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BUDGET 2007 - 2008: Budget Paper No. 3: GST Revenue to the States



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GST REVENUE TO THE STATES

In accordance with the Intergovernmental Agreement, the Australian Government 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 2007-08, GST revenue will be $43.1 billion — an increase of $2.4 billion (5.8 per cent) from 2006-07.

VARIATIONS IN GST REVENUE SINCE THE 2006-07 BUDGET

Table 2 is a reconciliation of the GST revenue estimates since the 2006-07 Budget and the Mid-Year Economic and Fiscal Outlook 2006-07 (MYEFO). The reconciliation accounts for policy decisions and parameter and other variations.

Table 2: Reconciliation of GST revenue estimates

$million 2006-07 2007-08 2008-09 2009-10

GST revenue at 2006-07 Budget 40,000 42,210 44,440 46,670

Changes from 2006-07 Budget to MYEFO Effect of policy decisions .. .. .. ..

Effect of revenue recognition variations(a) 390 340 260 350

Effect of parameter and other variations 240 580 930 980

Total variations 630 920 1,190 1,330

GST revenue at 2006-07 MYEFO 40,630 43,130 45,630 48,000

Changes from MYEFO to 2007-08 Budget Effect of policy decisions .. -110 -161 -138

Effect of parameter and other variations 90 70 31 -52

Total variations 90 -40 -130 -190

GST revenue at 2007-08 Budget 40,720 43,090 45,500 47,810

Estimates Projections

(a) Accrual estimates for GST revenue at the 2006-07 Budget were recognised using the Taxation Liability Method (TLM) of revenue recognition. Since the 2005-06 Final Budget Outcome, GST revenue has been recognised using the Economic Transactions Method (ETM) method of revenue recognition. Refer to Appendix F of Statement 5 in 2006-07 Budget Paper No. 1 for an explanation of the different methods of revenue recognition.

GST revenue for 2006-07 is expected to be $90 million higher than forecast at MYEFO. This reflects the stronger than expected March quarter outcome for consumption subject to GST. However, weaker inflation forecasts since MYEFO dampen GST revenue in 2007-08 and the forward years. Policy decisions will also have a small negative impact on GST revenue in 2007-08 and the forward years.

Policy decisions which have a positive impact on GST revenue include:

• providing funding for additional compliance activities for GST (additional revenue of $65 million over four years); and

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• not proceeding with a decision in respect to compulsory third party insurers (additional revenue of $27 million over four years).

The revenue impact of those policy decisions is more than offset by decisions which have a negative impact on GST revenue, including:

• increasing the registration turnover threshold for the GST (at a cost of $318 million over four years); and

• changes to the operation of tourist shopping arrangements to enhance their effectiveness (at a cost of $263 million over four years).

The estimated revenue effect of each GST policy decision since the 2006-07 MYEFO is shown in Table 3. Detailed information on each decision is in Appendix C.

Table 3: GST revenue policy decisions since the 2006-07 MYEFO $million 2007-08 2008-09 2009-10 2010-11

Compulsory third party schemes - alternative global decreasing adjustment methodology 6.7 6.7 6.7 6.7

Debt collection enhancement - reducing taxation debt and outstanding superannuation guarantee charge payments 5.0 20.0 20.0 20.0

Employee share schemes that provide stapled securities -0.1 -0.1 -0.1 -0.1

Expand the range of goods in inwards duty free stores -2.0 -2.0 -2.0 -2.0

GST car concession for certain injured defence personnel - - - -

GST concessions for the International Criminal Court .. .. .. ..

Increasing the GST registration turnover threshold -56.7 -82.9 -87.1 -91.4

Increasing the threshold for requiring an approved tax invoice for GST -0.9 -1.1 -1.2 -1.3

International telecommunications services - - - -

PAYG instalments paid annually when voluntarily registered for GST - -35.0 -5.0 -5.0

Pharmaceutical concession for certain defence personnel - - - -

Simplified accounting methods - extending availability -1.0 -2.0 -2.0 -2.0

Tourist Refund Scheme - introducing private providers and enhancements to tax-free shopping -61.0 -65.0 -67.0 -70.0

Total GST revenue policy decisions -110.0 -161.4 -137.7 -145.1

GST revenue to the States

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GST REVENUE TO THE STATES

Under the Intergovernmental Agreement, all GST revenue collected by the Australian Taxation Office is provided to the States. The Commissioner of Taxation estimates the likely level of GST receipts in June, prior to the end of each financial year. A balancing adjustment is also usually made in the following financial year to ensure that the States receive the full amount of GST receipts for a financial year. The calculations of GST revenue to be provided to the States are provided in Table 4.

