Bills Digest No. 17 1999-2000 States Grants (General Purposes)Amendment Bill 1999

Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details

Passage History

States Grants (General Purposes)Amendment Bill 1999

Date Introduced: 10 June 1999

House: House of Representatives

Portfolio: Treasury

Commencement: On Royal Assent

Purpose

To amend the States Grants (General Purposes) Act 1994 so as to:

• provide for general revenue assistance (including financial assistance grants and national competition payments) to the States and Territories in 1999-2000
• enable the Commonwealth to make payments to the States and Territories under the safety net arrangements relating to business franchise fees in 1999-2000, and
• enable windfall tax reimbursements received by the Commonwealth to be paid to the States and Territories in 1999-2000.

Background

Since the State Governments lost the capacity to levy income tax in 1942, they have become increasingly financially dependent on the Federal Government. At present the bulk of their funds come from Commonwealth sources, and almost half of that comes from general purpose grants.

All Commonwealth payments to the States and Territories are made as either Specific Purpose Payments or General Purpose Grants. The grants are contingent on the fulfilment of a wide range of terms and conditions.

This Bill covers general purpose grants. These grants are 'untied' in that the Commonwealth does not specify how the money should be spent. Nevertheless there are some conditions attached to the receipt of this money. The conditions are set out in the States Grants (General Purposes) legislation.(1)

There are two categories of general purpose grants to be provided by this Bill: financial assistance grants and national competition payments. According to 1999-2000 Budget Papers, Commonwealth general revenue assistance to the States and Territories is expected to be about $17.7 billion in 1999-2000, an increase of $706.2 million or 4.2 per cent on the previous year.(2)

Financial Assistance Grants

The financial assistance grants (FAGs) are the largest category of general purpose grants. The overall pool of money from which FAGs are allocated is determined according to a formula which maintains the grants in real per capita terms, making adjustments for inflation and national population growth. FAG funding arrangements have been operating since 1985-86, when they replaced the previous tax-sharing grant arrangements.(3)

FAGs are distributed among States and Territories essentially upon recommendations by the Commonwealth Grants Commission. In March 1999 the Commission presented the Government with its report on general revenue grant relativities.(4) The basis on which grants should be distributed between the States and Territories had not been reviewed since 1993 and the Commission recommended a number of changes to the way it believes the distribution should be decided.

The report was discussed at the Premiers' Conference on 9 April 1999 where it was agreed that the level of FAGs to the States and Territories would be maintained in real per capital terms in 1999-2000. The Premiers' Conference also decided that the pool of FAGs and 'unquarantined' Health Care Grants (HCGs) would be distributed using the per capita relativities calculated by the Commonwealth Grants Commission based on a five year assessment period and including an assessment for depreciation.(5)

The effect of the 1999 relativities is to redistribute funding away from Victoria and Western Australia to New South Wales and the smaller states. New South Wales gains the largest increase in grant share, benefiting most from the introduction of an assessment of depreciation costs.(6) This Bill gives effect to these decisions of the Premiers' Conference.

National Competition Payments

National competition payments will also be available to the States and Territories in 1999-2000 in accordance with the terms of the Agreement to Implement the National Competition Policy and Related Reforms. A total amount of $439.1 million is available in 1999-2000 to be divided on an equal per capital basis among those States and Territories that make satisfactory progress in implementing the reform conditions specified in the Agreement.(7)

The background to these payments is as follows:

The Commonwealth, States and Territories agreed at the Council of Australian Governments (COAG) meeting of 11 April 1995 to a program for the implementation of the National Competition Policy and related financial arrangements. The Commonwealth agreed to make additional general purpose payments to the States and Territories in the form of a series of national competition payments. It was agreed that national competition payments would commence in July 1997 at a level of $200 million, and increase to $400 million in July 1999 and $600 million in July 2001 (all in 1994-95 prices). States and Territories agree to comply with certain conditions in order to receive national competition payments.

