On 18 October 2018, the Senate referred the provisions of the Treasury
Laws Amendment (Making Sure Every State and Territory Gets Their Fair Share of
GST) Bill 2018 to the Economics Legislation Committee for inquiry and report by
8 November 2018.
Overview of the bill
The bill amends the Commonwealth Grants Commission Act 1973 and
the Federal Financial Relations Act 2009 to give effect to key elements
of the government's interim response to the Productivity Commission's Inquiry
Report, Horizontal Fiscal Equalisation.
The key elements of the government's interim response include:
- transitioning the horizontal fiscal equalisation system from full
equalisation (equalised to the strongest state or territory) to reasonable
equalisation (equalised to the stronger of New South Wales and Victoria);
- introducing a minimum Goods and Services Tax (GST) revenue
sharing relativity (GST relativity floor) that may be determined by the
Treasurer for any individual State or Territory; and
- permanently boosting the GST revenue pool with additional
Commonwealth financial assistance.
The following elements of the government's interim response are given
effect under existing laws:
- providing short-term transition payments to any state or
territory with a GST revenue sharing relativity below a relativity factor of
- providing short-term transition payments to the Northern
Territory if its GST revenue sharing relativity falls below its determined
relativity factor for
The bill introduces a guarantee that each state and territory will get
the better of the current distribution system or the updated distribution
system during the transition period.
In addition, the Productivity Commission will be required to conduct an
inquiry at the end of the transition period to assess whether the updated
system is operating efficiently, effectively and as intended.
The additional funding, to be contributed by the Commonwealth to support
the states and territories to transition to the new benchmark, is nearly
$9 billion over ten years.
Conduct of the inquiry
The committee advertised the inquiry on its website. It also wrote to
relevant stakeholders and interested parties inviting submissions by 24 October
2018. The committee received 13 submissions, which are listed at Appendix 1.
The committee held a public hearing in Canberra on 26 October 2018. The
witnesses who appeared at the hearing are listed at Appendix 2.
The committee appreciates the efforts of all stakeholders who
contributed to the inquiry.
Since the GST was introduced in 2000, GST revenue has been distributed
to the states and territories according to a system of horizontal fiscal
equalisation (HFE). This GST distribution system worked in a relatively stable
and predictable way in its early years, but the economic shocks of the last
decade have resulted in a level of volatility that could not have reasonably
been foreseen when the system was introduced. This volatility has reduced
community confidence in Australia's HFE system and resulted in the government
asking the Productivity Commission (PC) to undertake a thorough review of the
strengths and weaknesses of the existing GST distribution arrangements.
The PC concluded that the HFE system had deficiencies in the following
- the system is not policy neutral which can deter states from
improving the efficiency of their tax mixes or expanding their tax bases;
- too little weight is afforded to the importance of fairly
rewarding states and territories for their policy efforts; and
lack of transparency and accountability can lead to
misinformation and undermine accountability for decisions and public confidence
in the system.
The PC recommended that, among other things, the objective of the HFE
system should be refocused to provide the states and territories with the
fiscal capacity to provide services and associated infrastructure of a
reasonable standard. The PC also examined a range of alternative equalisation
benchmarks and noted none of these benchmarks is unambiguously superior and
there is no 'right' balance before concluding that the HFE system should
transition towards equalisation of the average
(pre-GST) fiscal capacity of all states and territories, with the remaining GST
revenue distributed on a per capita basis.
The government's interim response proposed a plan to update the way the
GST is distributed:
The Government's plan involves transitioning to a new HFE
system over eight years from 2019–20 in a way that is fair, reasonable and
sustainable and that would ensure all States [and Territories] are better off.
The plan announced by the government has three steps:
- short-term transition payments;
phasing in a new HFE system; and
- completing the transition to a new, more stable equalisation
The bill under investigation enacts the government's transition plan.
