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Thursday, 19 February 2004
Page: 25266

Mr PROSSER (12:02 PM) —I rise today to speak in support of the A New Tax System (Commonwealth-State Financial Arrangements) Amendment Bill 2003, which proposes amendments to A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 by making technical refinements to the existing goods and services tax scheme in order to facilitate its operation. This bill will implement three measures which have been agreed to by the states and territories and relate to enabling the Commissioner of Taxation to account for all GST refunds, the timing of final determinations, and introducing a mechanism for residual budget balancing assistance arrangements.

The government's reforms to Commonwealth-state financial relations, which were introduced in July 2000, have already resulted in five states and territories being better off than they would have been had tax reform not been implemented. Since the introduction of these reforms it has become apparent that minor amendments to the act are needed, and I might add that the proposed method for revenue adjustments has been agreed to by the states and territories.

The amendments proposed in this bill will authorise the Commissioner of Taxation to make necessary accounting adjustments to the amount of goods and services tax revenue collected by the Commonwealth to be provided to the states and territories. Secondly, the amendments to the timing of final determinations will provide sufficient time for all parties to make their determinations in compliance with the requirements of the act. Finally, the amendments will also introduce a mechanism to allow payments to a state to be adjusted, as that state comes off budget balancing assistance, to fully account for any overestimate or underestimate of payments in a previous financial year. GST revenue and budget balancing assistance are the main components of general purpose assistance.

The arrangements for the Commonwealth general purpose payments to the states and territories entered into a new phase with the introduction of the goods and services tax on 1 July 2000. The A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 is the legislative authority for general purpose payments. The act builds on and incorporates as a schedule the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations. The intergovernmental agreement sets out the terms under which GST revenue is paid to the states. It was endorsed by the Commonwealth, state and territory heads of government in June 1999.

The main features of the intergovernmental agreement are, firstly, that the Commonwealth must pass all GST revenue, net of administrative costs, to the states. Secondly, the states may spend the GST as they wish. Thirdly, the Commonwealth has guaranteed that, in each of the transitional years following the introduction of tax reform, no state will be worse off than had the reform not been implemented. To fulfil this commitment, each state is entitled to receive a guaranteed minimum amount. Fourthly, the Commonwealth meets the difference between each state's guaranteed minimum amount and GST entitlement in the form of budget balancing assistance. Fifthly, the interstate allocation of the GST revenue is based on the relativities calculated by the Commonwealth Grants Commission based on the fiscal equalisation principle. This principle is that all state governments should be able to provide services at the same standard if they make the same effort to raise revenue from their own sources and operate at the same level of efficiency. Sixthly, the states undertook to abolish a number of taxes, reduce gambling taxes and administer a new uniform first home owners scheme.

I note that, in my home state of Western Australia, the Western Australian state government received $2.9 billion worth of GST payments for the year ended 2003 and for this financial year it is forecast to receive some $3.1 billion worth of GST payments. The Western Australian state government took until January this year to abolish stamp duty on cheques, leases and unlisted marketable securities, but it will not abolish stamp duty on workers compensation insurance policies until July 2004 and it has put off abolishing the debits tax until July 2005. Not satisfied with the better than expected revenue from the GST, the state government in Western Australia whacked stamp duty on the GST component of the purchase of commercial and industrial property, trucks and plant and equipment, even though the GST is rebatable to business—and that is after increasing stamp duty by a whopping 15 per cent in the last state budget.

One technical and practical problem with the current act is that it operates in a way that excludes GST refunds made by the Commonwealth under the Tourist Refund Scheme. This means that marginally more GST revenue is provided to the states than is actually collected. The Tourist Refund Scheme allows travellers going overseas to recover GST paid on eligible goods purchased in Australia and then taken overseas in their luggage. In addition to the Tourist Refund Scheme, international organisations, diplomatic missions and visiting defence forces can claim refunds of GST, luxury car tax, fuel excise and the wine equalisation tax paid on significant purchases in Australia or can be exempted from these taxes on imported goods.

However, current subsection 5(4) of the act allows the Commissioner of Taxation to make only two deductions from the GST revenue when determining the amount of GST collected in a year which is to be provided to the states. Both relate to the refund of input tax credits paid to registered businesses. The Tourist Refund Scheme and the other GST refund schemes are excluded. As a result, the commissioner's GST determination overstates the total GST collected by the amount of the Tourist Refund Scheme and the other GST refunds. Consequently, the Australian government is providing the states with more GST revenue than is collected. As is clear from the inception of the new tax system policy, the Tourist Refund Scheme is intended to be part of the GST base, and the exclusion of the Tourist Refund Scheme is an omission from the act. In relation to the international refunds, these arrangements were not envisaged as GST refund schemes when the intergovernmental agreement was negotiated. At that time, it was intended that foreign governments would register for the GST and be entitled to input tax credits and, therefore, would not pay the GST on purchases. This bill rectifies this matter and some other technical anomalies by allowing the Commissioner of Taxation to account for all GST refunds when making a determination of GST revenue.

The basis of the legislative policy that underpins this bill is to ensure that the GST arrangements with the states operate in the way originally intended. The Commonwealth's general purpose assistance to the states now takes four forms: the provision of GST revenue, budget balancing assistance, national competition policy payments and special revenue assistance. The general purpose assistance is untied—that is, states may spend the money as they wish. Before 1 July 2000, the main component of general purpose assistance was financial assistance grants. These grants and revenue replacement payments have ceased. Revenue replacement payments were introduced after the High Court ruling on tobacco franchise fees in NSW, which cast doubt on the constitutional validity of all state franchise fees. To protect state finances, the Commonwealth, at the request of the states, increased the excise on tobacco, alcohol and petroleum products and returned that revenue to the states as a revenue replacement payment.