Revenue Replacement Payments

Revenue replacement payments are Commonwealth payments to the States separate from general purpose grants. They are designed to replace revenues that the States and Territories previously collected from State business franchise fees on tobacco and petroleum products and alcoholic beverages. Arrangements for revenue replacement payments were announced in August 1997 following the High Court's decision that cast doubt on the constitutional validity of these franchise fees.(8)

The total amount of revenue to be distributed will be determined by the Commissioner of Taxation and the Chief Executive Officer of Customs. The distribution of this revenue is unchanged from the revised shares which were agreed among the States and Territories in 1997-98.

Windfall Tax Reimbursements

A State or Territory will also be paid any amounts received by the Commonwealth under the Franchise Fees Windfall Tax (Collection) Act 1997 which imposes a 100 per cent windfall gains tax to protect State and Territory budgets against refund claims in respect of past business franchise fee payments. Any windfall tax reimbursement payments to a State or Territory will be equal to the amount collected by the tax in that State.

Changes to Commonwealth-State Financial Relations

On 13 August 1998, the Commonwealth Government announced its plan to reform the Australian taxation system. A key element of the A New Tax System (ANTS) package is the reform of Commonwealth-State financial relations. At the 1999 Premiers' Conference on 9 April, the Heads of Government signed an Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (IGA). A revised IGA was drawn up following Senate amendments to the Government's ANTS legislation. The revised IGA, which has been signed by each State and Territory Head of Government, gives effect to a number of reform measures including:

• From 1 July 2000, the Commonwealth will appropriate all of the Goods and Services Tax (GST) revenues to the States and Territories so that no State or Territory is worse off than under current arrangements.
• Financial Assistance Grants (FAGs) and revenue associated with the safety net surcharge arrangements for alcohol, petroleum and tobacco products will cease from 1 July 2000.
• Receipt of GST revenues by States and Territories will be subject to their meeting other obligations, including funding and administering a First Home Owners Scheme, and paying to the Commonwealth the cost of administering the GST.
• Initially the GST revenues will not be sufficient to fund the States and Territories current expenditure and the new responsibilities they are assuming. The Commonwealth has therefore guaranteed that, in each of the transitional years following the introduction of the GST, the budgetary position of each State and Territory will not be worse off under the new arrangements.

The revised IGA also provides for the setting up of a Ministerial Council from 1 July 2000, comprising Commonwealth and State Treasurers, to oversee the implementation and operation of the Intergovernmental Agreement and to ensure compliance with its terms. The Ministerial Council will also provide a forum for the discussion of per capita relativities to apply to the distribution of the GST revenues among the States and Territories and remove the need for the annual Premiers' Conference process.

Amendments to the Government's original GST package are projected to cost about $4 billion a year by 2002-03. This will result in decreased revenues to the States, and to compensate, the Commonwealth will continue to assume responsibility for providing assistance to local government. In addition, the abolition of nine State indirect taxes has been rescheduled and in some cases deferred indefinitely. The following table summarises the original and revised dates for abolishing the nine State indirect taxes.

Source: Gittins R, Premiers-and you and me-to pay for GST trickery, The Sydney Morning Herald, 5 June 1999.

The changes to Commonwealth-State financial arrangements require the passage of legislation by the Commonwealth, States and Territories. On 29 June 1999 the House of Representatives delayed consideration of the Senate's amendments to the A New Tax System (Commonwealth-State Financial Arrangements) Bill 1999 and the A New Tax System (Commonwealth-State Financial Arrangements - Consequential Provisions) Bill 1999 because some States and Territories had not signed the revised IGA at that time.(9) More detail on these bills can be found in the relevant Bills Digests.(10) Among the provisions of the A New Tax System (Commonwealth-State Financial Arrangements) Bill 1999 is the maintenance of the State and Territories' entitlement to national competition payments and the protection provided by the business franchise fees windfall tax from 1 July 2000 following the repeal of the States Grants (General Purposes) Act 1994.

Main Provisions

Item 1 of Schedule 1 inserts a new Schedule 6 into the States Grants (General Purposes) Act 1994 (the Act) to provide details of entitlements to financial assistance grants, national competition payments, revenue replacement payments and windfall tax reimbursements for 1999-2000.

