10 Dec 2010

How can government offer tax incentives in its contracts with private parties?

Governments might want to offer a range of incentives when contracting with private parties, but what are the relevant limitations? Can a Government promise tax relief in a contract – and is such a promise enforceable? The High Court has usefully clarified some of these issues in Port of Portland Pty Ltd v Victoria [2010] HCA 44 (8 December 2010).

The privatisation, the contract for sale, and the State's promise

When Victoria privatised the Port of Portland in 1996, it agreed with the purchaser that it would amend the Valuation of Land Act 1960 (Vic) so that the unimproved site value of the Port would be calculated by excluding the value of various buildings, wharves and associated works relating to the Port.

If it failed to do so and the purchaser was assessed at a higher rate of land tax than it would have been under the proposed amendment, the State would refund the difference, or allow it to the purchaser.

The State amended the land tax laws, but the purchaser argued that the amendments did not fulfil the State's promise. The purchaser accepted that any promise to amend the statute law was unenforceable, as neither a Minister or the Executive can bind the Parliament to any course of action. But it claimed it had a contractual right to receive a refund of the difference in the tax.

The Victorian Court of Appeal held that the second promise was unenforceable, as the Executive cannot lift a burden imposed by Parliament through an Act without Parliamentary approval. The High Court, on appeal by the purchaser, reversed the decision of the Victorian Court of Appeal on this point.

Why the High Court said the promise to refund tax was enforceable

The High Court said that the second promise was enforceable in contract because:

  • this promise did not constitute a dispensation from the operation of land tax laws – instead, it was a promise to adjust the price for sale of public assets; and
  • even if it were a dispensation, that dispensation had statutory backing. The privatisation legislation, the Port of Portland Authority Act 1958 (Vic), authorised the Treasurer to direct the Authority to sell its assets on terms and conditions, which included the making of adjustments, the assumption by the State of the obligation to refund tax, and to direct part of the sales proceeds into the Consolidated Fund.

So that meant that the matter fell to be determined on the merits: had the State held up its part of the bargain? The High Court said that the amendments had not had the effect intended by the parties when they made the contract. As a result, the Victorian Supreme Court must now determine how much tax must now be refunded to the purchaser under the terms of the contract.

What does this mean for government contracting?

This decision emphasises that governments will be held to be bound by their contractual promises subject to the understanding that:

  • the Executive has no power to grant a dispensation from statute law without the consent of Parliament, so that any contractual term promising this outcome will not be enforceable;
  • there is a distinction between a promise to dispense with a statutory imposition and a promise to adjust the sale price under a contract of sale if certain preconditions are met; and
  • even if a contractual promise amounts to a dispensation from a statutory burden, it can still be enforceable if there is statutory backing for that promise.

 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.