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Home > MYEFO > Part 4: Fiscal Strategy and Outlook > Attachment D: Australia's Federal Relations
This part provides information on payments for specific purposes and general revenue assistance, including GST payments, provided to the States and Territories (the States).
A new framework for federal financial relations
On 26 March 2008, the Council of Australian Governments (COAG) agreed to implement a new framework for federal financial relations that focuses on reducing Commonwealth prescriptions on service delivery by the States in conjunction with a significant rationalisation of payments for specific purposes, a clearer specification of roles and responsibilities of each level of government, and an improved focus on outcomes-based public accountability.
increased flexibility for resources to be allocated to areas where they will produce the best overall outcomes for the community;
genuinely collaborative working arrangements, including clearly defined roles and responsibilities and fair and sustainable financial arrangements, to facilitate a long-term policy focus and reduce blame and cost shifting;
incentives for wide-ranging reforms;
increased accountability of governments to the community; and
reduced administration and compliance overheads.
In addition, the Commonwealth will provide National Partnership payments to the States to support delivery of specified projects, to facilitate reforms or to reward those jurisdictions that deliver on national reforms. The new financial arrangements provide a solid foundation for far-reaching economic and social reforms to be undertaken as part of COAG's economic and social reform agenda.
The Prime Minister and Treasurer, along with their State and Territory counterparts, will consider the details of the new framework, including outcomes, roles and responsibilities, performance indicators and funding, prior to the commencement of the new arrangements from 1 January 2009. The information provided in this part does not reflect any funding offer the Commonwealth may make to the States as part of those negotiations.
The States receive significant financial support from the Commonwealth. In 2008‑09, total payments to the States will be 26.1 per cent of total Commonwealth expenditure.
In 2008‑09, the Commonwealth will provide the States with general revenue assistance, including all GST revenue, of $44.2 billion and payments for specific purposes of $34.9 billion, totalling $79.1 billion. This represents a 6.2 per cent increase compared with 2007‑08. Table 4.19 shows payments for specific purposes and general revenue assistance payments to the States.
Table 4.19: Commonwealth payments to the States, 2008-09 to 2011-12
Chart 4.2 shows the state shares of total payments from the Commonwealth in 2008‑09.
Chart 4.2: State shares of Commonwealth payments, 2008‑09
The Commonwealth provides payments to the States for specific purposes in order to pursue important national policy objectives in areas that may be administered by the States. Payments to the States for specific purposes will be 11.5 per cent of total Commonwealth expenditure in 2008‑09.
In 2008‑09, the States will receive $34.9 billion in payments for specific purposes, an increase of 8.9 per cent compared with the $32.0 billion the States received in 2007‑08. Payments for specific purposes for 2009‑10 and later years may change upon agreement with the States of the new financial framework and funding package.
Payments for specific purposes decline in 2009‑10 by 3.9 per cent, primarily due to:
the reclassification of Highly Specialised Drugs ($597 million in 2008‑09) as a Commonwealth own purpose expense from 1 July 2009;
the reclassification of royalties ($1.1 billion in 2008‑09), Snowy Hydro Ltd tax compensation ($47 million in 2008‑09), and ACT municipal services ($34 million in2008‑09) as general revenue assistance from 1 January 2009; and
the phasing out of the First Home Owners Boost ($1.2 billion in 2008‑09 and $354 million in 2009‑10).
Payments direct 'to' local government appear to decline in 2009‑10, primarily due to AusLink funding to local government ($560 million in 2008‑09) not yet being agreed.
Table 4.20 shows total payments for specific purposes by function.
Table 4.20: Payments for specific purposes, 2008‑09 to 2011‑12
General revenue assistance components of payments to local government only. Other payments to local government are categorised under the relevant sector.
Of the $34.9 billion to be provided to the States for specific purposes in 2008‑09:
$24.8 billion will be provided 'to' the States to help fund State government functions;
$9.4 billion will be paid 'through' the States, where the State governments distribute the payments to other organisations — this includes payments for non-government schools and financial assistance grants for local governments; and
$606 million will be paid direct 'to' local governments.
