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Local Government (Financial Assistance) Bill 1995

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House: House of Representatives

Portfolio: Housing and Regional Development

Commencement: Royal Assent


The Bill replaces the Local Government (Financial Assistance) Act 1986 (the Principal Act) and establishes new processes for the provision of Commonwealth financial assistance to local government through the States and Territories. It requires the formulation of national principles to be applied replacing the present system of bilateral agreements between the Commonwealth and the States and Territories. The Bill continues untied grants to local councils and the annual escalation formula and is proposed to operate from 1 July 1995.

The Bill continues the present approach of not absorbing local road funds into financial assistance grants (FAGs). It also provides earlier for announcement of the estimated funding levels to complement May budgets. The Bill provides for the Australian Capital Territory (ACT) to be included in local government financial assistance packages instead of the present system of appropriations.


Under the Principal Act the Commonwealth provides funding to local government through grants to the States and Territories. There are presently two components to the untied funding: (a) a financial assistance grant (FAG) which amounts to around two thirds of total general revenue assistance. This is distributed to the States and the Northern Territory on a per capita basis. The assistance is then distributed within the States and the Northern Territory on a horizontal equalisation basis; and

(b) identified local road funding. Since 1991-92 these funds have been distributed to the States and the Northern Territory (NT) on an "historical shares basis". Funds are distributed within those jurisdictions on a "roads needs basis".

Local government has received assistance indirectly from the Commonwealth for most of this century. In 1974-75 the Commonwealth began to provide general revenue assistance to local government expressly. Until 1991-92 a substantial amount of specific purpose assistance was also passed on via the States which was largely composed of funding for roads. Local road funding was subsequently absorbed into general revenue assistance from 1991-92. 1

Local government funding is escalated at the same rate as the increase in financial assistance and special revenue assistance payable to the States.

The ACT entered into Commonwealth-State financial arrangements from 1988-89. It is presently treated as having both local government and State functions. In relation to local government functions it has received general purpose assistance payments analagous to those paid to local governments through the States. It also receives specific purpose assistance for its local government function. 2

In June 1993 the Commonwealth and State Local Government Ministers agreed to review local government funding arrangements to ensure the effecient and effective use of resources under the Principal Act. The main changes proposed in the Bill originate from this consultation.

The Council of Australian Government (COAG) at its meeting on 11 April 1995 supported the national competition reform package and this was followed by a financial Agreement to Implement the National Competition Policy and Related Reforms between the Commonwealth of Australia, the States, the ACT and the NT. This Agreement provides that the provision of financial assistance is conditional on the States making satisfactory progress with the implementation of the National Competition Policy (NCP) and related reforms.

The preamble to the Agreement stated that "local government will benefit from the link between the State and Local Government FAGs." 3 The Commonwealth will review commitments if there is any major deterioration in its economic circumstances. Under this agreement the Commonwealth agreed to maintain the real per capita guarantee of the FAGs pool on a rolling 3 year basis. The Commonwealth therefore extended the current guarantee to 1997-98. Local government benefits from this because of the link between the State and local government FAGs pools. 4

The Commonwealth also entered into a Competition Principles Agreement with the States, the ACT and the Northern Territory on Competition Principles to achieve and maintain consistent and complementary competition laws and policies. Under Clause 7 of the Agreement the parties agreed to apply the Agreement to local government and publish a statement by June 1996 in consultation with local government which specifies the application of the principles to particular local government activities and functions. The parties will review the Agreement in 5 years.

The 1995 Premier's Conference decided to continue to distribute local government road funding as separately identified road funding. Total identified road funding will be approximately $358m in 1995-96 on the basis of historical shares. 5 This reflects the government's approach not to absorb identified road grants into local government FAGs. This approach differs from identified roads grants to the States where there is a timetable for absorption of such grants into FAGs.

The 1995 States' local government entitlement for 1995-96 is estimated at $1159.6m. This is determined on the basis of a provisional escalation factor of 4.3% and an estimated entitlement of $1111.4m (including the ACT). Distribution of FAGs for 1995-96 is on an equal per capita basis. 6

Main Provisions

Objects of Act

Clause 3 states the objects of the proposed Act as improving the following aspects concerning local government:

.financial capacity;

.capacity to provide residents with equitable level of services;

.certainty of funding;

.efficience and effectiveness; and

.provision of services to Aboriginal and Torres Strait Islander communities.

Parliament's goals are to:

. increase transparency and accountability of States in respect of the allocation of funds

. promote consistency in allocation of grants to achieve equitable levels of services by local governing bodies.

