whilst the decision gives clear guidance to domestic transport operators it also provides a precedent for other GST registered entities in similar industries that take bookings, hold fees and have cancellations and no shows. The decision of the full Federal Court hinged on the fact that a relevant supply only occurred when the customer was carried by Qantas. Therefore, if the customer was not carried, then a supply had not occurred and as GST is a supply based tax, there was no supply and hence no GST liability.

Opportunities for GST refunds may now exist for business operators in the accommodation industry. In addition, they may not have to remit GST when a supply did not occur (monies held after a cancelled or now show booking). In applying these principles to the accommodation sector, care needs to be taken to look closely at the contractual arrangements entered into with guests in relation to advance payments. Ensuring your cancellation policy is correctly worded and that guests are aware of your cancellation policy will be important to be able to access the GST concession.

Where these contractual agreements state that the service for which the advance payment made is non-refundable, small business operators in the accommodation sector may have a similar claim to that of Qantas – namely, if there has been no “taxable supply” then no GST is payable.

Should you be considering taking advantage of this opportunity and claiming a GST refund from the ATO or are reviewing your cancellation policy, you should seek professional advice before you act. Also note that there is a time limit on submitting a request for a GST refund from the ATO – you effectively have four years from the relevant tax period.

It is unlikely that the ATO will act immediately on any requests for GST refunds until the legal position is finally resolved as it remains to be seen whether the Commission of Taxation will appeal the decision to the High Court. However, as the High Court will only agree to hear tax matters on appeal from the full Federal Court in exceptional cases, there is a good chance that the full Federal Court’s decision will stand. Regardless of the final outcome, once the ATO is on notice of your claim, your position is protected and given that you have the ability to back-date your GST refund claim for four years, the amounts in question may be quite substantial.

Tony Rossiter

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