Detailed explanation of the bill
Amendments to the Commonwealth
Grants Commission Act 1973
The bill amends the Commonwealth Grants Commission Act 1973 to
require the Treasurer, when framing the terms of reference for a Commonwealth
Grants Commission (CGC) inquiry, to pursue the objective of ensuring the states
and territories each have the fiscal capacity to provide services at the same
standard as the higher of New South Wales and Victoria—that is, the Treasurer
is to set the equalisation standard to the stronger of New South Wales and
For the 2021–22 financial year and later financial years, the Treasurer
must set the equalisation standard to the stronger of New South Wales' and
Victoria's respective fiscal capacities when setting the terms of reference for
the CGC's inquiry and report. The CGC will be required to set this as the
standard when it makes its assessments using the HFE methodology.
The bill transitions Australia's HFE system over a number of years in a
fair, reasonable and sustainable way that would leave no state or territory
worse off. To give effect to the transition period for the adoption of the
updated equalisation standard, the Treasurer is to frame the terms of reference
for a financial year that occurs during the period 2021–22 to 2025–26, so as to
require the CGC, to make necessary adjustments to its principles, categories
and methods of assessment to make an appropriate and even transition from the old
equalisation standard to the new equalisation standard.
During the period 2021–22 to 2025–26, the terms of reference are to
involve the CGC applying a methodology that uses both the old and updated HFE
systems to recommend a new set of relativities that combine the results of both
systems in the way set out in Table 1.
Table 1: Methodology to
transition to an updated HFE system
factor =56×old factor+16×new factor
factor =46×old factor+26×new factor
factor =36×old factor+36×new factor
factor =26×old factor+46×new factor
factor =16×old factor+56×new factor
Where: old factor means the relativity derived
from the old HFE system; and new factor means the relativity derived from updated HFE
Amendments to the Federal Financial
Relations Act 2009
The bill amends the Federal Financial Relations Act 2009 to introduce
a 'minimum' or 'floor' in relation to the Treasurer's power to determine the
GST revenue sharing relativity factor for particular states or territories for
a financial year. The floor would initially be set at a relativity of 0.7,
before moving up to 0.75. These floors are intended to be an additional safety
net and, as such, are scheduled to come into effect at a time when the
relativities of all states and territories are projected to be, and projected
to remain, above these relativities.
In addition, the size of the annual funding pool from which GST grants
are made will increase by incorporating into the annual pool amount calculation
a 'pool top‑up' which will be sourced from Commonwealth revenues not
related to GST.
An additional $600 million will be placed in the GST distribution
pool from 2021–22, the first years of transition to the new equalisation
standard. This additional contribution will be indexed at the rate of growth of
GST collections; that is, the expanded GST pool would continue to grow at the
same rate as GST collections each year.
In 2024–25, a further $250 million will be added to the GST
distribution pool and future Commonwealth contributions to the GST distribution
pool will be indexed to grow in line with GST collections on a permanent basis.
In calculating indexation for a particular year, the amount of
indexation cannot be less than zero and cannot be less than the amount of
indexation included in the pool top-up from the immediately preceding year.
The bill introduces a guarantee that each state and territory will get
funding at least equal to the better of the current distribution system or the
updated distribution system during the transition period. This is achieved by
providing additional financial assistance if a state or territory's cumulative
grant entitlements under the updated distribution system, calculated from the
beginning of the transition period, is less than the entitlements they would
have received under the current distribution system.
Review of the operation of the bill
The bill contains a requirement for the Treasurer to refer to the PC for
inquiry, a review into the operation of the bill which would assess whether the
updated distribution system is operating efficiently, effectively and as
intended. In undertaking the inquiry, the PC would be required to focus on the
fiscal implications for each state and territory arising from the updated HFE
system and related reforms to the Federal Financial Relations Act 2009.
The PC must complete its inquiry and provide its report to the Treasurer by 31
Compatibility with human rights
The bill is compatible with human rights as it does not raise any human
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