Part 4: General Revenue Assistance
This part provides information on general revenue assistance paid to the States. General revenue assistance is a broad category of payments, including GST payments, which are provided to the States without conditions, to spend according to their own budget priorities. |
A new framework for federal financial relations
The reforms to federal financial relations will have only a small impact on general revenue assistance provided to the States. Under the treatment of payments for specific purposes in the new framework for federal financial relations, the following payments for specific purposes will be reclassified as general revenue assistance with effect from 1 January 2009: royalty payments ($351 million in 2008‑09); Snowy Hydro Ltd tax compensation ($23 million in 2008‑09); and two payments for ACT municipal services ($17 million in 2008‑09).
As the reclassification will take effect from half way through 2008‑09, half of the Budget year estimates for these payments are classified in this part as general revenue assistance and the other half remain classified in Part 3 as payments for specific purposes, as shown in Table 3.9. The full year effect of the reclassifications applies from 2009‑10.
The new framework for federal financial relations will not involve any change to the GST revenue sharing arrangements provided for in the Intergovernmental Agreement on the Reform of Commonwealth‑State Financial Relations.
Total general revenue assistance
In 2008‑09, the States will receive $45.5 billion in general revenue assistance from the Commonwealth, as shown in Table 4.1, comprising $45.3 billion in GST payments and $178 million of other general revenue assistance. This is a 6.3 per cent increase in general revenue assistance, compared with the $42.8 billion the States will receive in 2007‑08.
Table 4.1: General revenue assistance, by State
Part of the increase in general revenue assistance in 2008‑09 is a result of the reclassification of payments for specific purposes from 1 January 2009 ($391 million) as part of the new framework for federal financial relations. However, this increase is partly offset by the repayment by the States of overpaid compensation for GST policy decisions ($286 million). In addition, GST payments are expected to be $2.6 billion higher in 2008‑09, compared with 2007‑08.
For the Budget year, total general revenue assistance to the States will represent 15.5 per cent of total Commonwealth expenditure. The bulk of general revenue assistance is from GST payments the Commonwealth provides to the States, as shown in Table 4.2.
Table 4.2: General revenue assistance
GST payments
GST revenue variations since the 2007‑08 Budget
Table 4.3 is a reconciliation of the GST revenue estimates since the 2007‑08 Budget and MYEFO. The reconciliation accounts for policy decisions, parameter and other variations, and the reclassification in this Budget of the GST as a Commonwealth tax.
GST revenue for 2007‑08 is expected to be $840 million higher than forecast at MYEFO. This reflects the stronger than expected growth in consumption which is subject to GST. For 2008‑09, the increase in estimated revenue of $250 million incorporates GST refunds of around $500 million which are expected to be paid following the Federal Court decision in KAP Motors Pty Ltd v Commissioner of Taxation [2008] FCA IS9 (KAP Motors), as well as slower growth in consumption which is subject to GST and private dwelling investment, relative to the MYEFO estimates. These are partly offset by increased GST revenues resulting from policy decisions.
GST revenue has also increased in each year as a consequence of the reclassification of the GST as a Commonwealth tax. Budget Statement No. 5 in Budget Paper No. 1, Budget Strategy and Outlook 2008‑09, provides a further explanation of the accounting implications of reclassifying the GST as a Commonwealth tax and the GST revenue estimates more generally.
Table 4.3: Reconciliation of GST revenue estimates
- Once‑off impact of reclassifying the GST as a Commonwealth tax.
Table 4.4 shows policy decisions taken since MYEFO that affect GST revenue. These decisions increase the amount of GST payments to the States by over $2.5 billion over five years, and include:
- increasing the excise and customs duty rates on 'other excisable beverages' to the same rate as for full strength spirits ($282 million over five years);
- increased places for migrants in 2007‑08, 2008‑09 and over the forward estimates (five measures totalling $1.1 billion over four years); and
- tightening of the fringe benefits tax exemptions applying to certain work‑related items (including laptop computers, personal digital assistants and tools of trade) and meals under a salary sacrifice arrangement (two measures totalling $240 million over five years).
The Government is also proposing to implement several changes to the GST, including an integrity measure relating to the sale of real property under the margin scheme, and an amendment to ensure that supplies of mobile telephone 'global roaming' services provided to visitors to Australia remain not subject to GST. These measures are subject to the unanimous agreement of the States, pursuant to the Intergovernmental Agreement.
