High Court unanimously finds that GST payments are not unconstitutional

On 14 June 2023, the High Court held that payment of notional GST by a local government body, was not a tax on State property, and therefore did not contravene section 114 of the Commonwealth Constitution (Hornsby Shire Council v Commonwealth of Australia [2023] HCA 19).

The case concerned whether GST reported and paid under protest by Hornsby Shire Council on the sale of a car (notional GST) was an unconstitutional tax, contrary to section 114 of the Commonwealth Constitution. The High Court found that no federal law compelled or obliged the Council to pay the notional GST. As the payment of the notional GST was a voluntary act, it was not, on the facts of this case, a tax and the Council was not entitled to restitutionary relief.

Outline of key arguments

Section 114 of the Commonwealth Constitution provides: 

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.

The central issue covered in the decision was whether the payment of notional GST was a compulsory exaction (being one of the attributes which would support the characterisation of the payment as a tax).

The concept of notional GST arises from intergovernmental agreements between the Commonwealth, the States and the Territories at the time the GST was introduced. Part of that agreement included a promise that the Commonwealth would provide all GST revenue to the States and Territories in the form of GST revenue grants. These grants were to be made to the States pursuant to section 96 of the Commonwealth Constitution. Under the agreement, Local Governments and State statutory corporations were to operate as if they were subject to the GST legislation and make “voluntary or notional” payments.

The Council argued that the notional GST was a tax on state property and contrary to section 114 of the Commonwealth Constitution. There were two limbs to the Council’s argument, namely that it was:

1. legally compelled to pay the notional GST, having regard to the particular language of the legislation which gave effect to the inter-governmental agreements.

That is, section 15(aa) of the Local Government (Financial Assistance) Act 1995 (Cth) (LGFA Act) provided that a condition for the States to receive grants of financial assistance from the Federal Government was that the States would withhold notional GST payments that “should have, but have not, been paid by local governing bodies”

In addition, section 15(c) of the LGFA Act required States to repay the Commonwealth an amount of a grant if they had not complied with the requirements of section 15(aa).

2. practically compelled to pay the notional GST as the State was required to withhold Commonwealth funding in the same amount of notional GST that the Council should have paid but did not.

The Council relied on the following principle expressed by Latham CJ in Attorney-General (NSW) v Homebush Flour Mills Ltd (1937) 56 CLR 390 (Homebush):

'Voluntary loans' and 'gracious offerings' and 'forced benevolences' are not unknown in our history. When such transactions amount to the exaction of money by a government in obedience to what is really a compulsive demand, the money paid is paid as a tax.

The arrangement considered in Homebush practically forced the flour millers to repurchase flour they had milled at the greater price. If they did not, they would go out of business. The choice as to whether or not to repurchase the flour at the greater price was “illusory”.

The Council submitted that, just like the flour millers, it had no choice but to pay the notional GST. If it did not, it would suffer a significant detriment or alternatively, the same amount would be taken from it. Either way, the choice was illusory.

Decision of the High Court

In relation to the Council’s argument regarding legal compulsion, the High Court stated:

• there was no Act which imposed a liability to pay notional GST.
• the legislation imposing GST expressly provided for no GST to be paid.
• whilst section 15(aa) of the LGFA Act did create an obligation for the payment of grants to local governments, and an obligation on the State to withhold funds and remit those to the Commonwealth where notional GST has not been paid, it imposed no obligation or duty on any local governing body.
• the use of the word “should” rather than “must” reflects the absence of any enforceable obligation on any local governing body, such as the Council, and is consistent with compliance with a purely political arrangement.
• the conditions or obligation imposed by the LGFA Act were voluntary in the sense that they only could be enlivened when the State agrees to accept funding for local government. The State could refuse to accept such funding.

As to the argument that the Council was practically compelled to pay the notional GST, the High Court did not agree that the Council would suffer a significant detriment. While the High Court noted that some of the arguments presented by the Council departed from the agreed facts of the special case before the court, the inference was that the failure to pay notional GST would result in either a revenue neutral outcome or leave it better off. That is, the failure to pay the notional GST would only result in a reduction in funds from the Commonwealth in the same amount. Further, any reduction in funding would take place well after the failure to pay the notional GST, and the Council would probably be better off due to the time value of money.