There has been much discussion amongst local government bodies (such as municipal and shire councils) and the profession over the past 12 months regarding GST liability on the sale of their real property interests. This has culminated in a marked change in the Australian Taxation Office ('ATO') position issued publicly on 28 March 2012, in an amendment to GSTR 2006/5, confirming that a local government body "may...be the State for purposes of Section 114 of the Constitution and may similarly be the State or Territory for the purposes of the GST Act"1.
There are two key aspects to this however they both hinge on whether local government can be considered part of the/a "State":
- Whether local governments are considered to be "the Commonwealth, a State or a Territory" for the purposes of the margin scheme2 provisions of the GST Act which provides specific and significant concessions on property eligible sales under the margin scheme.
- Whether Australian Constitution operates to negate the GST liability on any property sale by local government by virtue of the wording that prohibits the Commonwealth imposing "any tax on property of any kind belonging to a State"3.
Why is this important?
If councils have been paying GST on eligible property sales under the margin scheme they may be entitled to significant refunds going back up to four (4) years in respect of those sales. The concession essentially provides a valuation point for the eligible interest in calculating the GST margin on the day of sale. As the GST liability under the margin scheme is calculated as 1/11th of that margin, the lower the margin, the lower the GST. By way of simple example, where a local council were to sell vacant unimproved land now that it held at 1 July 2000 the value at the date of sale would logically equate to the sale value – meaning that there is no margin and accordingly no GST liability.This is more complex when the relevant interest now has buildings or other improvements on it, as a valuation separating out the unimproved or "land" portion of the property will be required and GST may be payable in respect of the improvements. Invariably however the total GST liability will be lower than an ordinary sale under the
Moore Stephens has been recommending to eligible councils that they undertake a review and lodge amendments as soon practicable (given a four (4) amendment limit applies).
Where the constitutional argument noted above is held to be correct then it would follow that GST liabilities would be negated and recovery of overpaid GST for up to six (6) years may be possible on the basis that it was never correctly payable in the first place. At this point Moore Stephens expresses extreme caution on this view and we would suggest energies are better placed seeking amendments under themargin schemeas noted above.
Is it really that simple?
By reviewing historic decisions in cases such as Sydney Municipal Council4 and Dandenong City Council5 it appears quite clear that local government should ordinarily be part of the State and the ATO's strong historical view to the contrary contained within the previous versions of GSTR 2006/5 is now accepted as incorrect.
Moore Stephens has advised some NSW local councils that the position in regards to Division 75 is quite clear and have recommended that amendments be sought from the tax office in respect of eligible sale of property under the margin scheme where the GST has been overstated.
Although technically clear in respect of Councils being part of the State for the margin scheme provisions actual application of the provisions can be quite problematic and requires some level of care in particular eligibility of the real property depends on it having "no improvements as at 1 July 2000"6. Further, where the eligible property has had improvements put on it prior to sale the unimproved component (or land) will need to be separately valued.
The Constitutional argument – does it work?
The Constitutional argument noted in the second point above is being touted by some as being quite clear and that it follows from analysis of Section 114 of the Constitution and Section 5(1) of the GST Imposition Act that a "State" has no liability to pay GST on sales of real property. Further to this it is indicated that where the local government is properly considered a "State" it would follow that this treatment would extend to such bodies.
We note with some caution however that there is no clear precedent on this issue and further the distinction between tax "on property of any kind belonging to a State" may validly be distinguished from tax in respect of disposal of property by the State. It also may be argued that the GST burden on the supply is in fact borne by the purchaser, who on a fully taxable supply may have the right to claim back that credit, or if not, is in fact bearing the cost of being the end user putting that property into consumption. This is more complex perhaps on margin scheme supplies, where the ATO now largely accepts that the tax inclusive retail selling price may not be affected by the amount of GST borne by the vendor, however one may distinguish this on the basis of specific concessions within the margin scheme provisions and in particular the additional concession available to "a State".
This issue is further complicated by the existing conventions between State and the Commonwealth in the inter-governmental agreements (IGA) and related legislation where a State government would typically pay GST in these circumstances – subject only to the margin scheme concession as noted. One view may be that if local governments felt they were not bound by agreement between the States and Commonwealth then they may not be under sufficient control to be considered part of "the State".
Moore Stephens recommends that all Local Councils should obtain specific advice in regard to their circumstances. Where it is clear that the particular body qualifies as being part of "the State", immediate attention should be given to identifying and confirming eligible property sales under the margin scheme where GST may have been overpaid and seeking amendments as soon as practicable, noting the four year time limit.
If you would like assistance on this issue, please do not hesitate to contact us as below to discuss your needs.
1 GSTR 2006/5 - as amended 28 March 2012 -
2 Division 75 – A new Tax System (Goods & Services Tax) Act 1999 ('GST Act')
3 Section 114 – Commonwealth of Australia Constitution Act ('Constitution')
4 Sydney Municipal Council v the Commonwealth (1904) 1 CLR 208
5 Dandenong City Council v Australian Municipal, Administrative Clerical and Services Union (2001) FCA 349
6 Item 4 – table to Section 75-10 – GST Act
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