The states will receive GST revenue and payments from the Australian Government totalling an estimated $61.4 billion in 2004-05 (Table 1) and $64.8 billion in 2005-06 (Table 2).
All GST revenue is paid to the states under the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (the IGA). The GST revenue pool is distributed among the states on the basis of relativities recommended by the independent and expert arbiter, the Commonwealth Grants Commission (CGC). The CGC’s recommendations are based on the principles of Horizontal Fiscal Equalisation (HFE).
In 2004-05 and 2005-06, each state and territory is estimated to receive more revenue from GST than they would have received from Australian Government Financial Assistance Grants (FAGs) and their own inefficient taxes abolished under tax reform. In the absence of the abolition of further inefficient state taxes, it is estimated that the states would enjoy a cumulative GST windfall of $17.2 billion from 2004-05 to 2009-10.
A report on business stamp duties was prepared by Australian Government and state officials and, as required by the IGA, was considered by the Ministerial Council for Commonwealth-State Financial Relations at its meeting on 23 March 2005. As GST revenues are now sufficient to fund the abolition of these taxes, the Australian Government has proposed a timetable for these taxes to be abolished to reduce the tax burden on Australian businesses and families.
If still imposed in all jurisdictions, these taxes would represent a burden of $8.8 billion over the four years from 1 July 2006. As some states have already abolished some of these taxes, the Australian Government’s proposal involves the abolition of $7.4 billion in stamp duties still imposed by the states over the four years.
The significant GST windfall gains the states are receiving make this proposal affordable for all states. Even after the proposed tax cuts, it is estimated that the states will receive a GST windfall of approximately $9 billion over the period of 2004-05 to 2009-10.
As provided under the IGA, the Australian Government has paid Budget Balancing Assistance (BBA) to the states to cover any shortfall between GST revenue and a state’s Guaranteed Minimum Amount (GMA). This has ensured that no state is worse off during the transitional period after the changes made to Commonwealth-State financial relations as part of the Australian Government’s The New Tax System. The transitional period ceases on 30 June 2006. However, as part of the Australian Government’s proposal on the abolition of further taxes, it has offered to guarantee that no state will be worse off over the three years from 2006-07, resulting in an estimated payment of BBA of $563.1 million to the states.
The Australian Government will also provide the states with National Competition Policy Payments to implement National Competition Policy and related reforms, residual adjustment amounts, payments to compensate for GST revenue deferred as a result of allowing certain small businesses and non-profit organisations to pay their GST on an annual basis, as well as Specific Purpose Payments, including FAGs to local government, to contribute towards meeting the costs of state and local government responsibilities.
Other features of Commonwealth-State financial relations include the First Home Owners Scheme, which provides compensation to first home buyers for the one-off increase in housing prices associated with indirect tax reform, and mirror tax arrangements, which provide for the collection of certain state taxes on activities in or on Commonwealth places, to ensure competitive neutrality for businesses operating from Commonwealth places.
Table 1: GST revenue provision and total Australian Government payments to the state/local sector in 2004-05 (estimated)
- The GST estimate has been adjusted to account for the final 2003-04 outcome, reflecting that payments in 2003-04 exceeded final collections in that year. (Further details are provided in Table 14.)
Table 2: GST revenue provision and total Australian Government payments to the state/local sector in 2005-06 (estimated)
- Consistent with the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999, $219.4 million in compensation paid to the states in 2004-05 as an advance from their 2005-06 GST entitlement will be deducted from GST payments to the states in 2005-06. This amount will be repaid to the states in 2005-06 in addition to the $127 million it is estimated the states will require to compensate for lower GST revenue in 2005-06 as a result of allowing certain taxpayers to pay GST annually.
* This table has been amended.