Achievement of these goals is to be through:

. the formulation of national principles for the allocation of funds;

. the making of an annual report to Parliament about the operation of the proposed Act; and

. an assessment of the performance of local governing bodies.

Local government bodies Criteria for Local Grants Commissions

The Bill retains a similar definition as the Principal Act. Clause 4 defines "local governing body" as a body established under a State or Territory law other than a body whose sole or principle function is to provide a particular service.such as the supply of electricity or water; or a body declared to be a local governing body by the Minister on advice of the relevant State Minister.

Clause 5 sets out criteria to be satisfied for a body to be a Local Grants Commission. It provides that the Minister may declare a body to be a Local Grants Commission (a Commission) if:

. the principle function of the body is the making of recommendations to a State Government concerning financial assistance to local governing bodies in that State; and

. the Minister is satisfied that the membership of the body includes at least 2 people who are or who have been associated with local government in the State, whether as members of a local governing body or otherwise.

Clause 5 contains the same requirement as in the principal Act that a State (except the ACT which does not have/need a Commission) is not entitled to payment of an amount unless there is a Commission of the State. The Commission must also have made recommendations with respect to allocation of the amount among local governing bodies in the State. But clause 5(2)(c) also adds a requirement that the Commission must have held public hearings in relation to the recommendations; and permitted submissions from local governing bodies. The present provisions concerning recommendations to be made concerning road funding as road funding has been "untied" and is dealt with under clause 12.

Formulation of the national principles

Clause 6 requires the Minister to formulate after consulting with relevant State Ministers national principles for the allocation of amounts payable to the States for distribution to local governing bodies. These principles will be applied from 1 July 1996. (This replaces the the present process of bilateral negotiations of Commonwealth with each State). In formulating these principles the Minister is:

.to have regard to the need to ensure that the allocation of funds under clause 9 is made as far as practicable on a "full horizontal basis" (clause 6(2)(a);

.but not less than the amount that would be allocated if 30% of the amount to which the State is entitled under clause 9 were allocated among local governing bodies in the State on a per capita basis (clause 6(2)(b)).

Clause 6(3) defines the "full horizontal equalisation" principle as:

(a) ensures that each local governing body in State is able to function, by reasonable effort, at a standard not lower than the average standard of other local governing bodies in the State; and

(b) takes account of differences in the expenditure required to be incurred by local governing bodies in the performance of their functions and in their capacity to raise revenue.

The Minister may revoke or vary any of the principles (after consulting with relevant State Ministers and with local government representative bodies 7 ). The Minister must provide the relevant State Minister (and a body or bodies representative of local government 8 ) with a copy of any instrument formulating principles or revoking or varying any principles. An amendment to provide that the principles be disallowable instruments was not agreed to. 9

Part 2- calculation of financial assistance

Clause 7 requires the Treasurer to estimate and apply an escalation factor to the base figure for 1994-95 to determine general purpose payments and additional funding for 1995-96. From 1995-96 the estimated escalation factor will be provided by the Treasurer to the Minister who will notify the States. For the year 1995-96 it requires the Treasurer, and in years from 1 July 1996 requires the Minister, to determine the amount of the previous year's funding to be used as a basis on which to apply the escalation factor.

Clause 8 requires that the Treasurer before 30 June each year calculate the final factor in relation to that year. This is the percentage increase or decrease in local government grants between the estimated budget figure and the final amount known at the end of the financial year when final outturn figures are known.

Clause 8(2) adds certain matters that the Treasurer must take into account in determining whether to increase or decrease a sum. It allows the Minister to modify the escalation factor so that changes in Commonwealth relations with the States do not have unintended consequences for local government funding. These matters are:- movements in general purpose Commonwealth payments to States; changes to classifications of such grants to the distribution of financial responsibilities between the Commonwealth and the States; and any other matters that the Treasurer thinks relevant.

Clause 9 provides for the calculation of each State's entitlement on an equal per capita basis,

for local government purposes. Payments are to be made in equal quarterly instalments from 15 August 1995.

Clause 10 sets out the formula to calculate final payments to the States ie to adjust the payments made under clause 9 which were based on estimates. It specifies a formula to adjust underpayments and overpayments.

