Value added tax (“VAT”) is not a tax that is levied on revenue or receipts. For VAT to be levied, there must be a supply of goods or services by a vendor (section 7(1)(a) of the Value Added Tax Act, No 89 of 1991 (“the VAT Act”) refers). If there is such a supply, then the VAT is payable on the consideration received by the vendor for the supply made. The definition of “consideration” in section 1 of the VAT Act further excludes a deposit, unless the supplier applies the deposit as consideration for the supply, or if the deposit is forfeited.
One can therefore accept that in principle, if no supply is made, then there is no liability for VAT. This principle was applied by the European Court of Justice (“ECJ”) in Case C-277/05, where the ECJ held that a deposit paid by a client to an hotelier for the reservation of a room is not subject to VAT when the client does not arrive and forfeits the deposit.
The Full Federal Court of Australia came to a similar conclusion in September 2011 in the case of Qantas Airways Ltd v Commissioner of Taxation [2011] FCAFC 113. In the Qantas case the Full Federal Court was required to consider whether Qantas received consideration for a taxable supply where a person booked and paid for a domestic air ticket but either cancelled the booking or did not turn up for the flight, and did not collect a refund.
The Full Federal Court found that the only relevant supply was the supply of air travel, and because the air travel was not supplied, the amount retained by Qantas when the person cancelled the booking or did not turn up for the flight, was not consideration for any taxable supply as no supply was made.
The Commissioner for Taxation appealed against the decision to the High Court of Australia. The Commissioner argued that the passenger received a reservation of an air ticket when he made the booking, and that the reservation was the taxable supply for which Qantas received the payment as consideration.
The High Court considered the terms and conditions of Qantas in some detail and found that the conditions do not provide for an unconditional promise to carry the passenger and baggage on a particular flight. The conditions supplied something less than that. This was at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline. This undertaking by Qantas, that is, the promise to use best endeavours to carry the passenger and baggage, was a “taxable supply” for which the consideration, being the fare, was received. The High Court consequently overturned the decision of the Federal Court and found in favour of the Commissioner that the amounts retained by Qantas when a person cancelled a booking or did not turn up for a flight were subject to VAT.
The decision of the High Court was in line with its earlier decision in the case of Commissioner of Taxation v Reliance Carpet Co (Pty) Ltd. In that case the taxpayer, Reliance Carpet, entered into a contract for the sale of a commercial property which required a deposit of 10% to be payable. The purchaser paid the deposit but failed to pay the balance of the purchase price by the settlement date. The purchaser failed to remedy its default and the deposit was forfeited as a result. Reliance Carpet was assessed for VAT on the forfeited deposit.
The High Court also considered the sale agreement in detail and found that there was a supply because the vendor entered into various obligations when the contract was concluded, such as the obligation to maintain the property in its present condition, to pay all rates, taxes, assessments, fire insurance premiums and other outgoings in respect of the land and to hold the existing policy of fire insurance for itself and in trust for the purchaser to the extent of their respective interests. The vendor also granted rights to the purchaser in relation to the land, and the High Court held that the carrying out of the obligations and the granting of rights in terms of the agreement comprised a taxable supply for which the forfeited deposit was received as consideration.
To determine whether an amount retained by a vendor comprises consideration for a taxable supply, the terms of the underlying agreement between the supplier and the recipient seems to be of critical importance. The actual supply for VAT purposes may be totally different from what the parties perceive to be the supply.