Table 4.4: Policy decisions since MYEFO that affect GST revenue
The Government will not proceed with the proposal to allow private providers to offer refunds in relation to the Tourist Refund Scheme or the proposed GST changes for charities and other not‑for‑profit organisations which were announced in the 2007‑08 Budget.
Detailed information on each decision is included in Budget Paper No. 2, Budget Measures 2008‑09.
Reconciling GST revenue and GST payments to the States
In accordance with the Intergovernmental Agreement, the Commonwealth administers the GST on behalf of the States and all GST revenue is paid to the States. This provides the States with a robust, secure and growing source of revenue to spend according to their own budget priorities. In 2008‑09, GST revenue will be $46.9 billion — an increase of $2.5 billion (5.7 per cent) from 2007‑08.
The Commissioner of Taxation estimates the level of GST receipts in June, prior to the end of each financial year. That estimate forms the basis of GST payments to the States for that financial year. A balancing adjustment is usually made in the following financial year to ensure that the States receive their full entitlement of GST payments for a financial year.
GST revenue for a financial year also varies from the amount of GST payments to the States for that year because of:
- GST revenues which are recognised on a Commonwealth whole of government basis, but are not recognised by the Commissioner of Taxation in his June determination, because the revenues will not be remitted to the Australian Taxation Office until the following financial year; and
- penalties, other than general interest charge penalties, which are not included in the definition in the Intergovernmental Agreement of GST to be paid to the States.
The reconciliation of GST revenue and GST payments to the States is provided in Table 4.5.
Table 4.5: GST revenue and GST payments to the States
- General interest charge (GIC) penalties are defined in the Intergovernmental Agreement as being a part of the Commonwealth's GST revenue that is paid to the States. However, while other GST‑related penalties are also recognised in the Commonwealth's GST revenue, non‑GIC penalties are not defined in the Intergovernmental Agreement as being a part of the GST revenue that is paid to the States.
- This is the GST component of sales by Commonwealth agencies which has been collected by those agencies but which, as at 30 June in each year, will not have been remitted to the Australian Taxation Office, because it is not due to be paid until the next Business Activity Statement is lodged (typically on 21 July in the following financial year).
- The Commissioner's determination for 2006‑07 was $20 million higher than the final outcome. As the GST payment for 2006‑07 was made in accordance with the Commissioner's determination, this overpayment is recovered in 2007‑08.
Distribution of GST payments among the States
As agreed by all States in the Intergovernmental Agreement, GST payments are distributed among the States in accordance with the principle of horizontal fiscal equalisation and having regard to the recommendations of the Commonwealth Grants Commission.
State shares of GST payments for 2008‑09 (totalling $45.3 billion) are shown in Chart 4.1.
Chart 4.1: State shares of GST payments, 2008‑09
State revenue sharing relativities
The Commission recommends state revenue sharing relativities (the GST relativities) to be used in calculating each State's share of GST payments such that, if each State made the same effort to raise revenue from its own sources and operated at the same level of efficiency, each State would have the capacity to provide services at the same standard.
This does not necessarily result in the equalisation of government services — just the equalisation of each State's capacity to provide the same standard of services. In calculating the GST relativities, the Commission takes into account differences in the States' capacities to raise revenues and differences in the costs the States would incur in providing the same standard of government services.
States are able to spend their share of GST revenue according to their own budget priorities.
The GST relativities for 2008‑09 were endorsed by the Ministerial Council for Commonwealth‑State Financial Relations in March 2008. The relativities for 2007‑08 and 2008‑09 are shown in Table 4.6. Historical relativities are provided in Appendix A.
Table 4.6: GST relativities
- The Commission issued a corrigendum to its Report on State Revenue Sharing Relativities 2008 Update containing revised relativities which it recommended be used to distribute the pool in 2008‑09.
Applying the GST relativities to the GST pool
The Intergovernmental Agreement defines the GST pool for a financial year to consist of GST payments plus health care grants provided by the Commonwealth under the Australian Health Care Agreements. Some health care grants are quarantined from the GST pool.