The overall pool of money from which financial assistance grants (FAGs) are allocated and the distribution of the pool among the States and Territories is determined according to a formula set out in Section 9 of the Act. In this formula, the 'base assistance amount' is to be calculated under new subclause 2(2) of Schedule 6 and the relativities factors are to be provided by new clause 3 of Schedule 6. Page 4 of the Explanatory Memorandum to this Bill explains the operation of the formula in detail.

New clause 4 specifies a formula which determines the maximum amount which the Commonwealth Treasury may deduct from a State or Territory's financial assistance grant under Section 10 of the Act, if a State or Territory fails to comply with its obligations under the Agreement to Implement the National Competition Policy and Related Reforms.

New clause 8 specifies how each State and Territory's entitlement to a national competition payment is to be worked out. The formula includes an index factor multiplied by a figure representing the population of each State and Territory as at 31 December 1999. The purpose is to divide the amount available on an equal per capita basis among those States and Territories complying with the Agreement.

New clause 5 specifies how each State and Territory's entitlement to a revenue replacement payment is to be worked out. The distribution of this revenue is on the same basis as that agreed among the States and Territories in 1997-98.

The effect of new subclause 5(3) and 5(4) will be to facilitate the assessment of safety net revenues for tobacco on the existing basis. The basis is explained in detail in the Bills Digest to the States Grants (General Purposes) Amendment Bill No. 2 1997 (Bills Digest No. 99, 1997-98). According to the Explanatory Memorandum, the Government intends introducing a new 'per stick' excise regime for tobacco from 1 November 1999. New subclauses 5(3) and 5(4) will ensure that State and Territory shares of tobacco excise under the safety net arrangements will continue to be calculated on the existing weight and ad-valorem basis.

New clause 6 specifies how each State and Territory's entitlement to a franchise fees windfall tax reimbursement payment is to be worked out. The States and Territories are the agents for collecting any windfall tax and the Franchise Fees Windfall Tax (Collection) Act 1997 imposes on them certain conditions in relation to the manner and timing of remitting revenues to the Commonwealth. Any windfall tax reimbursement payments to a State or Territory will be equal to the amount collected by the tax in that State or Territory.

Endnotes

2. In 1998 the Joint Committee of Public Accounts and Audit examined and reported on the conditions which may appropriately be attached to General and Specific Purpose Payments to the States. The Committee concluded that, with regard to General Purpose Payments (GPPs), there is little to be gained from attempting to prescribe a definitive list of specific conditions which might appropriately be applied to hypothetical future conditional GPP funding arrangements. Conditions would need to be determined for each case. Joint Committee of Public Accounts and Audit, 'General and Specific Purpose Payments to the States', Report 362, June 1998, p. 96-97.

3. Federal Financial Relations 1999-2000, Budget Paper No. 3, 1999-2000, p. 6.

4. Denis James, 'Commonwealth Assistance to the States since 1976', Parliamentary Library, Background Papers (Economics, Commerce and Industrial Relations Group), No. 5, 1997/98, 20 October 1997, p. 11.

5. Commonwealth Grants Commission, 'Report on general revenue grant relativities 1999', Press Release, 2 March 1999.

6. Federal Financial Relations 1999-2000, Budget Paper No. 3, 1999-2000, p. 7.

7. Ibid., p. 31.

8. Ibid., p. 32-33.

9. Ha and Another v State of New South Wales & Others and Walter Hammond & Associates v State of New South Wales & Others (1997) 71 ALJR 1080.

10. House of Representatives, Debates, 29 June 1999, p. P6033.

11. A New Tax System (Commonwealth-State Financial Arrangements) Bill 1999, Bills Digest, 164, 1998-99; A New Tax System (Commonwealth-State Financial Arrangements - Consequential Provisions) Bill 1999, Bills Digest, 170, 1998-99.

Contact Officer and Copyright Details

Rosemary Bell
2 August 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

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ISSN 1328-8091
© Commonwealth of Australia 1999

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Published by the Department of the Parliamentary Library, 1999.

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