Clause 12 provides for escalation and distribution of funding which is additional to FAGs. This additional funding currently comprises identified local roads grants. Estimated funding is simply an escalation of historical shares. Such payment will be made after 15 August in a year (clause 12(2)) and paid in equal quarterly instalments (clause 12(4)). Clause 13 provides for the final adjustment to local road funding granted to the States and adjustment of payments made under clause 12 which were made on the basis of estimates and the adjustment of underpayments and overpayments. As Clause 14 provides a State is not entitled to payments under clause 12 unless:

. there is a Commission (except for the ACT) which has made recommendations concerning allocation;

.the relevant State Minister has given the Minister written particulars of how the State prposes to allocate the amount;

. the Minister is satisfied that in determining the allocation the State has adopted the recommendations of the Commission; and

. the State allocates the amount in accordance with such recommendations or any alteration agreed with the Minister.

Clause 15 specifies that payments to the States (other than the ACT) are conditional on the following:

.making payments to local government bodies without undue delay, unconditionally and inaccordance with the allocation requirements;

.each State Treasurer will give the Minister as soon as practicable after 30 July each year a statement setting out the payments and dates and certified by the State Auditor-General;

.if the Minister is satisfied that a State has not fulfilled a condition in relation to a whole or a part of an amount the State will repay to the Commonwealth any amount determined by the Minister but not more than the amount in question.

Preparation and tabling of report(s)

Clause 16 requires the Minister to have prepared a report(s) as soon as practicable after 30 June of each year on the operation of the Act. The report must include an assessment of the Minister, based on comparable national data, of:

. extent to which allocation has been made on a full horizontal equalisation basis;

. methods used by Commissions;

. performance of local governing bodies functions including;

. efficiency; and

. services provided to Aboriginal and Torres Strait Islander communities (clause 16 (2)).

The Minister must table a report(s) in each House of the Parliament as soon as practicable after preparation (clause 16(3)).

An amendment was accepted to clause 16(3) to require that the Minister consult with relevant State Ministers and representative bodies of local government in preparation of the report. 10

Some local government views

Some concerns expressed by the Australian Local Government Association are:

.that clause 16(3) requires reporting on the performance of local government bodies (within the annual report on the operation of the Act) to the Commonwealth Parliament rather than the Local Government Ministers Conference; and

.whether clause 3(2)(e) (which states an object of the proposed Act is to improve local government provision of services to Aboriginal and Torres Strait Islander communities) is appropriate for untied general purpose grants. While agreeing that councils are important for improvements in this area the view expressed is that such an object may be difficult to reconcile with the other requirements such as horizontal equalisation. It also refers to a particular group with special needs which may lead to other groups with special needs to seek similar treatment and that no additional funding is provided for this objective.

Review of Act

Clause 7 requires the Minister must instigate a review of the operation of the Act not later than 30 June 2001 in consultation with the States and with a body/bodies representative of local government. The review must examine:

.effectiveness of the Act in ensuring allocation is on a full horizontal equalisation basis;

.impact of the Act on the raising of revenue by local governmenr and on State assistence to local government bodies;

.implications of any changes in the functions of local government bodies;

.eligibility for assistance of bodies declared under the Act; and

.any other matters relating to local government that the Minister determines.

No double payments to ACT

Amounts payable to the Australian Capital Territory is reduced by any amounts paid to the ACT for local government purposes under the Apropriation Act (No.2) 1995-96 (clause 27).


Clause 20 repeals the Principal Act but continues its operation to years before 1 July 1995.

Clause 21 transfers recognition of local government bodies under the Principal Act to the proposed Act. Clauses 24-26 allow for modification and transitory modification of State and national principles.


1 James, DJ, Intergovernmental Financial Relations In Australia, Australian Tax Research Foundation Information Series No.3, Sydney, 1992, p. 72.

2 Ibid. p.72.

3 Competition Principles Agreement, p.2

4 Commonwealth Financial Relations with Other Levels of Government 1995-96, Budget Paper No.3, p.10.

5 Ibid. p.33.

6 Ibid. p.34.

7 Amendment moved by Mr Scott, agreed to House of Representatives, Parliamentary Debates, 8 June 1995, p.1575.

8 Amendment moved by Mr Scott, agreed to House of Representatives, Parliamentary Debates, 8 June 1995, p.1575.

9 Moved by Mr Scott, House of Representatives, Parliamentary Debates, 8 June 1995, p.1575.

10 Moved by Mr Scott, House of Representatives, Parliamentary Debates, 8 June 1995, p.1610.

Sarah O'Brien (Ph. 06 277 2433)

Bills Digest Service 21 June 1995

Parliamentary Research Service

For further information, if required, contact Denis James, Economics and Industrial Relations Group, on 06 277 2464.

This Digest does not have any legal status. Other sources should be consulted to determine whether the Bill has been enacted and, if so, whether the subsequent Act reflects further amendments.

Commonwealth of Australia 1995.

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Published by the Department of the Parliamentary Library, 1995.