Lexi Webster
The distribution of GST revenue among Australia's states and territories has been a contentious issue, with debates surrounding fairness and the potential for political manipulation. The Commonwealth Grants Commission advises the government on GST distribution to ensure states can provide comparable services, considering their spending needs and revenue-raising capabilities. While the GST is distributed per capita, the previous system allocated more GST per person to states with lower revenue-raising capacities. Western Australia (WA) has been at the centre of the dispute, with changes to GST distribution rules benefiting WA at the expense of other states, particularly Victoria, New South Wales (NSW), and Queensland. The Albanese government has pledged to uphold the changes, ensuring no state is worse off through top-up payments, despite criticism from some state treasurers.
| Characteristics | Values |
|---|---|
| GST distribution dispute | Victoria, South Australia, Tasmania, Western Australia |
| States that lost GST revenue | New South Wales, Queensland |
| States that gained GST revenue | Victoria, Western Australia |
| GST distribution recommendation | Commonwealth Grants Commission |
| GST distribution principle | Comparable services and infrastructure |
| GST distribution basis | Per capita |
| GST distribution changes | Introduced by Scott Morrison, backed by Labor |
| GST distribution impact | Lowered GST relativities of other states, higher top-up payments |
| GST distribution period | Until 2029-30 |
| GST distribution guarantee | No state will be worse off |
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What You'll Learn
GST allocation changes
The allocation of GST funds in Australia has been a source of contention for many years, with annual disputes arising over the distribution of funds among the states and territories. The GST system was introduced in 2000, replacing several state taxes. The money is distributed from a central pool, with the goal of equalising revenue between states and addressing fiscal imbalances. The Commonwealth Grants Commission (CGC) uses a formula to assess the level of 'need' in each state, based on population characteristics and the capacity of the state to raise its own funds. This results in a ''relativity' score, which determines how much funding each state receives per person.
In 2018, reforms were implemented to address dissatisfaction from Western Australia (WA) over its low returns. The changes guaranteed all states a minimum return on their contribution. However, this led to accusations of favouritism towards WA, with NSW Treasurer Dominic Perrottet claiming the GST formula was being "manipulated" and that WA's gains would come at the expense of the other states. The 2018 reform also introduced a "no worse-off guarantee", meaning states would receive funding based on whichever was higher between the old and new systems. This resulted in WA receiving billions more in GST, while states like NSW and Queensland lost millions.
The ongoing debate centres on the suitability of the minimum payments floor and the perceived inequity of the reform. While the Albanese government has committed to maintaining the changes, critics argue that the reform was a political move to gain support in WA. There are calls for a review of the GST distribution scheme, with suggestions to include gambling taxes in the calculations and to determine allocations based on a per capita formula.
The underperformance of GST collections relative to the overall growth of the economy has also been a concern. PwC's Chief Economist, Jeremy Thorpe, noted that Australia's GST collections have lagged, partly due to increased spending in exempt areas like housing, healthcare, and education. He suggested an increase in the GST rate from 10% to 12.5%, arguing that a properly structured reform package could lead to higher economic growth. However, any changes to the GST rate and exemptions must consider their impact on different economic groups within the community, especially low-income households.
While the GST allocation changes have sparked debates and disagreements, the goal is to ensure that each state and territory can provide its residents with a comparable level of services. The complexities of the GST distribution reflect the challenges of balancing the needs and circumstances of Australia's diverse regions.
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GST distribution disputes
The Goods and Services Tax (GST) in Australia has been a source of contention among the states and territories, with annual disputes arising over its allocation. The federal government distributes GST funds to the states and territories, which have significant spending responsibilities but limited means to raise money. While the principle of distribution is based on need, ensuring each state can provide comparable services, the reality is more complex.
In recent years, Western Australia (WA) has been at the centre of GST distribution disputes. Under the leadership of Scott Morrison, changes were made to the GST allocation rules, benefiting WA significantly. This prompted strong reactions from other states, particularly South Australia (SA) and Victoria, which stood to lose financially. The 2024 reforms were expected to cost the federal government over $50 billion by 2030, and were criticised by economists Saul Eslake and Chris Richardson as a political move to gain support in WA.
The Victorian Legislative Assembly initiated a public inquiry in 2021 to investigate the state's share of GST funding. The inquiry concluded that WA was unfairly advantaged and recommended a return to the original HFE system. NSW Treasurer Dominic Perrottet and Victorian Treasurer Tim Pallas also voiced their opposition to the perceived favouritism towards WA.
To address these concerns, the federal government implemented top-up payments to ensure that no state or territory was worse off due to WA's larger share. However, variations in state circumstances, such as the rise in black coal prices, have continued to impact GST distribution. While some states have lost funds, such as NSW and Queensland, Victoria gained an additional $3.7 billion due to its higher population and the decline in NSW and Queensland.
The GST distribution disputes highlight the challenges of balancing the needs of all states and territories in Australia. While the federal government aims to ensure comparable service levels, the varying circumstances and economic fluctuations in each state complicate the process.
