Commissioner issues ATO ID on whether council rates are an “Australian tax” for the purposes of Division 81 of the GST Act

On Friday the Commissioner issued ATO ID 2012/87 ‘GST and Division 81 of the GST Act: whether payment of general rates imposed by local government is an ‘Australian tax” for Division 81 purposes.  The view of the Commissioner is that general rates are an “Australian tax” for the purposes of s 81-5(1) of the GST Act, so that general rates are not subject to GST.

An “Australian tax” is defined as a tax imposed under an ‘Australian law’, which is defined to be a law of the Commonwealth, State or Territory.  The power to charge rates is found in the Local Government Act (being a legislative act of State Parliament).  Further, the rates as a “tax” because they are “a compulsory exaction of money by a public authority for public purposes, enforceable by law, and is not a payment for services rendered”: referring to Matthews v Chicory Marketing Board (Vict) (1938) 60 CLR 263 per Latham CJ.

The Commissioner also relied on the long-standing High Court decision in The Municipal Council of Sydney v The Commonwealth (1904) 1 CLR 208, where all three judges found that the municipal rates in question were taxes within the meaning of s 114 of the Constitution.

I note with interest that the Commissioner also refers to this decision in GSTR 2006/5 ‘GST: meaning of ‘Commonwealth, a State or a Territory’, where the Commissioner states as follows:

…all three judges found that the Council was the “State” for the purposes of s 114.  The power delegated to the Council, by State legislation, which allowed the Council to levy rates, was the determinative factor in that case.

Somewhat surprisingly, in that ruling the Commissioner contends that there is no general proposition that local governments are “State” for the purposes of s 114 of the Constitution, and that the legislation constituting a particular local government must be considered.  This contention is made notwithstanding the subsequent approval of The Municipal Council of Sydney by the High Court in Essendon v Criterion Theatres Pty Ltd (1947) 72 CLR 1 (per Latham CH at 13, Dixon J at 17, McTiernan J at 27), Deputy Federal Commissioner of Taxation v State Bank of NSW (1992) 174 CLR 219 (per the Court at 25), SGH Ltd v Commissioner of Taxation (2002) 210 CLR 51 (per Gummow J at [47]), Roy Morgan Research Pty Ltd v Commissioner of Taxation [2011] HCA 35 (per the six judge majority at [23]-[24]).

It is difficult to understand the basis for the Commissioner’s contention.  No examples are given where the legislation in question does not constitute local councils as “State”.  It is instructive to consider the following extract from the Court in Deputy Federal Commissioner of Taxation v State Bank of NSW (at [25]):

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.

Given the above statement, for the Commissioner’s contention to succeed it would arguably need to be shown that the terms of the legislation constituting a local council were such that the local council was no longer exercising governmental functions.  This would include, presumably, the government function of levying rates on properly held by its constituents.  I am not aware of any of the various State Acts in question being drawn in such terms.