High Court GST case impacting government entities

5 minute read  20.06.2023 Rhys Guild, Bastian Gasser, John Russell, Aaron Chisholm, Jesse Guo

The High Court's decision in Hornsby Shire Council v Commonwealth of Australia [2023] HCA 19 is a win for the Commonwealth and the States, but raises questions regarding their ability to enforce standard GST gross-up clauses.


Key takeouts


  • The High Court unanimously rejected Hornsby Shire Council's submissions as to the application of section 114 of the Constitution in this case, which involved Hornsby Shire Council's liability to pay 'notional GST' in relation to its sale of a motor vehicle.
  • The High Court held that 'notional' amounts of GST paid by the States pursuant to Intergovernmental Agreements and associated State legislation were voluntary payments, and accordingly, the prohibition in section 114 of the Constitution did not apply.
  • The decision suggests that government agencies may not always be able to rely on 'standard' GST clauses in contracts when seeking to recover GST from counterparties. Rather government agencies should ensure their GST clauses are drafted to explicitly include 'notional GST' payable under the Intergovernmental Agreements.

The High Court's recent decision in Hornsby Shire Council v Commonwealth of Australia [2023] HCA 19 considered the application of section 114 of the Constitution, which broadly prohibits the Commonwealth from taxing property of the States. This case arose from an objection lodged by Hornsby Shire Council regarding 'notional' amounts of GST paid by the Council to the ATO in relation to a sale of a motor vehicle (however the outcome of the case would have far more widespread implications for government entities and cover a vast array of transactions involving property of the State).

Section 114 of the Constitution prohibits the imposition by the Commonwealth of any tax on property belonging to a State (and, by extension, to the property of local government entities which are, in substance, a State entity under relevant legislation).

From a GST standpoint, this means that the Commonwealth cannot legally impose GST on State property, or transactions involving State property. However, the Commonwealth and the States and Territories have entered into a series of Intergovernmental Agreements (and passed associated State / Territory legislation to implement these Intergovernmental Agreements). Under the Intergovernmental Agreements, it was agreed that the Commonwealth, the States / Territories, local government and statutory corporations / authorities will operate as if they were subject to the GST legislation, including in relation to supplies of property. In other words, they would be entitled to register for GST, would make voluntary or notional payments where necessary and would be entitled to claim input tax credits in the same way as private entities.

In May 2022, Hornsby Shire Council sold a motor vehicle at auction for $34,601.80, which included an amount on account of 'GST' of $3,181.82 per the tax invoice in relation to the sale. The Council remitted this amount on account of notional GST to the ATO under protest – it considered the amount represented a tax on property of the State, which was explicitly prohibited under section 114 of the Constitution. Council then lodged an objection to the Business Activity Statement in which the notional GST was reported, before the matter proceeded to the High Court.

There was no dispute between the parties as to what a 'tax' was for the purposes of section 114 of the Constitution – which is commonly accepted to be 'a compulsory exaction of money by a public authority for public purposes, enforceable by law'. What was in dispute however was whether payment of the notional GST amount was in fact a compulsory exaction enforceable by law.

Council argued that it was effectively forced to pay the notional GST or suffer 'detrimental consequences', as refusal to pay the notional GST amount would result in amounts equal to the notional GST amount being withheld from grant funding payable to the Council by the Commonwealth. In the Council's view, this was in substance a 'compulsory exaction enforceable by law' which was prohibited under section 114 of the Constitution in these circumstances.

Conversely, the Commonwealth contended that the notional GST was not a 'tax' for the purposes of section 114 of the Constitution, as payment of notional GST amounts were entirely voluntary and not enforceable by law.

Why the High Court rejected the Council's argument

The High Court unanimously rejected the Council's argument and held in favour of the Commonwealth.

In coming to its decision, the Court reasoned that the inclusion of notional GST by the Council in its Business Activity Statement was a 'voluntary act' made in accordance with the Intergovernmental Agreements between the Commonwealth and the States, noting that there was no Federal (or State) law that 'legally or practically compelled the Council to include that notional GST in its BAS'.

Contracts entered into by government agencies must be carefully drafted

While the decision is a victory for the Commonwealth and the States, it does highlight the importance of careful drafting in any contracts entered into by Commonwealth and State government agencies.

Government agencies may not be able to rely upon the ‘standard’ GST clause in a contract which relies on the definition of GST taken from the GST Act, and which does not expressly extend its scope to cover ‘notional GST’. The 'standard' GST clause is open to challenge by contractual counter parties.

This may result in circumstances where government agencies are unable to enforce their purported contractual right to recover amounts on account of GST from counterparties they have made taxable supplies to. That is, the High Court has expressly recognised that there is a difference between 'normal' GST payable by private entities and 'notional' GST payable by government entities. So, for example, a customer of a State agency might argue that it is not contractually obliged to pay any GST to the agency where the GST clause in the relevant contract is a 'standard' GST clause that doesn't expressly refer to 'notional' GST. In many (if not most) situations, there may be limited utility in making this argument as the customer (if registered) would normally be entitled to an input tax credit for that GST. However, it does highlight the need for agencies to urgently review their GST drafting to ensure that their contracts adequately protect their GST position.


MinterEllison has extensive experience advising government clients in relation to both real and notional GST obligations and in creating tailored legal drafting to protect those clients. Please contact us if you have any questions or would like to discuss how the implications of this case might impact your organisation.

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