Table 4: GST revenue to the States Actual

$million 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

GST revenue 38,884 40,720 43,090 45,500 47,810 50,300

less change in GST receivables 1,443 1,140 1,240 1,300 1,360 1,450

GST receipts 37,442 39,580 41,850 44,200 46,450 48,850

plus variation from the Commissioner's determination(a) 28 plus prior year balancing adjustment -288 -28

GST revenue to the States 37,182 39,552 41,850 44,200 46,450 48,850

Estimates Projections

(a) The Commissioner’s determination for 2005-06 was $28 million higher than the final outcome.

GST revenue to the States has grown strongly since its introduction, as shown in Table 5. The average annual growth since 2001-022 has been 7.9 per cent. Furthermore, GST revenue has increased from 3.6 per cent of GDP in 2001-02 to 3.8 per cent in 2007-08.

Table 5: Growth in GST revenue to the States since 2000-01 $million NSW VIC QLD WA SA TAS ACT NT Total

2000-01 7,258 5,099 4,658 2,375 2,279 988 473 1,226 24,355

2001-02 8,132 5,593 5,019 2,518 2,477 1,060 544 1,290 26,632

2002-03 9,080 6,365 5,888 2,910 2,859 1,247 616 1,515 30,479

2003-04 9,667 6,961 6,553 3,158 3,146 1,394 658 1,681 33,219

2004-05 9,884 7,346 7,329 3,624 3,293 1,435 680 1,730 35,323

2005-06 10,362 7,833 7,689 3,804 3,442 1,496 723 1,834 37,182

2006-07(a) 11,034 8,573 8,049 3,978 3,591 1,573 768 1,985 39,552

2007-08(a) 11,926 9,147 8,384 3,945 3,855 1,646 823 2,124 41,850

(a) Estimates.

2 As only 11 monthly activity statements, 3 quarterly activity statements, and no annual activity statements were payable in 2000-01, the calculated annual growth uses 2001-02 as the base year.

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DISTRIBUTION OF GST REVENUE AMONG THE STATES

As agreed by all States in the Intergovernmental Agreement, GST revenue is distributed among the States in accordance with the long-standing principle of horizontal fiscal equalisation and having regard to the recommendations of the Commonwealth Grants Commission.

The state shares of GST revenue for 2007-08 (totalling $41.9 billion) are shown in Chart 2.

Chart 2: State shares of GST revenue, 2007-08

NSW

$11,926 million

VIC

$9,147 million

WA

$3,945 million

QLD

$8,384 million

SA

$3,855 million

NT

$2,124 million

TAS

$1,646 million ACT $823 million

GST relativities

The Commission recommends relativities to be used in calculating each State’s share of GST revenue 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.

This does not necessarily result in the equalisation of government services — just the equalisation of the capacity to provide the same standard of services. States are able to spend their share of GST revenue according to their own budget priorities.

In calculating the GST relativities, the Commission takes into account differences in the States’ capacities to raise revenues and differences in the costs the States would incur in providing the same standard of government services.

The GST relativities have been endorsed by the Ministerial Council for Commonwealth-State Financial Relations. The relativities for 2006-07 and 2007-08 are shown in Table 6.

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Table 6: GST relativities, 2006-07 and 2007-08 NSW VIC QLD WA SA TAS ACT NT

2006-07(a) 0.87332 0.89559 1.02387 1.00480 1.18862 1.54931 1.14575 4.32755 2007-08 0.89079 0.90096 1.00607 0.94747 1.20791 1.54465 1.16293 4.36824

(a) These relativities take account of amended data provided by South Australia after the release of the Commonwealth Grants Commission’s 2006 report.

Applying the GST relativities to the GST pool

The Intergovernmental Agreement defines the GST pool for a financial year to consist of GST revenue plus health care grants provided by the Australian Government under Australian Health Care Agreements. Some health care grants are quarantined from the pool.

The GST relativities are applied to estimated state populations in order to determine a weighted population for each State. Each State is then allocated its

population-weighted share of the combined pool of GST revenue and unquarantined health care grants. The final distribution of GST revenue 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 7.

