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RULING

SUBJECT: Local government councils

Question

Is the Council considered to be "the Commonwealth, a State or a Territory" for the purpose of Item 4 of subsection 75-10(3) of the A New Tax system (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The Council is considered to be "a State" for the purpose of Item 4 of subsection 75-10(3) of the GST Act.

This ruling applies for the following periods:

Not applicable in this case

The scheme commences on:

Not applicable in this case.

Relevant facts and circumstances

You are a local government council (the Council) and have an Australian Business Number (ABN) and are registered for the goods and services tax (GST).

The Council was proclaimed as a local government council in your State.

The Council was incorporated and governed by the relevant Local Government Act . This Act will hereinafter be referred to by the acronym, LGA.

Under the provisions of the LGA, the State is accorded with significant powers to ensure its business is correctly dealt with by local councils (in this case the Council).

Also under the provisions of the LGA, a local government council must provide a range of traditional government services to the local area under its jurisdiction.

According to the LGA, a local government council is a body politic of the State with perpetual succession and legal capacity and powers of an individual, both in and outside the State.

Under the LGA, a local government council has revenue functions and is entitled to levy rates, fees and charges. Thus, the Council can levy rates, fees and charges under this Act.

A local government council, under the LGA, may provide goods, services and facilities, and carry out activities appropriate to the current and future needs within the local community and of the wider public, subject to this Act, the regulations, and any other law.

The role of the State in the operation of local government councils is also provided in the LGA. The Act states, that the State has significant powers over many aspects of local government including the establishment of council areas, the remuneration of mayors and councillors, powers of inquiry and investigation into councils.

Also under the LGA, the relevant Minister of State has power to revoke or modify a local government council's order.

Under the LGA, local government councils are required to respond to inquiries and investigations, and/or recommendations, made by the Director-General of the relevant department of the State or the relevant Minister of State.

In the course of providing services under the LGA, the Council may be required to make taxable supplies of real property the Council owns and may choose to apply the margin scheme.

To work out the margin, the Council may sometimes have to obtain valuation of the real property the Council is selling. For this purpose the Council is required, under the GST Act, to determine the appropriate valuation date.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 75-10.

Reasons for decision

Subsection 75-10(3) of the GST Act specifies that, in certain circumstances, the margin for a taxable supply of the freehold interest, stratum unit or long-term lease, is the amount by which the consideration for the supply exceeds the valuation of the interest, unit or lease. The date when valuations are to be made is provided in the table given in subsection 75-10(3) of the GST Act.

Item 4 of in the table in subsection 75-10(3) of the GST Act states that in the case where the 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 when valuation is to be made is the day on which the taxable supply takes place.

Goods and Services Tax Ruling GSTR 2006/5 (GSTR 2006/5) provides the Commissioner's interpretation of 'Commonwealth, a State or a Territory'. The Ruling discusses the meaning of these terms for the purpose of, among other provisions, section 75-10 of the GST Act.

Paragraphs 13 to 15E of GSTR 2006/5 state as follows:

Local governments

13. Local governments may be a State or Territory. As is the case for corporations, the Commissioner considers that the principles developed by the High Court of Australia in cases concerning the meaning of 'a State' in section 114 of the Constitution, as described at paragraphs 8 to 12 of this Ruling, also apply in determining whether a particular local government is a 'State' or 'Territory' for the purposes of the GST Act.

14. There have been several cases in which the Courts have considered whether a local government is a 'State' for the purposes of section 114 of the Constitution.

15. In The Municipal Council of Sydney v. The Commonwealth (' Municipal Council of Sydney'), in three separate judgements, all judges of the High Court agreed that the Municipal Council of Sydney was the 'State' for the purposes of section 114 of the Constitution. The power delegated to the Council, by State legislation, which allowed the Council to levy rates, was the determinative factor in that case.