Chart 4.3 shows the state shares of payments for specific purposes from the Commonwealth in 2008‑09.
Chart 4.3: State shares of payments for specific purposes, 2008‑09
Payments for specific purposes cover most functional areas of State and local government activity — including health, education, community services, housing, infrastructure and environment. Detailed tables of payments for specific purposes, including State shares of each payment are provided in Annex A.
In 2008‑09, the States will receive $11.3 billion to support state health services. Most of this ($9.7 billion) is paid under the Australian Health Care Agreements, which assist with the provision of public hospital services free of charge to eligible persons. From 1 July 2009, the Commonwealth will provide a financial contribution to support state health services under the new National Healthcare Agreement.
In 2008‑09, the States will receive $11.2 billion to support state education services. Of this, $6.3 billion is allocated to non-government schools and $3.4 billion is allocated to government schools. From 1 January 2009, the Commonwealth will provide a financial contribution to support state and non-government school services under the new National Education Agreement and a financial contribution to support vocational education and training under the National Skills and Workforce Agreement.
In 2008‑09, the States will receive $2.0 billion to support state community services. Of this, $764 million was to have been paid under the terms of the Commonwealth State/Territory Disability Agreements, through the disabilities services program, to assist in the provision of accommodation support and other services for people with disabilities. From 1 January 2009, the Commonwealth will provide a financial contribution to support state disabilities services under the new National Disabilities Services Agreement.
In 2008‑09, the States will receive $2.7 billion to support state housing services. Of this, $985 million was to have been paid under the Commonwealth State Housing Agreement to provide public rental housing, crisis accommodation, community housing and assist Indigenous people to access rental housing. From 1 January 2009, the Commonwealth will provide a financial contribution to support state housing services under the new National Affordable Housing Agreement.
As part of its $10.4 billion Economic Security Strategy, the Australian Government has introduced the First Home Owners Boost to stimulate housing activity and give first home buyers a better chance to enter the housing market. The First Home Owners Boost will provide an additional $7,000 to first home buyers purchasing established homes and an additional $14,000 to first home buyers who purchase a new home.
This will mean that total grants (which includes the First Home Owners Scheme grant) to first home buyers will increase to $14,000 for those purchasing an established home and $21,000 for a newly constructed home.
To be eligible to receive the First Home Owners Boost, first home buyers must meet the eligibility requirements for the existing $7,000 First Home Owners Scheme grant and must enter into a contract to purchase a home between 14 October 2008 and 30 June 2009. The Commonwealth will fully fund the First Home Owners Boost, to be administered by the States, which also administer the existing First Home Owners Scheme.
The First Home Owners Boost will build on the Australian Government's $2.2 billion worth of housing initiatives in the 2008‑09 Budget. These initiatives include the National Rental Affordability Scheme to build 50,000 new affordable rental properties, a Housing Affordability Fund to reduce the cost of bringing new homes to market and First Home Saver Accounts to encourage young people to save for a new home.
In 2008‑09, the States will receive $3.6 billion to support state infrastructure provision. Of this, $3.5 billion will be paid under AusLink for the development, construction and maintenance of land transport projects on the national land transport network, some continuing projects off the network, 'black spots' projects and roads in unincorporated areas. From 1 January 2009, Commonwealth financial contributions to support state infrastructure provision will be provided through National Partnership payments to invest in infrastructure of national priority.
In 2008‑09, the States will receive $276 million to support state environmental services. Of this, $159 million will be paid under the Caring for our Country program. From 1 January 2009, payments to support state environmental services will be provided through National Partnership payments to achieve outcomes in areas of national priority.
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. In 2008‑09, total general revenue assistance to the States will be 14.6 per cent of total Commonwealth expenditure.
