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Economics Legislation Committee
01/06/2015
Estimates
TREASURY PORTFOLIO
Commonwealth Grants Commission

Commonwealth Grants Commission

CHAIR: We will reconvene with the officers of the Commonwealth Grants Commission. Welcome, Secretary, and Mr Markham.

Mr Markham : Thank you.

Senator KETTER: In terms of the recent GST review—I am just looking at the changes. Could you please provide a high-level explanation, firstly, as to the process you went through to develop the report?

Mr Spasojevic : The commission goes through a pretty standard process. It received its terms of reference from the Treasurer. It puts out papers for consultation with the states. It met with the states twice, once at the level of treasurer and once with under-treasurers. In the end I think it undertook three rounds of consultations with the states. It developed a draft report, which it put out as per the terms of reference 12 months after the receipt of those terms of reference, and it put out its final report to the Treasurer in February.

Senator KETTER: Are there any key methodology changes in this report as opposed to previous reports and, if so, what are they?

Mr Spasojevic : Perhaps I could draw your attention to the report, where the commission sets out some of the major changes? My apologies as I go through that. The major changes in methods were that we introduced a new way of measuring the Indigenous population and their sociodemographic distribution across the country; we introduced a new methodology to assess the transport infrastructure needs of the states; and we changed the way we did our mining revenue assessment, to move to a mineral-by-mineral approach. I think they were the major changes.

Senator KETTER: What impact did the Treasurer's additional guidance from December last year have in the development of the report?

Mr Spasojevic : The issue that was raised by the Treasurer had already been raised by Western Australia, so the commission was well on the path to considering that particular issue. In the end, the commission stuck with the methodology it had previously developed and maintained for dealing with volatile revenue sources.

Senator KETTER: Could you explain the impact of your recommendations in the 2015 GST review? Which of those did the government support? And what was the impact on the states and territories?

Mr Spasojevic : I think that the government has accepted the report in total. The implications are that there is a changed distribution of the GST.

Senator KETTER: Which jurisdictions—just very quickly—gain, and which lose?

Mr Spasojevic : As a result of the changes in fiscal capacities, New South Wales had a reduction in its GST, Victoria had an increase, Queensland had an increase, Western Australia had a reduction, South Australia had an increase, Tasmania had an increase, the ACT had a reduction and the Northern Territory had a reduction.

Senator KETTER: What are the key factors over the last few years which have driven the decline in the relative share of the GST for Western Australia?

Mr Spasojevic : Its mining revenue.

Senator KETTER: Could the commission conceive in the near future of changes in state based circumstances, perhaps, related to iron ore revenues—circumstances which might see WA increase its share of GST revenues?

Mr Spasojevic : The commission does not do any prognostication of the future, so I cannot answer that question.

Senator KETTER: I have some questions in relation to distance truncation. There is a particular impact on WA with respect to this new approach. Could you provide an explanation of how the 1,254 kilometre truncation was determined?

Mr Spasojevic : I will have to take that on notice.

Senator KETTER: How does the commission account for the differences in service delivery costs that obviously exist once you go beyond the truncation point?

Mr Spasojevic : I believe it does not go beyond the truncation point. We only provide for measures of higher service delivery cost for people we classify as remote. So we would not have higher classifications for areas beyond that; they would just get the remoteness classification up to that distance for all people living beyond that.

Senator KETTER: But obviously there are higher service delivery costs if you go beyond the 1,254 kilometres.

Mr Spasojevic : Do you have some evidence that we could look at for that, Senator?

Senator KETTER: I suppose the fact that it is a greater distance.

Mr Spasojevic : I understand it is a greater distance, but we have not been able to find any evidence to say that the costs continue to grow beyond that point. So if you have some evidence we would love to see it.

Senator KETTER: What work has the commission done following this change to the, as they call it, the ARIA to assess how closely the ARIA based assessment matches actual costs of service delivery?

Mr Spasojevic : There is very little evidence that states can actually provide us on the costs of service delivery in remote areas. So I do not believe that that question can actually be validated. We believe that the ARIA measure is a good measure across different states of people living in similar kinds of circumstances who would face similar costs. So the commission was comfortable that ARIA gives you a reasonable ratio of the people living across Australia in different service delivery cost zones.

Senator KETTER: The 2015 review notes in paragraphs 50 to 52 some adjustments that have been allowed to account for differences in non-wage costs. Can you outline how these adjustments were assessed for each state?

Mr Spasojevic : Not beyond what is provided in the report. If you want to know the detail, I would have to take that on notice.

Senator KETTER: Would you mind taking that on notice?

Mr Spasojevic : Certainly.

Senator KETTER: I have some further questions about border permeability and the removal of the capital city category. With the commission now allowing border permeability, Melbourne is now regarded as the capital city for Hobart and Adelaide for Darwin. Why were these specific changes considered necessary?