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Table 7: Distribution of the GST pool, 2006-07 and 2007-08 Projected population 31 December (5) - (6)

% $m $m $m

(1) (2) (3) (4) (5) (6) (7)

2006-07

NSW 6,863,553 0.87332 5,994,078 28.9 13,821.4 2,787.1 11,034.2

VIC 5,128,419 0.89559 4,592,961 22.1 10,590.6 2,017.8 8,572.8

QLD 4,089,996 1.02387 4,187,624 20.2 9,656.0 1,607.0 8,049.0

WA 2,073,267 1.00480 2,083,219 10.0 4,803.6 825.7 3,977.9

SA 1,561,537 1.18862 1,856,074 8.9 4,279.8 689.0 3,590.8

TAS 490,427 1.54931 759,823 3.7 1,752.0 178.8 1,573.3

ACT 330,735 1.14575 378,940 1.8 873.8 105.5 768.3

NT 208,330 4.32755 901,558 4.3 2,078.8 93.5 1,985.4

Total 20,746,264 n/a 20,754,277 100.0 47,855.9 8,304.2 39,551.7

2007-08

NSW 6,928,601 0.89079 6,171,928 29.4 14,858.3 2,932.0 11,926.3

VIC 5,198,499 0.90096 4,683,640 22.3 11,275.4 2,128.4 9,147.0

QLD 4,165,916 1.00607 4,191,203 19.9 10,089.9 1,705.6 8,384.3

WA 2,114,454 0.94747 2,003,382 9.5 4,822.9 877.5 3,945.4

SA 1,574,204 1.20791 1,901,497 9.0 4,577.6 723.0 3,854.6

TAS 493,242 1.54465 761,886 3.6 1,834.2 187.8 1,646.3

ACT 333,585 1.16293 387,936 1.8 933.9 111.3 822.6

NT 211,303 4.36824 923,022 4.4 2,222.1 98.6 2,123.5

Total 21,019,804 n/a 21,024,494 100.0 50,614.2 8,764.2 41,850.0

Share of GST pool Unquarantined HCGs

GST

revenue

GST

relativities

Weighted population(a) (1) x (2)

Share of weighted population

(a) The totals of the weighted populations in column 3 differ from the totals of the populations in column 1. This is a consequence of the population projections in column 1 being revised subsequent to the Commonwealth Grants Commission calculating the GST relativities.

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The effect of horizontal fiscal equalisation

One way to view the effect of horizontal fiscal equalisation is to compare each State’s share of the GST pool using the GST relativities with a notional distribution on an equal per capita basis. In 2007-08, $3.3 billion (or 6.6 per cent) of the GST pool will be redistributed among the States, compared with an equal per capita distribution (Table 8).

Table 8: Effect of horizontal fiscal equalisation, 2007-08 Redistribution(a)

$m $m $m million $

NSW 14,858.3 16,683.6 -1,825.3 6.9 -263.4

VIC 11,275.4 12,517.6 -1,242.3 5.2 -239.0

QLD 10,089.9 10,031.2 58.6 4.2 14.1

WA 4,822.9 5,091.5 -268.5 2.1 -127.0

SA 4,577.6 3,790.6 787.1 1.6 500.0

TAS 1,834.2 1,187.7 646.5 0.5 1,310.6

ACT 933.9 803.2 130.7 0.3 391.7

NT 2,222.1 508.8 1,713.3 0.2 8,108.1

Total 50,614.2 50,614.2 3,336.1 21.0 na

GST pool

distributed using GST relativities

Equal per capita distribution of GST pool

Per capita redistribution

Estimated population

(a) The total redistribution of $3,336.1 million is the sum of positive (or negative) items in that column.

The proportion of the GST pool being redistributed in 2007-08 continues the decline evident since 2004-05 (Chart 3). This reflects the convergence in the fiscal capacities of the four most populous States, partly due to the influence of commodity prices and property market cycles on the revenue raising capacities of these States.

Chart 3: GST redistribution as a proportion of the GST pool

0

2

4

6

8

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 0

2

4

6

8

Per cent Per cent

Simplification of the horizontal fiscal equalisation methodology

In March 2007, the Commonwealth Grants Commission reported to the Ministerial Council for Commonwealth-State Financial Relations on its further progress with the methodology review. The report was endorsed by the Ministerial Council. The outcomes of the Commission’s methodology review are to be implemented in 2010. The Commission’s report is available on its website at www.cgc.gov.au.

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GST ADMINISTRATION

Because the GST has a national tax base, but all GST revenue is provided to the States, the Intergovernmental Agreement provides for the Australian Taxation Office to administer the GST on behalf of the States. Consequently, the States compensate the Australian Government for the agreed costs incurred by the Australian Taxation Office in administering the GST, as shown in Table 9.

Table 9: GST administration costs Actual

$million 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Australian Taxation Office 603.8 618.5 635.9 644.5 633.6 639.3

State government payments -603.8 -618.5 -635.9 -644.5 -633.6 -639.3

Australian Government budget impact 0 0 0 0 0 0

Estimates Projections

In March 2007, the Ministerial Council for Commonwealth-State Financial Relations endorsed the administration costs for 2007-08, including additional costs of $15 million over four years in respect of the policy decision to improve compliance activities.