Notional GST – political compact or Pandora’s box

Presented at the Tax Institute National GST Conference, 18 August 2022

1.      Introduction

The GST is a tax imposed under the laws of the Commonwealth. The GST is imposed on “entities”[1] that carry on an “enterprise”[2]and are registered for GST. An “entity” is defined to include “a body politic”[3] and “enterprise” includes activities done by “the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for public purposes by or under a law of the Commonwealth, a State or a Territory”.[4] The GST Act therefore extends to the operation of government entities, including State government entities.[5]

In this context, the GST regime must navigate the restrictions imposed by section 114 of the Commonwealth Constitution (Constitution), which provides that the Commonwealth shall not impose a tax on the property of the State. On paper, the regime established by the Commonwealth and the States under the Intergovernmental Agreement and related Acts is simple – essentially operating as follows:

  • State entities will register for GST in the usual manner.
  • State entities will pay GST, claim input tax credits and prepare GST returns in the usual manner.
  • To the extent that the GST imposed on the State entities is a tax on the property of those entities (being property of the State), GST is not payable. However, the entities will treat themselves as being bound by the GST Act and will voluntarily pay an amount of “notional” GST equal to the GST that would have been payable if the GST Act had applied.

On the whole, the regime has appeared to work relatively well. However, over time cracks have emerged, mainly where a State entity and the Commissioner do not agree on a particular outcome under the GST Act. Those disputes have mainly arisen in the context of transactions surrounding the sale of land which is said to be unimproved – an area where the GST at issue is clearly “notional” and an area where certain provisions in the GST Act can remove, or significantly reduce, the amount of notional GST payable by the State entity.

In the past, the Commonwealth and State entities have proceeded on the basis that disputes surrounding “notional GST” issues cannot be ventilated in the Courts and the objection and review procedures in Part IVC of the Taxation Administration Act 1953 (TAA) are not available. Nevertheless, the Commissioner’s internal dispute resolution procedures have generally been made available, with State entities obtaining private rulings on notional GST matters and objecting to assessments of notional GST. The parties have also engaged in Alternative Dispute Resolution (ADR) including mediation, conciliation and in some cases, external review by an independent expert who provides a non-binding opinion on the issues in dispute.[6]

In April this year, the Commissioner formally documented the dispute resolution procedure for notional GST issues in a document titled “Notional GST dispute resolution” (ATO Dispute Protocols).  The purpose of the Protocols is set out in the first paragraph of the document, and provides as follows:

This document outlines the process for a government entity to dispute a position the Commissioner has taken on a notional GST matter, given that the legal objection and review rights under the Taxation Administration Act 1953 are not available in these circumstances.

In a somewhat ironic twist, around a month after the ATO Dispute Protocols were published, the Federal Court handed down its decision in Landcom v Commissioner of Taxation [2022] FCA 510 (Landcom), where the Court found that Landcom (a State entity) was entitled to:[7]

  • Ask the Commissioner for a private ruling about the operation of a provision in the margin scheme with respect to the proposed sale of land;
  • Object to the Commissioner’s private ruling under Part IVC of the TAA; and
  • Appeal the Commissioner’s Objection Decision to the Federal Court.

In light of the decision in Landcom, the accuracy of the statement extracted from the ATO Dispute Protocols must now be questioned. It appears that State entities do have formal objection and review rights under the TAA, with the decision putting State entities on a level playing field with other taxpayers – being able to: seek private rulings; lodge objections to private rulings and to assessments of net amount (including where that net amount includes amounts of notional GST); and, appeal those objection decisions to the Tribunal and the Federal Court. In my view, this is a good outcome. It provides State entities and the Commissioner with the opportunity to utilise the established review procedures in Part IVC of the TAA to resolve disputes if those disputes cannot be resolved through the usual administrative channels. It also allows State entities and the Commissioner to rely, and establish, legal precedent – with those legal precedents being available to the public in the ordinary manner.

I have also recently become aware of a case issued in the High Court by a local council in New South Wales seeking refunds of notional GST. The transcripts of the two directions hearings to date[8] provide only superficial details as to the nature of the claims, which appear to be at an early stage. But it appears that the claim may extend to the recovery of all payments of notional GST by the Council from the inception of the GST, that is from July 2000. This would likely bring into question the efficacy of the regime generally.  

Over the coming years, I expect to see more disputes before the Courts and the Tribunal involving State entities and issues relating to “notional” GST. 

With this in mind, the paper will explore some of the issues that have arisen in the context of “notional” GST and State entities, including the following:

  • The structure of the GST regime with respect to notional GST.
  • What is “the State” for the purposes of the GST Act?
  • Issues relating to unimproved land.
  • The scope of review rights after Landcom?
  • Refunds and time limits.

2.      Section 114 of the Constitution, the Intergovernmental Agreement and the GST Act

2.1    The structure of the GST law

Section 114 of the Constitution provides, so far as is relevant, as follows:

A State shall not, without the consent of the Parliament of the Commonwealth … impose any tax on property of any kind belonging to the Commonwealth, nor shall the Commonwealth impose any tax on property of any kind belonging to a State.

GST is imposed by s 3(1) of the A New Tax System (Goods and Services Tax Imposition (Recipients) – General) Act 2005 (Cth) (the GST Imposition Act).[9] The prohibition in s 114 of the Constitution is addressed by s 5 of the GST Imposition Act, which provides as follows:

Act does not impose a tax on a property of a State

  • This Act does not impose a tax on property of any kind belonging to a State.
  • Property of any kind belonging to a State has the same meaning as in section 114 of the Constitution.

Section 5 of the GST Imposition Act clearly envisages that GST is a tax on property, and may breach s 114 of the Constitution where GST is imposed on the property of the State. The issue has not been formally considered by a Court, but this does appear to be the likely outcome. In this context, in Deputy Federal Commissioner of Taxation v State Bank of NSW (1992) 174 CLR 219 the High Court found that sales tax imposed on the Bank was prohibited under s 114 of the Constitution as it was a tax on the property of the State. In coming to this finding, the High Court (at 228) made the following observation which would appear to be equally applicable to GST:

Once it is appreciated that liability to pay the tax is attracted either by the owner’s sale or by use of his or her property, the conclusion becomes inevitable that the tax is relevantly a tax on property.

In a similar vein, in Queensland v The Commonwealth (The First Fringe Benefits Tax Act) (1987) 162 CLR 74, Mason, Brennan and Deane JJ (at 98) made the following observation:

And a tax on the proceeds of sale of property is likewise a tax on the ownership of property or on property because it is an indirect means of taxing the ownership of property. Such a tax would necessarily fall within the constitutional immunity; if it did not, the constitutional immunity would amount to nothing but a formal prohibition.

This paper proceeds on the assumption that the GST is a tax on property and may fall within s 114 of the Constitution.

Entities that are “the State” for the purposes of s 114 of the Constitution are entitled to register for GST and are entitled to participate in the GST regime. By registering for GST, those State entities will be:

  • Liable for GST with respect to taxable supplies made by the entity attributable to each tax period, to the extent that the GST is not a tax on the property of that entity: Division 9 of the GST Act.
  • Entitled to input tax credits with respect to creditable acquisitions made by the State entity attributable to each tax period: Division 11 of the GST Act.  
  • Required to lodge GST returns for each tax period; Division 31 of the GST Act. Through the operation of Division 155 of Schedule 1 to the TAA, the Commissioner will be treated as having made an assessment of the net amount reported in the GST return.
  • Liable to pay an amount to the Commissioner if the reported net amount is a positive sum: Division 33 of the GST Act.
  • Entitled to a refund from the Commissioner if the reported net amount is a negative sum: Division 35 of the GST Act. 

The prohibition in s 114 of the Constitution creates a gap in the revenue base – State entities have no liability to pay GST to the extent that it is a tax on the property of the State. 

2.2    The Intergovernmental Agreement

The Commonwealth and the States sought to address the gap in revenue caused by s 114 of the Constitution by entering into a political compact titled the “Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations” (First IGA). Under this arrangement, government entities would make voluntary, or “notional”, payments of GST as if those entities were subject to the GST Act. 

