GST and the meaning of 'State' for the purposes of sections 38-445 and 38-450 of the GST Act

Is the entity, a company established to undertake certain State Government business activities, the 'State' for the purposes of sections 38-445 and 38-450 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when: • one class of shares is owned wholly by another company that is controlled by the state (State shareholder), with the remaining class of shares being owned by private investors • the State shareholder appointed half of the board of directors and these nominees can carry any motion proposed by them, and • the entity's objects do not include any reference to advancing any interests of the State?

No, the entity is not a 'State' for the purposes of sections 38-445 and 38-450 of the GST Act as it is not wholly owned and controlled by the State and does not act solely in the interests of the State.

The entity is a company that was established to undertake certain State Government business activities.

There are two classes of shares in the entity. All of one class of shares are held by another company that is wholly owned and controlled by the State and which is accepted as 'the State' (State shareholder). All of the other class of shares are held by private investors.

The State shareholder appointed half of the entity's directors. The entity is governed by the board of directors and rules governing voting at the directors' meetings enable the nominees of the State shareholder to carry any motion proposed by them.

The objects of the entity do not include any reference to advancing any interests of the State.

Under sections 38-445 and 38-450 of the GST Act, certain supplies by 'the Commonwealth, a State or a Territory' of land on which there are no improvements are GST-free. Thus, before sections 38-445 and 38-450 of the GST Act can apply, the entity must be the Commonwealth, a State or a Territory. In this case it is only relevant to consider whether the entity is a State.

'State' is not defined in the GST Act, however, paragraph 17(o) of the Acts Interpretation Act 1901 provides that in any Act, unless the contrary intention appears, 'State' means a 'State of the Commonwealth'.

There have been a number of cases where the courts have considered the meaning of 'State', particularly in relation to section 114 of the Commonwealth of Australia Constitution Act (Constitution), which relevantly includes that the Commonwealth shall not '...impose any tax on property of any kind belonging to a State.'

In Deputy Commissioner of Taxation v. State Bank (NSW) (1992) 174 CLR 219; 92 ATC 4079; (1992) 23 ATR 1, the court rejected the argument for a restricted meaning of 'State' for the purposes of applying section 114 of the Constitution, as to do this would not achieve the intent of the section. The court said that there can be no doubt that section 114 of the Constitution refers to the polity which is a State within the Australian federation, and that references to the States in the Constitution are wide enough to denote a corporation which is an agency or instrumentality of a State.

In SGH Limited v. Federal Commissioner of Taxation (2001) HCA 18 (SGH) the majority of the court said: ....whether SGH was 'the State' requires demonstration of more than government policy favouring or facilitating the creation of the entity in pursuit of some aspect of the public interest. No doubt it requires consideration of the circumstances and purposes of the entity's creation, but it also requires consideration of every feature of the entity which bears upon its relationship with the polity. That is why cases about s 114 have focused upon the ownership and management of the entity and the purposes the entity was required to pursue. It is those features which will most often reveal the relationship the entity has with the State, and if it is revealed by examination of them that the entity is wholly owned and controlled by the State concerned, and must act solely in the interests of the State, the conclusion that it is the State ... will readily follow.

In reaching its decision that SGH was not the State, the majority of the court specifically considered the following factors: • the circumstances of the establishment of SGH • the ownership and management of SGH • the presence or absence of corporators and whether SGH could disregard the interests of persons other than the State, and • the objects of SGH and whether SGH was required to advance the interests of the State.

The factors considered in the SGH case are relevant in determining whether an entity is a 'State' for the purposes of the GST Act. As such, an entity will be a 'State' if it is wholly owned and controlled by the State and must act solely in the interests of the State.

The entity is partly owned by the State through the State shareholder and partly owned by private investors. The entity is managed by its board of directors and, even though the rules governing voting at directors' meetings enable the nominees of the State shareholder to carry any motion proposed by them, it cannot be said that the State fully controls the entity. The entity cannot act in disregard of the interests of private investors. In addition, the objects of the entity do not include any reference to advancing any interests of the State.

Therefore, as the entity is not wholly owned and controlled by the State and does not act solely in the interests of the State, the entity is not a 'State' for the purposes of section 38-445 and 38-450 of the GST Act. Note: the factors applied in reaching the decision as to whether the entity is a 'State' for the purposes of the GST Act, apply equally to determining whether an entity is the 'Commonwealth' or a 'Territory'.