In brief

The case of Hornsby Shire Council v Commonwealth of Australia [2023] HCA 19 concerned proceedings in the High Court of Australia (Court) by the Hornsby Shire Council (Council) against the Commonwealth and New South Wales in respect of the payment, under protest, of an amount of notional goods and services tax (notional GST) to the Commonwealth.

The Court found that notional GST paid by a local government was not a tax on the property of the State and did not offend section 114 of the Commonwealth of Australia Constitution Act (The Constitution) (Constitution).


The Council paid, under protest, a notional amount of GST to the Commonwealth. The amount of notional GST arose from the sale of a motor vehicle by the Council.

Western Australia, South Australia, Victoria, and Queensland intervened in the proceedings.

The Council claimed that that the notional GST paid by it was a tax on property of the Council and the laws which related to payment of the notional GST were invalid under section 114 of the Constitution.

Section 114 of the Constitution provides that the Commonwealth must not impose any tax on property of any kind belonging to a State. The Council is considered to be the State for the purposes of section 114.

Legislative scheme

Goods and services tax (GST) is imposed by a legislative scheme which includes three imposition Acts. Each of those imposition Acts provides that the relevant Act does not impose a tax on property of any kind belonging to a State. This is to ensure that those Acts do not contravene section 114 of the Constitution.

Around the time that the GST legislation was introduced in 1999, the Commonwealth, States, and Territories entered into an Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations.

Under the Intergovernmental Agreement:

  • the Commonwealth undertook to legislate to provide all of the revenue from the GST as imposed by the GST legislation to the States and Territories;

  • the parties intended that the Commonwealth, States, Territories, and local governments, and their statutory corporations and authorities, would operate as if they were subject to the GST legislation and would make voluntary or notional payments of GST;

  • the Commonwealth undertook to legislate to require the States and Northern Territory to withhold from any local government the amount of any notional GST that was not paid by that local government.

A further version of the Intergovernmental Agreement was entered into in 2009 in substantially the same terms as the 1999 Intergovernmental Agreement.

The parties to the proceedings agreed that the Intergovernmental Agreements were not intended to create legally enforceable rights and obligations, but were political arrangements setting out the fiscal relationship between the parties with respect to GST.

The Commonwealth and New South Wales enacted legislation to give effect to the Intergovernmental Agreements.

Under that legislation:

  • the Commonwealth and New South Wales confirmed that each of them intended to comply with and give effect to the Intergovernmental Agreements;

  • the Commonwealth undertook to pay GST (including notional GST) to the States;

  • a State entity (including the Council) may pay to the Commissioner of Taxation notional GST and do things which would have been necessary or expedient if it had been liable for GST;

  • it was a condition of receipt by a State of federal funding for local government purposes that the State agreed to:

    • withhold funding from a local government body where that body failed to pay notional GST, and

    • pay the amount withheld back to the Commonwealth.

Arguments of the parties

The Council argued that notional GST was a tax because it was a compulsory exaction of money for public purposes enforceable by law.

The Council argued that it was either compelled or practically compelled to pay notional GST. In the view of the Council, the legislative scheme legally compelled the Council to pay notional GST as a condition of receiving federal funding and it had no choice but to pay notional GST.

Alternatively, the Council argued that the legislative scheme was a circuitous device by which the prohibition in section 114 of the Constitution was impermissibly circumvented.

The other parties argued that payment of notional GST by the Council was an entirely voluntary and political act.

Decision of the High Court

The High Court unanimously found that there was nothing in the legislative scheme which imposed on the Council a liability to pay notional GST. Instead, the payment of notional GST was entirely voluntary and part of a political arrangement.

The conditions for receipt of funding for local government purposes which were imposed on the State only applied when the State chose to accept the funding. The State was able to refuse to accept the funding.

The Council had no entitlement to receive the federal funding. The State also had no entitlement to receive the federal funding, if it did not comply with the conditions in the legislative scheme.

In any case, if the Council failed to pay notional GST this would either result in a revenue neutral outcome for the Council, or leave it better off due to the time value of money. The Council was not compelled or practically compelled to pay notional GST.

It was also relevant that the funding provided by the Commonwealth accounted for only 2% of the Council's revenue.


Whilst the case concerned an isolated transaction undertaken by a particular local government in New South Wales, the Court noted that its decision would have wider application (at [5]):

"Whilst the special case concerned only the sale of one car by the Council, the following reasoning would apply to any local government body that also chose to include, in any BAS [Business Activity Statement], notional GST in the circumstances described below."

As the Intergovernmental Agreements were entered into by all States, and the legislative scheme described above has been entered into by all States on substantially the same terms, the reasoning would apply to notional GST paid by any local government body of any State.

It is clear that a local government body is free to decide whether or not to pay notional GST to the Commissioner of Taxation. But if the body chooses to pay notional GST, it will have no right to recover the amount paid because of the application of section 114 of the Constitution.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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