Clause 17 of the First IGA provided as follows:[10]

Application of the GST to Government

17. The Parties intend that the Commonwealth, States, Territories and local government and their statutory corporations and authorities will operate as if they were subject to the GST legislation. They will be entitled to register, will pay GST or make voluntary or notional payments where necessary and will be entitled to claim input tax credits in the same way as non-Government organisations. All such payments will be included in GST revenue.

While described as an “agreement”, the First IGA was a statement of political intent and did not create legally enforceable rights or obligations.[11]

In New South Wales, the First IGA was implemented by the Intergovernmental Agreement Implementation (GST) Act 2000 (NSW) (Implementation Act). Section 4 states that it is the intention of the State of New South Wales to comply with, and give effect to, the first IGA. Section 5 provides:

Payment of GST equivalents by State entities 

A State entity may pay to the Commissioner of Taxation amounts representing amounts that would have been payable for GST if:

  • the imposition of that GST were not prevented by section 114 of the Commonwealth Constitution, and
  • section 5 of each of the GST Imposition Acts had not been enacted,

and may do things of a kind that it would be necessary or expedient for it to do if it were liable for that GST.

“State entity” is defined by s 3 to mean:

a person who is not liable for GST that the person would be liable for if:

  • the imposition of that GST were not prevented by section 114 of the Commonwealth Constitution, and
  • section 5 of each of the GST Imposition Acts had not been enacted.

Legislation implementing the First IGA was also enacted by the Commonwealth and each of the other States and Territories.[12]

The role played by this regime in filling the revenue gap is illustrated by the fact that “notional GST” is an integer in the calculation of GST revenue grants to the States under the Federal Financial Relations Act 2009[13] pursuant to which each State is entitled to the payment of a grant using a formula calculated with reference to “GST revenue”. Pursuant to s 6 of that Act, “GST revenue” relevantly includes:

…the payments made to the Commissioner of Taxation representing amounts of GST that would have been payable if the Constitution did not prevent tax from being imposed on property of any kind belonging to a State and section 5 of the GST Imposition Acts had not been enacted.

The importance, within the overall GST system, of “notional GST” payable pursuant to the IGA was described by Perram J in TT-Line Company Pty Ltd v Federal Commissioner of Taxation (2009) 181 FCR 400 at [66] as follows:[14]

Section 114 of the Constitution prohibits the imposition by the Commonwealth of “any tax on property of any kind belonging to a State”. That prohibition made impossible the imposition by the Commonwealth upon the States of a tax on supplies of the kind contemplated in the legislation introducing the GST. At least in relation to the provision of supplies of property, the interposition of a State at any point along the supply chain would have disrupted the process of credits upon which the system depends. The introduction of the GST could not practically proceed therefore unless the States voluntarily agreed to subject themselves to it. This they promised to do by the Financial Relations Agreement (1999).

In Landcom, Thawley J (at [28]) referred to this extract and observed that the difficulty to which Perram J referred was that GST was a value added system of consumption tax, being imposed as each stage of commercial dealings on the making of “supplies”, and an entity acquiring goods and services as a result of a “taxable supply” made to it is allowed an input tax credit for that GST. This system of input tax credits seeks to ensure that, although GST is a multi-stage tax, tax is only payable by each supplier in a chain on the value added by that supplier, and that it is the consumer who ultimately bears the burden of the tax. However, because Landcom cannot be made liable to GST on the supply of “property” within the meaning of s 114 of the Constitution, it cannot include GST in the consideration for the supply of the property. Absent some solution, the recipient of a supply of “property” from a State would not be able to claim an input tax credit. 

His Honour observed (at [32]), that in order for the GST Act to work as intended, there were at least two issues which it was desirable to, and which were, addressed:

  • First, the States and Territories (and the Commonwealth) agreed to participate in the GST system “as if they were subject to the GST legislation” and pay GST voluntarily, by making “notional” payments of GST.
  • Secondly, for the purposes of the recipient of a supply from a State or Territory of the Commonwealth:
    • The supplies either had to fall within the concept of a “taxable supply” or be treated as a “taxable supply”; and
    • The amount of GST for which the State, Territory or Commonwealth is notionally liable on the supply had to be treated as the amount of GST payable on the supply.

The first issue identified by his Honour was addressed by the Intergovernmental Agreement. As observed by Thawley J in Landcom(at [42]):

The end result is that the States and Territories have voluntarily subjected themselves to “notional GST”, albeit their agreement to pay “notional GST” does not give rise to any legal liability to pay and is not capable of enforcement by the Commonwealth by reason of s 114 of the Constitution and s 5 of the General Imposition Act.

The second issue was addressed by the GST Act, and is discussed in the next section of the paper.

2.3    How “notional” GST fits within the GST Act

Notional GST is paid by Commonwealth, Territory and State entities. Notional GST is addressed in Division 177 of the GST Act.

2.3.1     Commonwealth entities

Section 177-1 of the GST Act deals with Commonwealth entities, and provides as follows:

(1) The Commonwealth and *untaxable Commonwealth entities are not liable to pay GST payable under this Act. However, it is the Parliament’s intention that the Commonwealth and untaxable Commonwealth entities should:

(a) be notionally liable to pay GST payable under this Act; and

(b) be notionally entitled to input tax credits arising under this Act; and

(c) notionally have *adjustments arising under this Act.

As observed in Landcom (at [44]), the Commonwealth also pays “notional GST”. Section 177-1(1) of the GST Act, adopting the language of “intention” found in the Intergovernmental Agreements, provides that the Commonwealth is not liable for GST but intends to be notionally liable to pay GST and notionally entitled to input tax credits. In this regard, the entirety of the participation of Commonwealth entities could be characterised as “notional”. 

This can be contrasted with the position of State entities, where only the payment of GST that is a tax on property is “notional”. GST that is not a tax on property, and entitlements to input tax credits on creditable acquisitions, are not notional. They give rise to enforceable rights and obligations.

2.3.2     The amount of “notional” GST

The notional GST is to be calculated by reference to in Subdivision 9C of the GST Act, more particularly s 9-70 which provides that the amount of GST on a taxable supply is 10% of the “value” of the taxable supply. Section 9-75 provides that the value of a taxable supply is 10/11th of the “price” of the supply.

The operation of Subdivision 9-C of the GST Act is subject to special rules relating to the amount of GST on taxable supplies: s 9-99. The special rules include the “margin scheme” in Division 75, which applies to particular transactions involving interests in real property.

2.3.3     Recipients of “notional” GST transactions

While a liability for GST cannot be imposed on a State entity, that entity nevertheless, in terms, makes “taxable supplies” within the meaning of s 9-5 of the GST Act.[15] Each of the elements of the definition are satisfied:

  • The entity makes a supply for consideration: paragraph (a).
  • The entity makes the supply or supplies in the course or furtherance of an enterprise that it carries on: paragraph (b).
  • The supply is connected with the indirect tax zone: paragraph (c).
  • The entity is registered for GST: paragraph (d).

A taxable supply made by a State entity to an acquiring entity is also a “taxable supply” within the meaning of paragraph 11-5(b) of the GST Act. Therefore, where the purchasing entity satisfies the other limbs of s 11-5, the entity makes a “creditable acquisition” and is entitled to input tax credits: s 11-20 of the GST Act. However, the amount of the input tax credit is nil, given that the input tax credit equals the GST payable on the supply by the State entity: s 11-25 of the GST Act. 

This gap is filled by s 177-3 of the GST Act, by ensuring that the amount of input tax credit to which the purchasing entity is entitled equals the amount of GST for which a State entity is notionally liable on the supply. The section provides as follows:[16]

If:

(a)   an *Australian government agency, other than the Commonwealth or an *untaxable Commonwealth entity, makes a supply to another entity; and

(b)   the agency is not liable for GST on the supply, but an amount relating to the agency’s notional liability for GST on the supply is included in the *consideration for the supply;

the *GST law applies in relation to the other entity as if: 

(c)   the supply were a *taxable supply to that entity; and

(d)   the amount of GST for which the agency is notionally liable on the supply is the amount of GST payable on the supply.