In 2008‑09, the States will receive $44.2 billion in general revenue assistance from the Commonwealth comprising $43.9 billion in GST payments and $328 million of other general revenue assistance. This is a 4.2 per cent increase in general revenue assistance, compared with the $42.5 billion the States received in 2007‑08. Table 4.21 shows general revenue assistance payments to the States.
Table 4.21: General revenue assistance, 2008‑09 to 2011‑12
GST revenue variations since the 2008‑09 Budget
Table 4.22 is a reconciliation of the GST revenue estimates since the 2008‑09 Budget. The reconciliation accounts for policy decisions, parameter and other variations. There have been no policy decisions since Budget that have had a direct effect on GST revenue.
GST revenue in 2008‑09 has been revised down by $1.4 billion since Budget, reflecting lower forecast growth for taxable consumption and dwelling investment. In 2009‑10, GST revenue is forecast to be lower by $1.9 billion, in line with the expected slowing in growth of consumption subject to GST, but partly offset by expected stronger growth in dwelling investment in response to the housing stimulus.
Table 4.22: Reconciliation of GST revenue estimates since 2008‑09 Budget
In accordance with the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations, 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 payments will be $43.9 billion — an increase of $1.6 billion (3.8 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 4.23.
Table 4.23: GST revenue and GST payments to the States
The Commissioner's determination for 2007‑08 was $49 million lower than the final outcome. This underpayment will be paid in 2008‑09.
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.
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.
The Intergovernmental Agreement defines the GST pool for a financial year to consist of GST payments plus unquarantined health care grants provided by the Commonwealth under the Australian Health Care Agreements.
The GST relativities are applied to estimated state populations in order to determine an adjusted population for each State. Each State's share of the 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 4.24.
Table 4.24: Distribution of the GST pool, 2008‑09
State shares of GST payments for 2008‑09 are shown in Chart 4.4.
Chart 4.4: State shares of GST payments, 2008‑09
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 4.25.
Table 4.25: GST administration budget, 2007‑08 to 2011‑12
Preliminary outcome for 2007‑08 pending confirmation by the Australian National Audit Office.
The preliminary outcome for the 2007‑08 GST administration expenses of $631.4 million differs from the amount paid by the States and the prior year adjustment by $1.6 million. Once the outcome for GST administration in 2007‑08 is audited, this difference will be incorporated into the States' administration costs for 2008‑09.
Other general revenue 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 taxes had not been abolished as part of the reforms.
The Commonwealth will pay budget balancing assistance to the States during the transitional period 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 payments exceed the guaranteed minimum amount. The transitional period will expire on 30 June 2009.
In 2008‑09, all States will receive GST payments that exceed their guaranteed minimum amount, as shown in Table 4.26. Consequently, no State will require budget balancing assistance.
Table 4.26: Guaranteed minimum amount, GST payments and budget balancing assistance, 2008‑09
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. Royalties will be paid as general revenue assistance from 1 January 2009.
In the 2008‑09 Budget, the Commonwealth removed the exemption of condensate from crude oil excise. This has resulted in a consequential reduction in revenue from the off-shore petroleum royalty.
As the Commonwealth pays two thirds of the royalty revenues to Western Australia, the Government decided to provide compensation for the loss of royalty revenue. Payments will be equal to the impact on Western Australia's share of royalties of removing the condensate exemption. In 2008‑09, these payments are estimated to be $55 million.
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.
Final tax return data for 2004‑05 indicated that the impact of the measure on GST revenue was much lower than forecast. Therefore the Commonwealth and the States agreed to suspend annual payments from 2006‑07.
By 2006‑07, the Commonwealth had paid the States a total of $346 million in compensation. Subsequent tax return data indicate that the cost of deferral of GST revenue since its introduction to be $37 million, resulting in a cumulative overpayment of $309 million. This overpayment will be repaid by the States in 2008‑09. From 2009‑10, the Commonwealth will recommence providing annual compensation payments to the States according to revised estimates.
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. Company tax compensation will be paid to States as general revenue assistance from 1 January 2009.
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. Australian Capital Territory municipal services will be paid as general revenue assistance from 1 January 2009.