The guaranteed minimum amount was introduced consequent to the agreement between the government and the Australian Democrats regarding the passage of the GST legislation. The agreement reduced the amount of GST revenue below what the government originally proposed. Consequently, the states would have been worse off than under the arrangements which applied before 1 July 2000. The government introduced the guaranteed minimum amount so that no state would be worse off. Therefore, the amendments set out under subsection 5(4) of the act allow adjustments to the amount of GST to be provided to the states and territories to take certain refunds into account.

Current subsection 5(6) of the act provides an interpretive definition applicable under section 5. Items 1 and 2 of schedule 1 of this bill broaden the category of refunds that may be taken into account by the Commissioner of Taxation, such as the Tourist Refund Scheme arrangements. A generic definition of `GST refund provisions' is a flexible approach, allowing for new GST refund schemes to be introduced in the future without the need to amend the act. Section 11 also includes the restriction that the rate of the GST and the GST base are not to be changed unless each state agrees to the change and that such changes to the GST base should be consistent with maintaining the integrity of the GST base and should have administrative simplicity and minimise compliance costs for taxpayers.

Item 3 is necessary since the amount of GST revenue is determined in June each year based on an estimate of revenue from that particular month. In this determination, the commissioner adjusts the estimate of GST collected in June of the previous year to reflect the actual GST collected in that month. For the financial year in which the bill commences, the commissioner will not be able to deduct GST refunds under the Tourist Refund Scheme and like arrangements from the calculation of actual GST collected in June of the previous financial year. This clause will ensure that the amendments do not apply to GST revenue provided to the states in the financial year prior to the one in which the amendments commence. After this year, the commissioner will be obliged to take account of all GST refunds in making the determination of GST revenue which will be provided to the states.

Amendments to the timing of determinations are necessary, as there are a number of annual determinations required under the act. These relate to GST revenue, the guaranteed minimum amount and the balancing assistance. The Australian government pays budget balancing assistance to the states in the transitional period to cover any shortfall of the GST revenue compared with each state's guaranteed minimum amount, which is an estimate of the funding each state would have received if tax reform had not been implemented. Each state's budget balancing assistance is the difference between the state's guaranteed minimum amount and its share of GST revenue.

Currently, the Treasurer's determination of each state's guaranteed minimum amount must be made before 10 June. However, the guaranteed minimum amount cannot be determined without the determination of each state's population by the Australian Statistician and the determination of hospital grants for each state by the health minister. Both of these latter determinations have a statutory deadline of 10 June. It would not therefore be feasible to satisfy the statutory deadline for the guaranteed minimum amount determination if the determinations of population and hospital grants were not made on the date required by the act. To date, statutory deadlines for the guaranteed minimum amount determinations have been met through informal agreements to bring forward the other determinations. However, there is the potential for slippage if these informal arrangements break down for any reason.

This bill will change the dates for making the determinations of guaranteed minimum amounts, population and hospital grants to ensure sufficient time for all parties to be able to make their determinations in accordance with the requirements of the act and to facilitate the consultation process with the states. The statutory deadline for determining GST revenues will be aligned with the statutory deadline for the guaranteed minimum amount determination. The Commonwealth government and the states have agreed that the timing arrangements specified in the intergovernmental agreement will be amended to ensure consistency between the act and the intergovernmental agreement, and this bill amends the statutory deadlines to ensure that the existing working arrangements are formalised.

Finally, amendments are proposed to deal with residual adjustments for GST transitional years. Both the Treasurer's determination of guaranteed minimum amounts and the Commissioner of Taxation's determination of GST revenues are made in June each year. The timing of these determinations necessitates the use of estimates when making them because final outcomes for the year are not known until the following financial year. The intergovernmental agreement provides for any difference between the estimates used in the Treasurer's determination of guaranteed minimum amounts and the final outcomes for that year to be corrected in the following year. This is done through the inclusion of adjustments in the calculation of each state's guaranteed minimum amount in the following year. Similarly, there is provision for the commissioner's determination of GST revenue for the year to include the difference between the GST estimate used in the previous year's determination and the final outcome of GST revenue in the previous year.

As the budget balancing assistance is the difference between the guaranteed minimum amount and the GST, these ex post facto adjustments will give rise to a variation in the amount of budget balancing assistance that each state is entitled to in the following year; that is, if ex post facto calculations show that the determinations made in June resulted in an underestimate or overestimate of the GST or guaranteed minimum amount for the year, this will be addressed through an adjustment to the GST or guaranteed minimum amount that a state is entitled to in the following year, which affects the state's budget balancing assistance entitlement for the following year.

The need to amend the act arises because there is no mechanism to ensure that, as a state comes off budget balancing assistance, the required adjustments from the previous year are fully implemented. These adjustment amounts are known as residual adjustment amounts. This bill will provide for the Treasurer to determine the residual adjustment amounts for each state. Therefore, proposed section 12, `Residual adjustments for GST transitional years', will enable the Treasurer to determine in a GST year the residual adjustment amount for each state for the previous GST year.

The residual adjustment amounts will reflect the amount by which a state's payments in a previous GST year were underestimated or overestimated as a result of the estimates used to calculate GST and guaranteed minimum amount, and which cannot be adjusted through existing mechanisms. The proposed amendments to this bill are technical refinements to the existing GST scheme and are required to facilitate its practical operation. I commend the bill to the House.