An “*Australian government agency”, referred to in s 177-3(a), includes a State and an authority of a State.[17]

In Landcom, the Court (at [51]) observed that so far as concerns acquirers of property from a State, the difficulty posed by s 114 of the Constitution to the intended operation of the GST system has been avoided by:

  • ensuring that, if a supply were not otherwise a “taxable supply” within the meaning of the definition in s 9-5 of the GST Act, the relevant supply would be treated as if it were a “taxable supply”: s 177-1(3)(c); s 177-1(4)(a); and
  • treating the “notional GST” included in the consideration for the supply as if it were the GST payable on the supply: s 177-1(3)(d); s 1771(4)(b).

The Court also made the following observations on the “real” impact of notional GST on acquirers – noting that the consequences for the acquirer are not in any way notional:

  • It is not possible to determine the correct operation of the GST Act to the acquirer of property from a State without determining the correct operation of the GST Act with respect to the State’s notional GST liability. It is necessary to determine “the amount of GST for which the [State] agency is notionally liable” in order to identify the “the amount of GST payable on the supply” for the purposes of ascertaining the legal consequences to the acquirer: s 177-3(d) of the GST Act.
  • Assuming the acquirer of a supply from the State or Commonwealth is otherwise entitled to input tax credits, the acquirer would lawfully claim input tax credits because the supply either is a “taxable supply” or is deemed to be a “taxable supply” and the notional GST is treated as GST on the supply. To the extent the acquirer’s dealings give rise to a GST liability any such liability is a “tax-related liability” enforceable as a debt due to the Commonwealth, payable to the Commissioner: ss 250-10(2) (Item 5) and 255-5 of Sch 1 to the TAA.

2.4    Penalties and interest

The Commissioner’s position on the application of penalties and interest to State entities with respect to notional GST is set out in MT 2011/1 ‘Miscellaneous taxes: application of penalties and interest charges to the Commonwealth, States, Northern Territory and Australian Capital Territory’. The position of the Commissioner can be summarised as follows:

  • The uniform penalty regime applies in relation to the legal taxation liabilities of a State body. It does not apply in relation to a State’s notional taxation liabilities. This is because a notional liability does not form part of a tax-related liability or amount of tax imposed under a taxation law.
  • The GIC and SIC apply to a State body in relation to its legal liabilities. They do not apply in relation to its notional liabilities.

3.      Provisions of the GST Act relating to State entities

The disputes between State entities and the Commissioner largely appear to stem from the fact that the GST Act includes a set of provisions that apply specifically to State entities and give State entities a concessional GST treatment for certain supplies of real property, either by making those supplies GST-free under Division 38 (thereby removing the notional GST liability entirely) or significantly reducing the notional GST liability on those supplies through the operation of the margin scheme in Division 75. 

Unsurprisingly, this has provided an incentive for entities to establish firstly, that the entity is “the State”, and secondly, that the provisions apply. Before discussing those issues, the various provisions are set out below.

3.1    Subdivision 38-N – Grants of land by governments

Sections 38-445 and 38-450 of the GST Act make certain supplies of land by the Commonwealth, a State or a Territory GST-free. In this paper, it is sufficient to refer only to s 38-445 which provides as follows:

38-445 Grants of freehold and similar interests by governments

(1)   A supply by the Commonwealth, a State or a Territory of land on which there are no improvements is GST-free if:

(a) the supply is of a freehold interest in land; or

(b) the supply is by way of a *long-term lease.

(1A) A supply by the Commonwealth, a State or a Territory of land is GST-free if:

(a) the supply is of a freehold interest in land, or is by way of a *long-term lease; and

(b) the Commonwealth, State or Territory had previously supplied the land, by way of a lease, to the *recipient of the supply; and

(c) at the time of that previous supply, there were no improvements on the land; and

(d) because conditions to which that lease was subject had been satisfied, the recipient was entitled to the supply of the freehold interest or the supply by way of long-term lease.

(2)   However, the supply is not GST-free if, since 1 July 2000, the land has already been the subject of a supply that is GST-free under this section.

3.2    Division 75 – the margin scheme

The margin scheme is available for specific types of supplies of “real property”, including the sale of a freehold interest in land: s 75-5(1)(a). A “freehold interest in land” is not defined. In Landcom it was common ground that each Certificate of Title gives rise to a separate freehold interest land (at [73]).

The margin scheme is a special rule that overrides the operation of Division 9 in determining the GST payable. Rather than GST being payable on 1/11th of the price, GST is payable on 1/11th of the “margin”. Generally, the margin is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the freehold interest in land: s 75-10(2). However, where the supplier held the land prior to 1 July 2000, special rules in s 75-10(3) allow for the margin to be calculated by reference to the value of that land at a particular time. The table is relevantly reproduced below:

Use of valuations to work out margins 
ItemWhen valuations may be usedDays when valuations are to be made
1The supplier acquired the interest, unit or lease before 1 July 2000, and items 2, 3 and 4 do not apply.1 July 2000
2… 
2A  
3  
4The supplier is the Commonwealth, a State or a Territory and has held the interest, unit or lease since before 1 July 2000, and there were no improvements on the land or premises in question as at 1 July 2000.The day on which the *taxable supply takes place

As illustrated by item 1, the general position is that the margin will be calculated by reference to the value of the land on 1 July 2000, the date of the commencement of the GST Act. The policy underpinning this concession was identified by the Full Federal Court in Brady King Pty Ltd v Federal Commissioner of Taxation (2008) 168 FCR 558 at [9], being to address the potential unfairness would arise if the property the subject of supply was acquired by the taxpayer before 1 July 2000, it being a fundamental feature of the GST regime that it only taxes value added after 30 June 2000.[18]

Item 4 of the table (Item 4) provides a significantly greater concession to State entities where there were no improvements on the land at 1 July 2000, with the margin to be calculated on the day on which the taxable supply takes place. This will generally the date of settlement or completion. In applying Item 4, it is also necessary to take account of s 75-10(3A), which provides as follows:

(3A)      If:

  • the circumstances specified in item 4 in the second column of the table in subsection (3) apply to the supply; and
  • there are improvements on the land or premises in question on the day on which the *taxable supply takes place;

the valuation is to be made as if there are no improvements on the land or premises on that day.

The land is therefore to be valued as if there are no improvements on the land. The policy intent of this section, as identified by the Court in Landcom (at [79]), is that GST will only be imposed on the value of any improvements made to the land after 1 July 2000 and not on the value of the land as at 1 July 2000 or any increase in value in that land not attributable to improvements. If there were no improvements on the land at the time of the supply, the land would be GST-free under s 38-445.

This policy intent is reflected in the GST Explanatory Memorandum, which states as follows:

6.108 Where the Commonwealth, a State or a Territory holds unimproved land at 1 July 2000 that is subsequently improved, it is able to be sold under the margin scheme. In this case, GST will be charged on the difference between the sale price and the value of the unimproved land at the date of sale: Item 4 of subsection 75-10(3). The effect is that the value of the land is not subject to GST (that is, it is consistent with subdivision 38-L which provides that the sale of unimproved land held by an Australian government agency will be GST-free).

3.3    Common elements to the operation of s 38-445 and Item 4

The common elements to the operation of s 38-445 and Item 4 are as follows:

  • The supplying entity is “a State”; and
  • The supply is of a freehold interest in land on which there are no improvements (at the time of supply for s 38-445 and at 1 July 2000 for Item 4).

These two elements are discussed below.