15A. In Deputy Commissioner of Taxation v. State Bank of New South Wales, the High Court referred to the Municipal Council of Sydney decision and said:

Indeed, the decision in Sydney Municipal Council v The Commonwealth is direct authority for the proposition that a corporation exercising governmental functions is 'a State' for the purposes of section 114.

15B. The Full Federal Court's decision in Greater Dandenong City Council v. Australian Municipal, Administrative, Clerical and Services Union (' Dandenong City Council) is another instance where a local government was considered to be a 'State' for the purposes of section 114 of the Constitution, albeit that it was the constitutional immunity under paragraph 51(xxxv) of the Constitution that was the key focus of that case. In his judgement, Finkelstein J referred to the Municipal Council of Sydney decision and considered several aspects of the statute under which the Council was established in reaching the conclusion that the Council was a 'mere instrumentality of the State'.

15C. The Municipal Council of Sydney decision and the Dandenong City Council decision both turned upon the specific features of the particular Councils involved; those specific features being bestowed upon them by State legislation.

15D. These decisions demonstrate that the legislation constituting a particular local government must be considered to determine whether it is a State for the purposes of section 114 of the Constitution. These decisions do not stand for a general proposition that local governments are a State for the purposes of section 114 of the Constitution.

15E. The decisions in Municipal Council of Sydney and Dandenong City Council are contrasted with decisions where the Court has determined that local governments do not operate as instrumentalities of a State or Territory Crown, and therefore are not considered to have the immunities of the Crown. However, the principles for determining whether an agency or instrumentality represents the 'Crown' and has been endowed with the privileges and immunities of the 'Crown' for a particular purpose are different to the principles applied to determine whether a body is a 'State' for the purposes of section 114 of the Constitution. Therefore, a local government that does not share the immunities of the Crown may, nevertheless, be the State for the purposes of section 114 of the Constitution and may, similarly, be the State or Territory for the purposes of the GST Act.

GSTR 2006/5 provides several indicators to determine whether or not a local government council is a 'State' for the purpose of section 114 of the Commonwealth of Australia Constitution Act (Constitution). Where it is so determined, a local government council will be a 'State' for the purpose of subsection 75-10(3) of the GST Act.

From the above paragraphs of GSTR 2006/5 it is possible to delineate five indicators, in their own right or collectively, that would determine whether or not a particular local government (a local government council such as the Council in this case) is a 'State'.

The first indicator, in this case, is whether or not the Council is allowed by State legislation to levy rates (see paragraph 15 above). The facts of the case show that the Council is able to levy rates. This is a determinative factor for the Council to be considered as a 'State'.

The second indicator is whether a local government council satisfies the principles developed by the High Court of Australia in cases concerning the meaning of 'a State' in section 114 of the Constitution and as provided in paragraphs 8 to 12 of GSTR 2006/5. These principles refer equally to both corporations as well as local government councils such as the Council which is the subject of this case. In summary, these paragraphs state that:

· where a corporation's accounts are audited by the State Auditor-general,

· where the corporation carries out a regulatory role,

· where the corporation is controlled by the State,

· where there is a provision that the corporation must pursue the interests of the State or the public or its policies are determined by the State, and

· where the Minister or the Executive Council of the State has the power to override the decisions made by the corporation,

· it is a 'State' for the purpose of section 114 of the Constitution. As the Council satisfies these principles, it is a 'State' for the purpose of section 114 of the Constitution and therefore also for the GST Act.

The third indicator is whether or not a local government council exercises governmental functions. Where it does, it is a 'State'. In this case the Council does exercise functions that can be construed as governmental functions.

Fourthly, where a Council is established under a statute, it is considered a mere instrumentality of the State. As the Council in this case was established under statute of the state government, it satisfies the term 'State' as provided in the GST Act.

And, finally, where the particular features of a Council are bestowed upon it by State legislation, it also satisfies the term 'State' as given in the GST Act.

On the basis of the above we consider the Council is a 'State' for the purpose of Item 4 of subsection 75-10(3) of the GST Act.

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