The GST relativities are applied to estimated state populations in order to determine an adjusted population for each State. Each State's adjusted population is then applied to the combined pool of GST payments and unquarantined health care grants to estimate weighted shares of the GST pool. The final distribution of GST payments is determined by deducting the unquarantined health care grants, which are separately provided to the States, from each State's share of the GST pool. The calculations for the distribution of the GST pool are shown in Table 4.7.
Table 4.7: Distribution of the GST pool
Box 4.1: The effect of horizontal fiscal equalisation One way to view the effect of horizontal fiscal equalisation is to compare each State's share of the GST pool using the GST relativities with a notional distribution on an equal per capita basis. In 2008‑09, around $3.6 billion (or 6.7 per cent) of the GST pool will be redistributed among the States, compared with an equal per capita distribution (Table A). Table A: Effect of horizontal fiscal equalisation, 2008‑09
The proportion of the GST pool being redistributed in 2008‑09 is broadly consistent with the average redistribution since the commencement of the GST (Chart A). The average generally reflects the convergence in the fiscal capacities of the four most populous States, with the slight increase in 2008‑09 chiefly driven by mining revenue increases and stamp duty increases in the booming resource States. Chart A: GST pool redistribution as a proportion of the GST pool
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GST administration
In March 2008, the Ministerial Council for Commonwealth‑State Financial Relations endorsed the GST administration budget for the Australian Taxation Office of $631.2 million for 2008‑09, including the effects of the efficiency dividends which apply to all Commonwealth agencies, as shown in Table 4.8.
Table 4.8: Reconciliation of the GST administration budget
- The efficiency dividend was increased from 1 per cent to 1.25 per cent for a further three years to 2010‑11. This measure was announced in the Mid‑Year Economic and Fiscal Outlook 2007‑08.
- A one off 2 per cent efficiency dividend applies from 1 March 2008.
Because the GST has a national tax base, the Intergovernmental Agreement provides for the Australian Taxation Office to administer the GST on behalf of the States. As all GST revenue is provided to the States, the States compensate the Commonwealth for the agreed costs incurred by the Australian Taxation Office in administering the GST, as shown in Table 4.9.
Table 4.9: GST administration budget
Other general revenue assistance
Budget balancing assistance
In the Intergovernmental Agreement, the Commonwealth guaranteed that the budget position of each State would be no worse than it would have been had tax reform not been implemented. The guaranteed minimum amount is an estimate of the revenue that each State would have received under the previous system of Commonwealth grants and if their own inefficient state taxes had not been abolished as part of the reforms.
The Commonwealth will pay budget balancing assistance to the States during the transitional period (which will expire on 30 June 2009) if a State's share of GST payments in a financial year is less than its guaranteed minimum amount for that year. No budget balancing assistance is payable when GST revenue exceeds the guaranteed minimum amount.
In 2008‑09, all States will receive GST payments that exceed their guaranteed minimum amount, as shown in Table 4.10. Consequently, no State will require budget balancing assistance.
Table 4.10: Guaranteed minimum amount, GST payments and budget
balancing assistance(a)
- No budget balancing assistance is payable when GST revenue exceeds the guaranteed minimum amount. As part of the agreement with the States to abolish most of the state taxes listed for review under the Intergovernmental Agreement, the Commonwealth has extended the transitional period (in which budget balancing assistance may be paid) from 30 June 2006 to 30 June 2009.
National Competition Policy payments
Between 1997‑98 and 2005‑06, the Commonwealth provided National Competition Policy payments to the States for implementing National Competition Policy and related reforms.
In 2005‑06 the Commonwealth suspended $43.2 million in National Competition Policy payments, following recommendations provided by the National Water Commission. This included water reform suspensions for outstanding obligations relating to interstate trading in the southern Murray‑Darling Basin, and for lack of progress and outstanding reforms with respect to water planning.
On 13 September 2007, the Commonwealth lifted the suspensions following a subsequent recommendation by the National Water Commission that satisfactory progress by the States in implementing their water reform commitments had been achieved.
Consequently, the suspended payments of $43.2 million were paid in 2007‑08. These payments are the final payments under the previous National Competition Policy arrangements.
Royalties
The Commonwealth makes payments to Western Australia for royalties collected in respect of the North West Shelf oil and gas project. The Commonwealth collects these royalties because it has jurisdiction over off‑shore areas. These royalties are shared between the Commonwealth (one third) and Western Australia (two thirds) and paid in accordance with section 129 of the Petroleum (Submerged Lands) Act 1967.