4.      What is “the State”?

In Landcom, it was common ground that Landcom was “a State” for the purposes of s 114 of the Constitution and the GST Act. Landcom is a State owned corporation pursuant to s 20A of and Schedule 5 to the State Owned Corporations Act 1989 (NSW). It was established by s 5(1) of the Landcom Corporation Act 2001 (NSW). This approach reflects what I believe to be the generally accepted position, that the question whether an entity is “a State” for the purposes of the GST Act should be determined in the same way as the question posed by s 114 of the Constitution. This is the view of the Commissioner in GSTR 2006/5 ‘Goods and services tax: meaning of ‘Commonwealth, a State or a Territory’ (GSTR 2006/5) (at paragraph 9).

4.1    Section 114 of the Constitution – the general principles

The general principles derived from judicial commentary on s 114 of the Constitution can be summarised as follows:

  • The term “a State” in s 114 is not to be understood narrowly:  SGH Ltd v Federal Commissioner of Taxation (2002) 210 CLR 51 (SGH) at [13].
  • The term “a State” in s 114 is “wide enough to denote a corporation which is an agency or instrumentality of … a State”: Deputy Federal Commissioner of Taxation v State Bank (NSW) (1992) 174 CLR 219 (State Bank NSW) at 230.
  • A corporation that exercises governmental functions can be “a State” for the purposes of s 114:  State Bank NSW at 233.
  • A requirement in legislation that a corporation must pursue the interests of the State or of the public, or a legislative provision that its policies can be determined by the Executive Government of the State, will indicate that the corporation is “a State” within s 114:  SGH at [31].
  • The fact that a corporation is given functions that are traditionally governmental in character may help in determining that the corporation is “a State” for the purposes of s 114:  Inglis v Commonwealth Trading Bank of Australia (1969) 119 CLR 334 at 337-338.
  • In considering whether an entity falls within the description “the State” in s 114, it is relevant to consider the activities undertaken by the entity.  It is also relevant, and usually very important, to identify the legal relationship between the entity and the executive government of the State and to identify what rights and powers the executive government of the State has over the use and disposal of the property in question: SGH at [16]
  • An entity that is wholly owned and controlled by the State concerned and which must act solely in the interests of the State will likely be treated as “a State” for the purposes of s 114:  SGH at [22].

4.2    Local Councils

Determining whether an entity is “a State” can be a difficult task. But the description is not to be construed narrowly, and it is apt to catch many entities that carry out governmental functions. Including entities that may appear, at least on their face, to operate autonomously. 

An illustration of this type of entity is local government. In the context of the GST Act, and s 38-445 and Item 4, the question whether local councils are “a State” is an important one, given that local councils hold and regularly dispose of land – including land that may be regarded as unimproved and potentially fall within s 38-445 or Item 4. 

The Commissioner’s initial position in GSTR 2006/5 was that local councils were not “a State”, as reflected in the following paragraph:

13. Local governments are not a State or a Territory. A local government performs its functions independently of, and not as an instrument of, the State. It neither operates solely in the interests of the State, nor is controlled by the State, but is an autonomous body, separate from the State.

I recall that this was a somewhat controversial view at the time, given that there was a consistent line of authority in support of the view that local councils were “a State” for the purposes of s 114 of the Constitution, beginning in 1904:

  • In Municipal Council of Sydney v The Commonwealth (1904) 1 CLR 208 the High Court found that the Council could not recover from the Commonwealth municipal rates in respect of land occupied by the Commonwealth because of s 114 of the Constitution. As observed by O’Connor J (at 240):

The State, being the repository of the whole executive and legislative powers of the community, may create subordinate bodies, such as municipalities, hand over to them the care of local interest, and given them such power of raising money by rates or taxes as may be necessary for the proper care of these interests.  But in all such cases these powers are exercised by the subordinate body as agent of the power that created it.

  • In State Bank NSW, the Court referred to Municipal Council of Sydney v The Commonwealth with approval, at [25]:[19]

Indeed, the decision in The Municipal Council of Sydney v The Commonwealth is direct authority for the proposition that a corporation exercising governmental functions is “a State” for the purposes of s 114.  In that case the municipal council, a body corporate, which levied local government rates on property, was held to be the State and its rates were held to be a tax on property for the purposes of that section.

I understand that litigation was issued in the Federal Court by a local council in Victoria, where one of the issues was whether the council was “the State” for the purposes of the GST Act. Ultimately, the Commissioner amended the ruling to recognise that local councils “may” be the State for the purposes of s 144 of the Constitution and the GST Act.[20] But the Commissioner does not accept that, as a general proposition, local governments are “a State” for the purposes of s 114. 

The Commissioner’s view is that the decisions in which the Courts found that local governments were “a State” turned upon specific features of the particular councils involved, those specific features being bestowed on them by State legislation. This may be correct, but it does appear difficult to envisage a situation where a local council is not “a State”, given that local councils appear to be invariably: established by State law; carrying out functions that are traditionally governmental in character; and ultimately controlled by the State. In these circumstances, it would appear likely that local councils will invariably be characterised as “mere instrumentalities of the State”. 

5.      “Land on which there are no improvements”

As outlined above, a State entity will make a GST-free supply under s 38-445 of the GST Act where it supplies “a freehold interest in land on which there are no improvements”. This means the State entity will have no notional GST liability. If there are improvements on the land at the time of supply, but there were no improvements at 1 July 2000, the State entity may utilise Item 4 of the margin scheme to determine its notional GST liability.

Two questions arise in establishing the operation of s 38-445 and Item 4:

  • First, the identification of the land to which the sections are to be applied.
  • Second, determining whether there were improvements on that land at the relevant date.

The first question was at the heart of the decision in Landcom, which involved a private ruling sought by Landcom on the operation of Item 4. The question whether there were improvements on the land 1 July 2000 was left to another day.

5.1    The Landcom proceeding – identification of the land

5.1.1     The facts

Landcom was the registered proprietor of a number of lots of land which it intended to sell. Each lot was described in a separate Certificate of Title. The various lots were grouped together for the purposes of preparing the contract of sale.

Four lots (Lots L, M, N and P) were grouped into “Property B2” and were the subject of Contract B2. Lot P was separated from Lots L, M and N by a train line. Lot P was connected to Lot N by a private access road that was part of Lot P and which lead through a tunnel under the rail line.

The lots had been held by the State of New South Wales since before 1 July 2000, when the GST was introduced. The lots were previously owned by the New South Wales Land and Housing Corporation (LAHC). On 1 January 2002, the lots were transferred from LAHC to Landcom pursuant to an order of the Minister made under s 17 of the Landcom Act.

A number of the lots had been used for the purpose of farming activities, although these activities had ceased a number of decades before Landcom became the owner of the lots. The lots had also been subject to other human interventions. Lot M, for example, had an aero club for remote control plane enthusiasts, including a runway and a clubhouse.

The lots were to be sold to enable a developer to build residential premises, effectively creating a new suburb. The lots were marketed for sale by expression of interest or competitive tender process. The lots were promoted as a single piece of land as part of the same transaction, on the basis that a single buyer would purchase all of the lots. By a put and call option agreement dated 5 November 2015 (as amended), Landcom granted an option to the purchaser, and the purchaser granted Landcom an option to require the purchaser, to purchase the lots comprising Property B2 on the terms of Contract B2. Clause 36.3 of the contract of sale provided that the parties agreed that the “margin scheme” would be applied to work out the GST payable on any taxable supply of property under the contract.

5.1.2     The private ruling application

The private ruling asked the following questions relevant to the Lots:

Question 3 

For the purposes of working out whether the circumstances specified in the second column of item 4 of the table in subsection 75-10(3) of the GST Act apply, will the sale of the freehold interests in the Lots comprising Property B2 pursuant to Contract B2 be a single supply?

Question 4 

For the purposes of working out whether the circumstances specified in the second column of item 4 of the table in subsection 75-10(3) of the GST Act apply, will the sale of the freehold interest in each Lot comprising Property B2 pursuant to Contract B2 be a single supply?