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GST funding for disability services
The Goods and Services Tax (GST) has been collected by the federal government and distributed to the states and territories since 2000. In 2024, the federal government will give the states a total of $180 billion, with about half of that ($87 billion) set aside for schools, hospitals, and infrastructure. The remaining $93 billion is GST, which states can use as they see fit. The idea is that the money should ensure each state and territory is able to provide its residents with a comparable level of services.
However, the way GST is distributed among the states has been a source of contention. In 2024, the Albanese government pledged to uphold changes made by the Morrison government that would benefit Western Australia (WA) at the expense of all other states. While the changes include top-up payments to ensure no state or territory is worse off, New South Wales (NSW) and Queensland have lost out on millions, while Victoria gained an extra $3.7 billion.
GST funding is also used for disability services. The National Disability Insurance Scheme (NDIS) is a federal government initiative that provides support to Australians with disabilities. NDIS participants can elect to have their plan managed by a third party, and these plan management services can be GST-free if certain requirements are met. For example, there must be a written agreement between the NDIS participant and the supplier, and the supply must be of reasonable and necessary supports specified in the participant's NDIS plan.
Additionally, disability support workers and supplies often qualify for GST-free status. However, it is the responsibility of the support workers to determine which items require tax to be added or not, and this may depend on whether the service provider receives funding under the Disability Services Act 1986. There are listings of covered items provided in Table A (non-government-funded) and Table B (government-funded).
The NDIS Commission also has a 'Support for NDIS Providers' Grants Program', which is funded by the Australian government. This program aims to enable people with disabilities to access quality providers and workers and exercise their rights when accessing NDIS supports and services.
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GST revenue calculations
The Goods and Services Tax (GST) in Australia is a broad-based tax of 10% on most goods, services, and other items sold or consumed in the country. While some items are GST-free, the GST is typically included in the price charged by businesses and organisations registered for GST. These businesses can also claim credits for the GST included in the price of goods and services they buy.
Calculating the GST on a net price (exclusive of GST) can be done by multiplying the amount by 1.1. For example, if the GST-exclusive price is $90, multiplying it by 1.1 gives $99, which includes GST. To calculate the GST-inclusive price, one can multiply the GST-exclusive price by the GST rate of 10%.
Businesses with a GST turnover of $75,000 or more ($150,000 or more for non-profit organisations) are required to register for GST. This also applies to those providing taxi or limousine services, regardless of turnover. Once registered, businesses can use the GST to claim tax credits on purchases for their business.
The GST revenue is distributed to the states and territories, with the federal government splitting the money based on need. This ensures that each state can provide comparable service levels to its residents. However, the distribution of GST revenue has been a source of contention, with some arguing for a per-capita distribution or a return to the original HFE system. The current system has resulted in variations, with some states gaining or losing billions depending on factors like population changes and resource royalties.
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GST's impact on states
The Goods and Services Tax (GST) in Australia has had a significant impact on states and territories, influencing their revenue streams and intergovernmental relations. GST was introduced in July 2000 by the Howard government, and it has been a source of annual contention due to its complex distribution among the states.
The federal government distributes GST revenue to the states, aiming to ensure that each state can provide its residents with comparable service levels. In the 2023-24 financial year, the states collectively received $180 billion, with about half allocated for specific purposes, such as schools, hospitals, and infrastructure projects. The remaining $93 billion in GST revenue is distributed based on need, with the intention of ensuring each state can provide essential services.
However, the distribution of GST revenue has been a point of contention, with some states arguing that they receive less than their fair share. For example, Western Australia (WA) has long argued that it should receive a larger share of GST revenue due to its large contribution to the Australian economy through mining royalties. As a result, the Morrison government changed the GST allocation rules to benefit WA, with the Albanese government committing to uphold these changes. However, these changes have been criticized by other states, particularly Victoria, New South Wales (NSW), and Queensland, which stand to lose substantial revenue.
The impact of GST on states is also felt through its influence on state incentives and tax benefits for companies investing in those states. The introduction of GST has impacted the structure of tax incentives, with interstate sales no longer impacting incentives and a lower effective tax rate for companies. This has resulted in a shift in the benefits offered by states to attract investments, with potential implications for employment generation and industrial development.
Overall, the GST has had a significant impact on the finances and operations of Australian states and territories, shaping their revenue streams, influencing intergovernmental relations, and impacting their ability to provide essential services. The ongoing debates and adjustments to GST distribution reflect the dynamic nature of federalism and the challenges of ensuring equitable distribution of resources in Australia.
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Frequently asked questions
Western Australia (WA) typically pays the most GST in Australia.
In 2024, Western Australia received $6.2 billion more in GST than it would have under the previous distribution arrangements.
The Commonwealth Grants Commission advises the Australian Government on how to distribute GST funds to states. The aim is to ensure that each state can provide comparable services, such as hospitals and schools.
Victoria gained an extra $3.7 billion in GST revenue, while NSW and Queensland lost $310 million and $469 million, respectively.
Yes, there has been opposition from several states, including Victoria, South Australia, Tasmania, and New South Wales, which have argued that the changes unfairly favour Western Australia.
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