Commonwealth-State Financial Relations

The States will receive GST revenue and payments from the Australian Government totalling an estimated $64.6 billion in 2005‑06 (Table 1) and $67.5 billion in 2006-07 (Table 2).

All GST revenue is paid to the States in accordance with 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 principle of Horizontal Fiscal Equalisation (HFE).

In 2005-06, the States are estimated to receive $1.2 billion 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. Only New South Wales will require Budget Balancing Assistance (BBA) in 2005‑06. In 2006‑07, all States and Territories are estimated to receive a GST windfall. This windfall is estimated to be $1.9 billion in 2006-07.

The Australian Government has now reached agreement with all States on a schedule for the abolition of most taxes listed for review in the IGA. Inefficient state taxes such as stamp duty on mortgages, leases, and credit and rental arrangements will be abolished, as was originally intended under the IGA. The abolition of these taxes is expected to save taxpayers approximately $4.4 billion over the four years from 1 July 2006.

The Australian Government will also extend the transitional period from 30 June 2006 to 30 June 2009. This is a guarantee by the Australian Government that ensures that no State is worse off as a result of tax reform. Given current estimates, this is a sufficient timeframe to ensure the States will no longer require transitional assistance even after the abolition of the IGA taxes.

The Australian Government will provide payments to the States under the Agreement to Implement the National Competition Policy and Related Reforms of an estimated $820.4 million in 2005-06. The 2005‑06 National Competition Policy Payments are the final payments under the current National Competition Policy arrangements. At its 10 February 2006 meeting, the Council of Australian Governments (COAG) agreed to a new National Reform Agenda comprising human capital, competition and regulatory reform streams. COAG agreed that, if funding is needed to ensure a fair sharing of the costs and benefits of reform, the Australian Government will provide funding to the States on a case-by-case basis once specific implementation plans have been developed.

The Australian Government will also provide the States with 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 2005-06 (estimated)

1. The GST estimate has been adjusted to account for the final 2004-05 outcome, reflecting that payments in 2004‑05 exceeded final collections in that year. (Further details are provided under GST adjustment in 2005-06.)
2. 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.

Table 2: GST revenue provision and total Australian Government payments to the State/local sector in 2006-07 (estimated)

1. For one SPP agreement, individual State splits cannot be specifically identified (see footnote (d) in Table B3). Therefore, the sum of the individual State splits which include 'Specific Purpose Payments to the States' as a component will not match the total.