As observed by the Court (at [15]), the question of significance for Landcom was the operation of Division 75 in circumstances where four freehold interests in land were sold in one contract. For the purposes of the application of Division 75, was there one supply of all of the lots the subject of Contract B2 or single supplies of each of Lots L, M, N and P? If the sale of Property B2 was a single supply for Division 75 purposes, then any improvement on any one of the lots would be sufficient to take the supply of all of the land outside of the exception provided by Item 4; any improvement on one lot would ‘taint’ all of the lots – in this context, one of the lots contained a runway. If the transaction involved separate supplies of individual freehold interests in land, then some of the lots might fall within Item 4 and some might not.

The private ruling requested the Commissioner to not consider whether there were improvements on the land and that matter was not ruled upon. It would be necessary to determine that matter once the questions were addressed.

The Commissioner issued the private ruling, answering “Yes” and “No” respectively. The reasons for each answer were the same, being:

Item 4 of the table in subsection 75-10(3) of the GST Act requires identification of the land that is the subject matter of the supply. For item 4 purposes, the supplies of the freehold interests in the Lots comprising Property B2 pursuant to Contract B2 is a single supply of land as the subject matter of the supply is the totality of Property B2. 

The genesis for the Commissioner’s response is found in GSTR 2006/6 ‘Goods and services tax: improvements on the land for the purposes of Subdivision 38-N and Division 75’, and what is described as the “single supply rule” at paragraphs 47A-51E of the ruling. Paragraphs 47B and 47D state as follows:

47B. The subject matter of the supply is identified as a matter of substance not form. It is not determined simply on titles to the land. That is, separately titled lots are not necessarily separate supplies of land for the purposes of sections 38-445, 38-450 or subsection 75-10(3). Nor is the subject matter of the supply determined simply on whether there is a single contract or multiple contracts.

47D. If land that is the subject matter of a supply is a single piece of land comprising separately titled lots, then it is necessary to consider whether there are improvements on that single piece of land as a whole. The separately titled lots are not considered separately. If any part of that single piece of land has improvements, the entire land that is the subject of the supply is land on which there are improvements.

Applying its analysis in the Ruling, the Commissioner approached the private ruling on the basis that the sale of the land in the four certificates of title under Contract B2 was a single supply of land and therefore Item 4 was to be applied to the land as a whole.

Landcom objected to the private ruling. By an objection decision, the Commissioner disallowed Landcom’s objection. 

Landcom lodged an appeal to the Federal Court pursuant to s 14ZZ of the TAA, seeking to invoke the Court’s original jurisdiction to hear and determine an appeal against an objection decision. The relief sought was that the objection decision be set aside and the Commissioner rule on questions 3 and 4 by answering “No” and “Yes”, respectively.

5.1.3     The appeal – the jurisdiction issue

The Court made the following observations on the question of jurisdiction raised by the Commissioner:

3 Despite the Commissioner having apparently issued a private ruling and having apparently made an objection decision, the Commissioner contended that he was not authorised to do either of those things. It was submitted that these things had been done as a matter of mere “courtesy” to provide guidance to Landcom. The Commissioner did not adduce evidence in support of these contentions. Nothing that occurred at the time suggests that the Commissioner considered he was not authorised to make the private ruling or make the objection decision.

4 The Commissioner contended that this Court had no jurisdiction to entertain the appeal, there being no “matter” which could be the subject of the Court’s jurisdiction, because the dispute between Landcom and the Commissioner as to the correct operation of the GST Act could not give rise to the determination of any immediate right or liability and was merely hypothetical. At the heart of this contention is the fact that s 114 of the Constitution prohibits the Commonwealth imposing “any tax on property of any kind belonging to a State”.

The Court rejected the Commissioner’s submission that it did not have jurisdiction to hear the appeal brought under Part IVC of the TAA. The reasons fall under two heads reflecting the submissions put by Landcom, and can be summarised as follows.

The first head of reasons (at [123]-[142]) was that the voluntary inclusion by Landcom of notional GST in a GST return results in an assessment of a net amount which gives rise to a debt to the Commonwealth and which is enforceable by the Commissioner unless a finding of invalidity is made by a Court of competent jurisdiction. And Landcom could object to such an assessment. In this context:

  • Landcom has a real interest in knowing how much notional GST to include, voluntarily, in its GST return. It is common practice to obtain the Commissioner’s views via a private ruling before engaging in a proposed course of action (“scheme”). That is one of the purposes of the private ruling system: at [139].
  • The statutory scheme, being one which enables a taxpayer to obtain an advisory opinion in advance of taking a step or entering into a scheme, is underscored by s 14ZVA of the TAA 1953 which operates to limit Landcom’s right of objection against a future assessment to a right to object on grounds that neither were, nor could have been, grounds for the objection against the ruling: at [140].
  • The Commissioner’s private ruling and objection decision were not “purported” or undertaken as a matter of mere courtesy. They were each authorised by, and made in accordance with, the statutory scheme. Landcom has exercised its right to appeal to this Court under Part IVC of the TAA 1953: at [141].

The second head of reasons (at [143]-[184]) applied even if a self-assessment which included notional GST did not give rise to a legally enforceable debt, as there was a “matter” before the Court. As observed by the Court (at [146]), a matter must involve a real justiciable controversy, between interested parties, capable of being resolved by an exercise of Commonwealth judicial power. If the issue is purely abstract or hypothetical it will not give rise to a “matter”. There must be “some immediate right, duty or liability to be established by the determination of the Court”.[21] The Court found there were three circumstances in particular which establish the existence of a “matter” in the proceedings before it:

  • Item 4 in the table to s 75-10(3) of the GST Act expressly applies to Landcom. The GST Act does not “notionally apply” to Landcom. It expressly applies to Landcom.
  • The TAA 1953 gives Landcom a right to seek a ruling about how a provision of the GST Act applies to Landcom or would apply to Landcom if it were to take identified steps. Landcom was registered for GST, its activities and the scheme in respect of which it sought a ruling fell within the operation of the GST Act, and the private ruling regime contains a statutory mechanism for Landcom to obtain an advisory opinion from the Commissioner “about” how Item 4 of the table to s 75-10(3) “applies”.
  • Landcom was “dissatisfied” with the ruling which it was given. Landcom’s “dissatisfaction” establishes its “standing” as an entity affected by the decision. The consequences to Landcom were not relevantly hypothetical. Landcom is relevantly affected by the objection decision in the context of tax laws administered by the Commissioner.

The Court also considered the following matters to be relevant:

  • The GST Act contemplates Landcom’s participation in the GST system. 
  • The Commissioner has a duty to administer the GST Act, the terms of which expressly address notional GST. The Commissioner’s duties include duties of collection of GST, including notional GST.
  • Economically, the statutory scheme contemplates Landcom participating in the collection of GST, being one of the Commissioner’s central duties, even if Landcom’s participation in this way cannot be legally enforced.
  • The Commissioner has published public rulings dealing with the operation of the GST Act with respect to the supply of real property by “a State”, including public rulings expressly dealing with aspects of the operation of Item 4 in the table to s 75-10(3) of the GST Act. The rulings underscore both that the GST Act contemplates the participation of the States by inclusion of notional GST in the consideration they charge for a supply and that the expression of the Commissioner’s opinions about the operation of those laws, through rulings, are part of his administration of the indirect tax laws generally and the GST Act in particular.
  • The Commissioner has also issued legislative instruments which prescribe the valuation methods that must be used where the supplier is a State and the elements of Item 4 in the table to s 75-10(3) are engaged.[22] Again, this emphasises the Commissioner’s administration of notional GST.
  • The Commissioner has power to give a ruling about how the GST Act “applies” to Landcom, it being a taxpayer which the GST Act contemplates might include notional GST in the consideration it charges for a supply.

5.1.4     The appeal – the substantive issue[23]

Landcom’s principal submission was that s 75-5(1)(a) of the GST Act provides separate treatment for any taxable supply of real property made by selling a freehold interest in land. Even if it was possible for a supply of multiple freehold interests to be a single supply under the basic rules, s 75-5(1)(a) (contained in the special rules) focusses upon and treats separately each supply made by selling “a freehold interest in land”. 