The Commonwealth also pays grants to the Northern Territory in lieu of royalties on uranium mining due to the Commonwealth's ownership of uranium in the Northern Territory. The grant is payable at the royalty rate of 1.25 per cent of net proceeds of sales. These royalties are paid under a continuing agreement, as established under the 1978 Memorandum of Understanding between the Commonwealth and the Northern Territory.
Compensation
Compensation for impact on royalties of excise amendment
The Commonwealth is removing the current exemption of condensate from crude oil excise. This will result in a consequential reduction in revenue from the offshore petroleum royalty.
As the Commonwealth pays two thirds of the royalty revenues to Western Australia, the Government has decided to provide compensation for the loss of royalty revenue. An initial payment of $80 million will be made to Western Australia in 2007‑08, with payments in subsequent years adjusted to equal the impact of removing the condensate exemption.
Further information is contained in the revenue measure Crude oil excise — condensate in Budget Paper No. 2 in the Treasury portfolio.
GST compensation for small business concession
In 2004‑05, the Commonwealth and the States agreed to allow small businesses and non‑profit organisations which voluntarily registered for the GST to pay and report GST on an annual rather than monthly or quarterly basis. The measure was designed to reduce the compliance costs faced by these organisations and has the effect of deferring some GST revenue from one financial year to the next. The Commonwealth agreed to compensate the States for this deferral of GST revenue.
The Commonwealth and the States agreed that the annual payments should be suspended from 2006‑07 because final tax return data indicated that the impact of the measure on GST revenue was much lower than forecast. The over‑estimate of the cost of the measure led to an over‑payment of compensation to the States, which is estimated to be $286 million at the end of 2008‑09, as shown in Table 4.11.
Table 4.11: Overpayment of compensation for GST deferral for small business
- Payments from 2006‑07 have been suspended.
- Latest estimates. Outcomes for 2004‑05 and 2005‑06 are based on tax return data.
The Government will recover the overpaid compensation in 2008‑09, and payments to the States, estimated at approximately $10 million per year, will recommence from 2009‑10.
Further information is contained in the expense measure Goods and Services Tax Compensation to the States for Small Business Concession — recovery of overpayments in Budget Paper No. 2 in the Treasury portfolio.
Snowy Hydro Ltd — company tax compensation
On 28 June 2002, the Snowy Mountains Hydro‑Electric Authority was corporatised. The assets and business of the Authority were transferred to Snowy Hydro Limited, a company jointly owned by the Commonwealth, New South Wales and Victoria (with 13 per cent, 58 per cent and 29 per cent shareholdings respectively).
The Commonwealth provides compensation to New South Wales and Victoria for Commonwealth taxes paid by Snowy Hydro Ltd in proportion to the States' shareholdings. These taxes would have previously been payable to the States through tax equivalence regime payments.
Australian Capital Territory — municipal services
Funding is provided to the Australian Capital Territory to assist in meeting the additional municipal costs which arise from Canberra's role as the national capital.
The Commonwealth also provides funding to compensate the Australian Capital Territory for additional costs resulting from the national capital planning influences on the provision of water and sewerage services.
The level of funding for both of these payments is based upon the findings of the Commonwealth Grants Commission, in its second and third reports on financing for the Australian Capital Territory, prior to the move to self‑government in 1989.
Mirror tax arrangements
The Commonwealth introduced mirror tax arrangements in 1998 to ensure that the States were not financially disadvantaged by the High Court decision in Allders International Pty Ltd v Commissioner of State Revenue (Victoria), which invalidated state taxes on Commonwealth places.
These arrangements mirror certain state taxes, including payroll taxes, land taxes and stamp duties, with respect to Commonwealth places.
The States collect these mirror taxes on behalf of the Commonwealth and bear the administrative costs of collection. All mirror tax revenues are credited to the Commonwealth and simultaneously appropriated to the States. Hence, mirror taxes are recorded as both Commonwealth revenue and negative revenue, with no net impact on the Commonwealth's Budget position.
Estimates of mirror taxes are provided in Table 4.12.
Table 4.12: Mirror taxes accrued on behalf of the States
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