A Sydney council led by the former Howard government minister Philip Ruddock is spearheading a high court case arguing that GST levied on local councils is unconstitutional.
The challenge by Hornsby shire council questions the legality of the goods and services tax it has paid since it was first introduced by the Howard government in 2000.
Given Hornsby paid $144,479 notional GST in just the last year of the two decades of the tax’s operation, the claim could be worth several million to the council and tens or hundreds of millions across the 537 councils that make up the third tier of government in Australia.
The council argues that local governments are in effect forced to pay GST through an agreement between the commonwealth, states and territories in 1999 that councils either account for and pay “notional GST” or equivalent amounts will be withheld from their grants if they refuse.
That breaches the constitution’s guarantee that the federal government “cannot impose any tax on property of any kind belonging to a state”, it submitted.
The commonwealth rejects the council’s claim, arguing the “voluntary” payments are not a tax because there is “no compulsory exaction of property” involved, including in withholding grant payments.
It says councils “have no legal right to receive” grants and Hornsby’s case amounts to seeking a “windfall” of keeping both the full value of grants and not paying GST.
Ruddock, the mayor of Hornsby council, was a cabinet minister in the Howard government from 1998 to 2007, including during the time the GST was designed and legislated.
A spokesperson for the council said it was pursuing the case in “the interests of its ratepayers and residents” and that this was its priority “whatever the effect on the tax base if the notional GST scheme is unconstitutional”.
“Wearing his current hat, the mayor supports council’s decision to commence these proceedings.”
Ruddock confirmed he and other councillors had been briefed by the general manager and supported the court battle.
“My role is to make decisions in council’s best interests,” he told Guardian Australia. “The fact I may have been in a previous role doesn’t influence that I have a responsibility to make sound decisions.
“I’m acting for council in the context of costs we have to meet, as we are constrained financially due to council amalgamations.”
In a writ launching the case in December 2021, Hornsby sought a declaration that it was entitled to GST it had paid since July 2000 plus interest – a yet to be calculated amount.
In its May 2022 business activity statement alone, the council reported paying $144,479 GST on sales and $981,929 GST on purchases, a net amount of $836,450 refunded by the tax office.
In September the parties agreed to facts narrowing the case to consideration of one set of transactions: the council’s $35,000 purchase of a Holden Colorado Trailblazer four-wheel drive in September 2018, and its sale, which included the payment of $3,182 in GST, in May 2022.
In July 2022 the council’s general manager, Steven Head, wrote to the Australian Taxation Office stating it had reported and paid the GST “under protest”.
In its submissions, Hornsby council argues although the commonwealth can place conditions on grants to states, it cannot “require action which is in contravention of a constitutional prohibition”, including requiring the states to withhold funds from local government.
The council says it was “compelled” to pay GST or suffer “detrimental consequences”, including deductions from grants that make up 2% of its annual revenue, compromising its ability to maintain “sporting ovals, grandstands, bridges and … infrastructure”.
Though notionally voluntary, the council says this makes GST payments a form of “forced benevolence” that amounts to an unconstitutional tax.
It described the 1999 agreement and legislation giving effect to it as “a circuitous device” to avoid the prohibition on taxing states’ property.
“In the event the plaintiff does not pay the notional GST, the amount will be taken from it.”
The council’s spokesperson told Guardian Australia that the GST regime required council pay the ATO “notional GST on supplies of council’s property”.
“But for the regime, council would have been entitled to retain this money for the benefit of its residents.”
The council’s spokesperson confirmed that, if successful, “a claim for restitution of notional GST paid by council will be pursued separately”.
The commonwealth submitted that it had agreed with states and territories to treat councils “as if” they were subject to GST to achieve “equality of treatment” between government and non-government entities.
The agreement “enabled the GST system to work as intended (as a value added tax, the burden of which is ultimately borne by the consumer) by ensuring that the interposition of a state in the supply chain did not disrupt the system of input tax credits on which the system depends”, it said.
The commonwealth submitted that the threat of withholding grants did not make “notional GST” payments a tax or “forced benevolence” because councils were under no “legal obligation” to pay it, and were explicitly given the choice not to do so.
The commonwealth submitted that councils can pay notional GST or receive a reduced grant but this left them “no worse off” because they would be in the same position either way.
“To deny the plaintiff a windfall gain is not to ‘compel’ it to make a payment of notional GST.”
The commonwealth is supported by New South Wales, which is the second defendant, and interventions from Queensland, Victoria, Western Australia and South Australia.
Hornsby council will file reply submissions in February, before the case is heard in early 2023.