The Commissioner submitted that the logical and necessary starting point is identification of “the supply”. The nature of “the supply” will affect whether and how the items in the table in s 75-10(3) apply because s 75-10(3) only applies if “the circumstances specified in an item in the second column of the table in this subsection apply to the supply”: s 75-10(3)(a). Item 4 of the table in s 75-10(3) raises the question whether there were improvements on the “land or premises in question” as at 1 July 2000. Given that the circumstances in Item 4 have to apply to “the supply”, the term “land or premises in question” refers to whatever has been supplied. This is to be understood as a reference to the “tangible land that has been supplied”.

The Court agreed with Landcom’s approach and concluded (at [193]) that the logical starting point for the application of Div 75 of the GST Act is s 75-5(1). Relevantly for present purposes, the question was whether there has been a “taxable supply” made “by selling a freehold interest in land”. Contrary to the Commissioner’s submission, s 75-10(3)(a) does not indicate that the identification of “the supply” under s 9-5 is the necessary starting point for the purpose of determining the application of Div 75.

The Court considered that the better construction of s 75-5(1)(a) was that it contains a special rule applicable where there has been a supply by selling a particular freehold interest in land and the supplier and recipient have agreed that the margin scheme is to apply. Where that has occurred, the margin is calculated by reference to the particular freehold interest which was sold. It applies whether or not that particular supply, made by selling a freehold interest in land, is part of a larger supply. This construction better accords with the ordinary meaning of the language employed in s 75-5(1) and Division 75 as a whole. 

The Court concluded (at [196]) that for Item 4, the reference to “the interest” is a reference to the particular freehold interest referred to in s 75-5(1)(a). Contrary to the Commissioner’s submission, the reference to “the land … in question” is a reference to the land to which the particular freehold interest relates, not to the “tangible land that has been supplied”.

5.2    Improvements on theland

The expression “land on which there are no improvements” in Item 4 or s 38-445 is not defined. Unsurprisingly, the expression has not been considered by a Court or the Tribunal given the prevailing view that the issue was not able to be ventilated in that manner. Given the outcome in Landcom, that position is expected to change in the future.

5.2.1     GSTR 2006/6

The Commissioner’s view on the meaning of “improvements on the land” is set out in GSTR 2006/6. The ruling has changed over time.

Under the ruling as initially drafted, the Commissioner considered that “unimproved land” was taken to be land in its natural state (paragraph 20). Thus, to establish whether there are improvements on the land for the purposes of the provisions, the land is compared with land in its natural state.

The Commissioner considered for there to be improvements on the land (paragraph 22):

  • There must have been some human intervention;
  • The human intervention must have been physically located on the land; and
  • That human intervention must enhance the value of the land at the relevant date for ascertaining whether there are improvements on land. 

The ruling considered that this was an objective test, meaning that whether a human intervention enhances the value should not be determined by reference to use or intended use by either the supplier or the recipient.

5.2.2     Disputes and ADR

I understand there were a number of disputes between State entities and the Commissioner about whether land was unimproved, either at 1 July 2000, or at the time of supply. There was reportedly an increase in private rulings, refunds and refund notifications in relation to certain supplies of unimproved land by government entities, with the ATO taking the view that some positions being adopted by government entities were not consistent with the Commissioner’s view in GSTR 2006/6.[24]

Given the view that the issue could not be ventilated in the Courts, a managed ADR process was established with some lead cases to be progressed. Two of those decisions are identified in the ATO Dispute Protocols, being the Finkelstein Evaluation and the Crennan Evaluation. Summaries of the principles said to be established by those opinions is attached at the end of the protocols.

After these evaluations were made, apparently there was some type of agreement entered into between the Commissioner and the States. The ATO Dispute Protocols (at page 3) refer to a December 2015 GSTAS[25] agreement that the principles from the Finkelstein Evaluation were to be applied by all government entities and were to be applied by external reviewers in any future cases. In light of the decision in Landcom, there would now appear to be an opportunity for the issue to be ventilated in the Courts and it may be questioned whether it continues to be appropriate for all parties to be bound by a single opinion. This issue is discussed later in the paper.

5.2.3     Addendum to GSTR 2006/6

In August 2019, an Addendum to GSTR 2006/6 was published. The Addendum appeared to expand the concept of an improvement to mean a human intervention that enhances the value of the land or enhances the usefulness of the land. In this context, the Addendum stated that a human intervention on the land that enhances the usefulness of the land does not necessarily have to also result in an increase in the value of the land to constitute an improvement – it is sufficient that what was done has made the land more useful to an occupier.

The expansion of the concept of what is an improvement appears to be based on the Finkelstein Evaluation, which concluded that to be characterised as an improvement “it will be sufficient if the activity improves the usefulness of the land for the occupant”.[26]

6.      State entity review rights post Landcom

6.1    Are State entities no different to other taxpayers?

In the context of a State entity’s rights to seek private rulings and to engage the review procedures in Part IVC of the TAA with respect to objections, the answer is arguably yes.

While the question in Landcom was whether the Court had jurisdiction to hear an appeal with respect to an objection to a private ruling, the analysis of the Court identified no relevant distinction between Landcom’s rights to appeal against an objection to a private ruling and an objection to an assessment of net amount. Indeed, the reasoning of the Court expressly supports the view that a State entity has objection rights against both, and can engage Part IVC of the TAA with respect to both, including appealing to the Federal Court or the Administrative Appeals Tribunal.

The Court observed (at [129]) that two matters were ultimately not contentious:

  • As an entity registered for GST, Landcom is required to lodge a GST return whether or not it was “liable for the GST on any taxable supplies that are attributable to the tax period”: s 31-5(2)(b) of the GST Act.
  • If Landcom includes an amount of notional GST in a GST return:
    • the Commissioner is treated as having made an assessment under section 155‑5 of the * assessable amount (being the net amount), which includes the notional GST which Landcom reported: s 155-15(1) of Schedule 1 to the TAA.
    • the validity of the assessment is not affected by any non-compliance with a taxation law: s 155-85 of Schedule 1 to the TAA.
    • Landcom could object against the assessment if dissatisfied with it: s 155-90 of Schedule 1 to the TAA.

In Landcom, the evidence was that Landcom provided GST returns that did not distinguish between GST which it was required by the relevant taxation laws to pay and notional GST which it paid voluntarily. The Court observed (at [58]) that there was no suggestion in the evidence that the Commissioner has, in the performance of his duties of administration, raised any difficulty with this approach. My understanding is that this reflects how State entities remit notional GST, by including those amounts in its GST returns. 

The Court was of the view (at [132]) that a State which had included an amount of notional GST in a return would be able to object to the assessment which the Commissioner would be taken to have made. The State could then seek review in the Tribunal or appeal to this Court in accordance with Part IVC of the TAA. If the State brought a Part IVC review in the Tribunal, the Tribunal would presumably find the assessment excessive because of s 114 of the Constitution assuming the entity discharged its onus of establishing that it was a “State” and that the GST in the assessment was a “tax on property” within the meaning of s 114 of the Constitution.

The Court observed (at [139]) that Landcom had a real interest in knowing how much notional GST to include, voluntarily, in its GST return. It was common practice to obtain the Commissioner’s views via a private ruling before engaging in a proposed course of action (“scheme”). That is one of the purposes of the private ruling system.

6.2    The ATO Dispute Protocols

As outlined in the introduction to this paper, given the decision in Landcom, the ATO Dispute Protocols appear to be based on a false premise – that the legal objection and review rights under Part IVC of the TAA are not available to State entities in a dispute relating to notional GST. Further, now that State entities appear to be on a similar playing field to other taxpayers, one may question the need for a specific set of dispute resolution protocols for a particular category of taxpayers, where the long-established review procedures under Part IVC of the TAA appear to be available.

A similar point can be made with respect to the “December 2015 GSTAS agreement” referred to in the ATO Dispute Protocols, which I understand is to the effect that the principles from the Finkelstein evaluation 1 are to be applied by all government entities and are to be applied by external reviewers in any future cases. That agreement was made at a time when the view was held that the issues were not able to be ventilated in the Courts. Also, any such “agreement” would not appear to be binding on State entities. Rather, it would operate as a political compact, similar to the Intergovernmental Agreement.

I also note some of the concerns made by other writers about future disputes being resolved based the Finkelstein evaluation, including:[27]

  • Is it appropriate for government entities to be bound by the single opinion of the evaluator in the first ADR matter?
  • How can government entities apply the principles in the evaluation? The ATO has made limited public disclosure of the facts in the evaluation.
  • What about other issues not covered in the first ADR? The facts of the dispute in the evaluation were narrow and not representative of the broader disputes arising in the area.

One can argue that leaving the issue to be developed through the Courts, with matters tested by reference to evidence and legal precedent, is a preferable approach. Such an approach will give rise to decisions that are legally binding on all parties, give both parties rights of appeal, and are published to the winder community in the ordinary manner. In my view, this will ultimately give more certainty to this difficult area.

7.      Refunds and time limits

My understanding is that State entities prepare their GST returns in the same way as other taxpayers, save that they include any “notional” GST with real GST. Accordingly, for each tax period the State entity will have a “net amount” and a deemed assessment of that net amount. Where that net amount is positive, the State entity will pay that amount to the Commissioner. Where the net amount is negative, the Commissioner will pay a refund to the State entity. 

The question is how, if at all, the various time limits and refund restrictions in the GST Act and the TAA apply to State entities in these circumstances. For some aspects, the answer is far from clear.  

7.1    Input tax credits – s 29-10 and s 93-5 of the GST Act

With respect to input tax credits, State entities are in the same position as other taxpayers. The entitlement of a State entity to an input tax credit is a “real” entitlement and is not impacted by s 114 of the Constitution. Accordingly, the attribution rules in s 29-10 operate in the usual manner and, pursuant to s 93-5 of the GST Act, State entities effectively have four years to claim input tax credits. 

7.2    Refunds under s 35-5 of the GST Act

Where a State entity lodges a GST return reporting a negative net amount, that entity is in the same position as other taxpayers. Pursuant to s 35-5 of the GST Act, the Commissioner is required to pay a refund of that amount to the entity. That the GST return may include amounts of “notional GST” does not impact this outcome. The net amount reported in the GST return is the entity’s assessed net amount. 

Where a State entity is entitled to a refund, and the entity is in dispute with the Commissioner as to the payment of an amount of notional GST, an issue that often arises is whether the Commissioner can offset the refund entitlement of the entity against that notional GST liability said to be payable by the Commissioner. For example, where the Commissioner has issued a “notional” assessment for GST. In my view, the answer is no. Such action would be contrary to s 114 of the Constitution and s 5 of the GST Imposition Act. The payment of notional GST is a voluntary act of the State entity. The payment cannot be recovered by way of unilateral action taken by the Commissioner through an offset of that amount against a refund legally payable to the State entity. 

7.3    Division 142 of the GST Act

Division 142 of the GST Act restricts the ability of entities to recover overpaid GST. Relevantly, the provisions are as follows:

142.5 When this Subdivision applies

(1)   This Subdivision applies if, after disregarding any amounts covered by (2), your *assessed net amount for a tax period takes into account an amount of GST exceeding that which is payable.

Note: This Subdivision applies whether or not you have paid, or been refunded, the assessed net amount.

Example: Sunny Co mistakenly reports a negative net amount of $4,000 made up of GST of $10,000 less input tax credits of $14,000. In fact, Sunny Co’s GST should have been $8,000 making its negative net amount $6,000. Sunny Co has excess GST of $2,000.

…

142.10 Refunding the excess GST

For the purposes of each *taxation law, so much of the excess from subsection 142-5(1) (the excess GST) as you have *passed on to another entity is taken to have always been:

(a)        payable; and

(b)        on a *taxable supply;

until you reimburse the other entity for the passed-on GST.

7.3.1     Overpayment of GST

Where a State entity overpays “real” GST, the entity is in the same position as other taxpayers. Division 142 of the GST Act will operate to deem the overpaid GST to be GST on a taxable supply, unless the State entity did not “pass on” that overpaid GST to the recipient, or the State entity has reimbursed the recipient for the overpaid GST: s 142-10 of the GST Act.

7.3.2     Overpayment of “notional’ GST

Where a State entity overpays “notional” GST, the position is less clear. It is difficult to see how the deeming effect of s 142-10 could be effective, where the underlying payment itself could not be GST because of s 114 of the Constitution and was a “notional” or voluntary payment. If the underlying payment was prohibited under s 114 of the Constitution and s 5 of the GST Imposition Act, that payment could not be deemed to be GST under a provision of the GST Act. 

If s 142-10 cannot be engaged, the position remains that the State entity has overpaid an amount of “notional’ GST that was voluntarily paid to the Commissioner. There are no provisions in the Intergovernmental Agreement dealing with refunds of overpaid notional GST. Presumably, the expectation is that the State entity and the Commissioner will operate as though Division 142 did apply, and a refund would be forthcoming where it could be shown that the State entity did not “pass on” the overpaid notional GST to the recipient, or that the State entity had reimbursed the recipient for the overpaid notional GST. 

7.4    Refunds of “notional” GST

In the introduction to this paper I noted that I had identified a proceeding recently issued in the High Court where a local council in New South Wales is seeking refunds of “notional’ GST paid to the Commissioner. I have no direct knowledge of the matter, and what little information I have gathered is sourced from the transcripts of two directions hearing heard before Gageler J in June 2022 that have been published in the ordinary course. [28]

I am not aware whether this action is brought by a single council, or on behalf of a number of councils. However, I note that in around 2015 there were discussions surrounding a class-action law suit from a number of local councils across Australia seeking to recover all GST paid on council property.[29]  

From the published transcripts of the directions hearing, the details of the claim appear to include the following:

  • Every payment of notional GST by the Council since 1 July 2000 has in truth been an involuntary payment made under compulsion of Commonwealth law. That is said to be contrary to section 114 and certain provisions of the Commonwealth law are also said to fall foul of section 55 of the Constitution.
  • What the plaintiff wants is a declaration of invalidity, and it also wants some form of order for restitution, presumably of all of the payments ever made.
  • The essence of the Commonwealth’s response, is that the payments are and always have been voluntary and there are defences to a claim for restitution.

With respect to the question of voluntariness, Gageler J referred the parties to the discussion of the High Court in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, at 372 to 374. That discussion referred to a number of cases where recovery of monies was denied because the payments were made voluntarily. As observed by the Court at 373-4:

An important feature of the relevant judgments in these three cases is the emphasis placed on voluntariness or election by the plaintiff. The payment is voluntary or there is an election if the plaintiff chooses to make the payment even though he or she believes a particular law or contractual provision requiring the payment is, or may be, invalid, or is prepared to make the payment irrespective of the validity or invalidity of the obligation, rather than contest the claim for payment. We use the term “voluntary” therefore to refer to a payment made in satisfaction of an honest claim, rather than a payment not made under any form of compulsion or undue influence.

With respect to the plaintiff’s claims in restitution, the Solicitor General for the Commonwealth informed the Court that he understood the case to be advanced on three separate bases:

  • By analogy with some Canadian case law to say that there is a constitutional right to restitution of an invalidly-paid tax. This may be a reference to the decision of the Supreme Court in Kingstreet Investments Ltd v New Brunswick (Finance) [2007] SCC 1. In a subsequent decision, Merchant Group v Canada Revenue Agency 2010 FCA 184 the taxpayer unsuccessfully contended that the decision in Kingstreet created an independent cause of action in restitution that if founded on a constitutional principle that government is obligated to return taxes wrongly paid.
  • On the basis of Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70. In this respect, I note the following statement of Lord Goff at 172:

[T]he retention by the state of taxes unlawfully exacted is particularly obnoxious, because it is one of the most fundamental principles of our law – enshrined in a favour constitutional document, the Bill of Rights 1968 – that taxes should not be levied without the authority of Parliament; and full effect can only be given to that principles if the return of taxes exacted under an unlawful demand can be enforced as a matter of right.

  • On the basis of the more traditional David Securities-type restitution principles that might involve a mistake.

This case would appear to have the potential to undermine the spirit and intention of the Intergovernmental Agreement. In addition to exposing the Commonwealth to a very significant financial burden if the plaintiff is successful. I will follow the matter with great interest. 

8.      Conclusion

As a Federal taxation regime that extends to State government entities, the GST Act must navigate the prohibition against taxing the property of the State imposed by section 114 of the Constitution. 

As there is no effective way around the prohibition that would bind the parties, to facilitate the operation of the GST Act – and the participation of State entities in the GST regime – the Commonwealth and the States entered into a political compact described as the “Intergovernmental Agreement”, whereby State entities will treat themselves as being bound by the GST Act and will voluntarily pay an amount of “notional” GST equal to the GST that would have been payable if the GST Act had applied.

On the whole, the regime has appeared to work relatively well, with State entities including GST, and notional GST, in their GST returns. However, over time cracks have emerged, mainly where a State entity and the Commissioner do not agree on a particular outcome under the GST Act. These disputes have largely been driven by provisions introduced into the GST Act that give State entities a significantly better GST outcome for the sale of land where that land is unimproved. 

Initially, the view was taken that these disputes could not be ventilated before the Courts, and an ADR regime was established. Under this regime, a number of non-binding opinions were obtained from retired Judges and these opinions appear to have been used to form a body of principles which are to underpin the approach taken to these issues. The ATO and the States and also worked to formally document a set of dispute resolution protocols that are to be followed for such disputes. 

However, one month after these protocols were published, the Federal Court decision in Landcom appeared to remove the blockage which underpinned the need for the protocols, the view that State entity did not have formal review rights under Part IVC of the TAA for disputes relating to notional GST. That view now appears to be wrong, and the need for the formal set of protocols must now be questioned.

State entities now appear to be in a similar position to other taxpayers with regards to the treatment of disputes with the ATO around notional GST. To me, that is a good thing. It should lead to transparent decision making, with the parties able to rely on legal precedent and the appeal process. 

There will likely be further disputes between State entities and the Commissioner, particularly with respect to what constitutes improvements on land. Such disputes can now be dealt with through rulings, objections and appeals under Part IVC of the TAA. Again, that is a good thing. This is how the GST Act has developed over the last 22 years. Parliament writes the law, and the Courts interpret those laws.  

Chris Sievers

26 July 2022

[1] A New Tax System (Goods and Services Tax) Act 1999 (GST Act), s 184-5.

[2] GST Act, s 9-20(1).

[3] GST Act, s 184-5(1)(d).

[4] GST Act, s 9-20(1)(g).

[5] The GST regime also extends to Commonwealth and Territory entities, but the main focus of this paper will be on the extension of the GST regime to State entities. 

[6] Well known examples of external review are the opinions of Raymond Finkelstein QC on 15 April 2015 (the Finkelstein Evaluation) and Susan Crennan AC QC on 24 May 2018 (the Crennan Evaluation) with respect to unimproved land for the purposes of the margin scheme. Summaries of those opinions are attached to the ATO Dispute Protocols.

[7] The Commissioner has lodged an appeal to the Full Federal Court, but not with respect to this aspect of the decision.

[8] Hornsby Shire Council v Commonwealth of Australia & Anor [2022] HCATrans 105, [2022] HCA Trans 116.

[9]                 In providing separately for the GST Act and the Imposition Act, the Parliament followed the “well established procedure to comply with the requirement of s 55 of the Constitution that laws imposing taxation shall deal with only the imposition of taxation”: Roy Morgan Research Pty Ltd v Commissioner of Taxation (2011) 244 CLR 97 at [5]. GST is also imposed by two other acts, the A New Tax System (Goods and Services Tax Imposition – Customs) Act 1999 and the A New Tax System (Goods and Services Tax Imposition – Excise) Act 1999, which impose GST insofar as that tax is a duty of customs or a duty of excise within the meaning of s 55 of the Constitution.

[10] In December 2008, the first IGA was replaced by an agreement between the Commonwealth, the States and the Territories titled “Intergovernmental Agreement on Federal Financial Relations” (second IGA). Clause 17 of the first IGA is replicated in clause A28 of Schedule A to the second IGA.

[11] In Landcom, Thawley J observed (at [36]) that it was not contentious that the First and Second Intergovernmental Agreements contain statements of political intent and do not contain terms from which it should be concluded that either agreement creates legal rights or obligations – see, for example, in the context of other intergovernmental agreements: South Australia v Commonwealth [1962] HCA 10; (1962) 108 CLR 130 at 149, 152, 153; and Bob Brown Foundation Inc v Commonwealth of Australia [2021] FCAFC 5; (2021) 283 FCR 225 at [48]- [49].

[12] Former s 10 of the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 (Cth); s 4 of the Intergovernmental Agreement Implementation (GST) Act 2000 (NSW); s 4 of the National Taxation Reform (Consequential Provisions) Act 2000 (VIC); Former s 4 of the GST and Related Matters Act 2000 (QLD); s 3 of the Financial Relations Agreement (Consequential Provisions) Act 1999 (WA); s 3 of the National Tax Reform (State Provisions) Act 2000 (SA); s 5 of the National Taxation Reform (Commonwealth-State Relations) Act 1999 (TAS); Former s 4 of the Financial Relations Agreement Act 2000 (ACT); s 3 of the Financial Relations Agreement (Consequential Provisions) Act 2000 (NT).

[13] And the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 which preceded it.

[14] Referred to in Landcom at [27].

[15] In Landcom, the Court observed (at [49]) that the parties were agreed that the supply or supplies the subject of these proceedings would fall within the definition of a “taxable supply” within the meaning of s 9-5 of the GST Act, even though the supplies would not in fact be taxable.

[16] An equivalent provision exists to address supplies by the Commonwealth in respect of which it is notionally liable to pay GST: s 177-1(4).

[17] S 195-1 of the GST Act; s 995-1 of the Income Tax Assessment Act 1997 (Cth).

[18] See also the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (GST Explanatory Memorandum) at [6.100].

[19] See also Essendon v Criterion Theatres Pty Ltd (1947) 74 CLR 1 at 17 (Dixon J) and 27 (McTiernan J); Greater Dandenong City Council v Australian Municipal, Clerical and Services Union (2001) 112 FCR 232 at [224] per Finkelstein J; SGH at [47]; Roy Morgan Research Pty Ltd v Federal Commissioner of Taxation (2011) 244 CLR 97 at [23].

[20] GSTR 2006/5A1 – Addendum, 28 March 2012.

[21] Referring to In re Judiciary and Navigation Acts (1921) 29 CLR 257 at 265.

[22] A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/3, paragraphs 11, 13; A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1, paragraphs 13(6), 15; A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination 2020 MSV 2020/1 paragraphs 6(6), 7.

[23] It should be noted that the Commissioner has appealed this aspect of the decision to the Full Court.

[24] “GST and unimproved land”, Paper for ATAX GST Conference, 28 and 29 April 2016, Bastian Gassar and Nicholas Batten of Minter Ellison, 3.6.

[25] The GST Administration Sub-Committee, which monitors the operation and administration of the GST.

[26] “GST and unimproved land”, Paper for ATAX GST Conference, 28 and 29 April 2016, Bastian Gassar and Nicholas Batten of Minter Ellison, 4.6.

[27] “GST and unimproved land”, Paper for ATAX GST Conference, 28 and 29 April 2016, Bastian Gassar and Nicholas Batten of Minter Ellison, 4.11.

[28] Hornsby Shire Council v Commonwealth of Australia & Anor [2022] HCATrans 105, [2022] HCA Trans 116.

[29] “Tea Tree Gully Council joins local government class-action against Australian Taxation Office”, The Advertiser, 1 July 2015.