Mr Spasojevic : I do not think we consider it as the capital city; we consider it as the major city, the biggest city, that is close by. That gives us a different metric for measuring what costs might be throughout Tasmania in relation to costs in similarly remote areas from, say, Melbourne. That gives us a better reflex of costs in Tasmania as a total, given the higher transport costs across the Tasman.

Senator KETTER: Why were these specific changes deemed necessary?

Mr Spasojevic : It has always been an issue of whether the cost of goods sourced in Hobart are the same as the cost of goods sourced in Melbourne, and the view of the commission has been consistently that they are not. It has done the adjustment in two different ways. In 2010 it made an arbitrary adjustment based on freight costs. This time it decided to let ARIA tell us that people in Hobart and other areas of Tasmania were in similar cost zones for people equally remote from Melbourne.

Senator KETTER: Was consideration given to how shifting from the capital city based measure would disadvantage Western Australia?

Mr Spasojevic : It was not considered to be a measure that would necessarily disadvantage Western Australia, because in relation to Western Australia it has always been that the major source of costs has been taken from Perth.

Senator CANAVAN: Yes, but this is fixed to the extent that you benefit Tasmania and you take away from the others.

Mr Spasojevic : There was an arbitrary adjustment made to recognise the remoteness of Western Australia.

Senator CANAVAN: In this method?

Mr Spasojevic : Yes, in this method.

Senator KETTER: How was the population of 250,000 set as the minimum size for a capital city?

Mr Spasojevic : I would have to take that on notice.

Senator KETTER: Finally, could you outline in general terms how state based gambling revenue is or is not treated in relation to the calculation of GST relativities?

Mr Spasojevic : State based gambling revenue is assessed on an equal per capita basis, so it has no impact on the distribution of the GST.

Senator KETTER: Is there a potential here for certain jurisdictions which do not have a lot of legalised gambling, and therefore revenue pertaining to gambling, to lose out in these calculations?

Mr Spasojevic : It has no impact on the distribution of the GST and so they do not miss out or gain.

Senator DASTYARI: Mr Spasojevic, this is probably quite a simplistic question, so I apologise for my lack of understanding about how the Commonwealth Grants Commission works. State royalties are factored into the distribution—is the word 'relativities' the right word I am looking for here?

Mr Spasojevic : Yes.

Senator DASTYARI: State royalties are factored into that?

Mr Spasojevic : Correct.

Senator DASTYARI: I just want to ask—and again I want to avoid a hypothetical because I think this may be a genuine kind of situation—what happens if state royalties are retrospectively changed or paid back? I know this sounds a bit kind of random, but I want to make it realistic.

Senator BUSHBY: Is there a point to asking the question?

Senator DASTYARI: I am asking an honest question; I am just saying that I do not know how. At the moment, through the work of this committee or its sister committee, we are looking at corporate tax avoidance. There is a proposition that perhaps some of the impact of what has happened with transfer pricing may retrospectively have an impact on what has happened with royalties in Western Australia. That is a live debate that is going on. There is a question about what that actually does to the state laws in terms of royalty determination, which is obviously a state matter—it is a state law. But if that factor has changed retrospectively and, effectively, Western Australia was entitled to back pay, does that change the future? How does it work?

Mr Spasojevic : I do not think I can answer that question. That is something that the commission would have to look at once that event has actually occurred.

Senator DASTYARI: Can I ask another question—and you might want to take this one on notice. Has there ever been a situation where a state has repaid money or been required to repay money?

Mr Spasojevic : Yes—repaid money to a corporate?

Senator DASTYARI: No. I meant to—

Mr Spasojevic : To the other states?

Senator DASTYARI: Yes, the relativities changed after the fact.

Mr Spasojevic : No.

Senator DASTYARI: When did they repay money to a corporate?

Mr Spasojevic : Sorry, they have levied taxes on different individuals who have appealed and then won the appeal, so the money has been repaid.

Senator DASTYARI: Yes, of course. I think you have answered this but you might want to take it on notice: what you are telling me is there has not been a like situation where after an event—like a couple of years later—there has been a change in something like the relativities as a result of back pay, or money owed or a dispute from earlier, that has historically resulted in a state being required to repay money or reallocate money that has been given to them?

Mr Spasojevic : Monies, once they are distributed, are distributed. Where the future distributions of the GST take things into account—for example, where a state has had to repay stamp duty—we would take that repayment into account in calculating future years' GST distributions. So it is not a repayment as such, but it would affect a future year's GST distribution.

Senator DASTYARI: Can you take on notice—because this may not be a question you can answer here and I completely understand that—if there is a situation where Western Australia may be entitled to royalties and they repay in future years, what the consequence of that would be to future relativities?

Mr Spasojevic : Sorry, what does 'repay the royalties' mean? They would have to hand money back to the corporates?

Senator DASTYARI: No, it is the opposite direction. The corporates may owe them money.

Mr Spasojevic : Given that we use historical data, to the extent that it affected the historical data that would be automatically reflected in the GST distribution.

Senator DASTYARI: So the answer is—

Mr Spasojevic : That is the answer to that, if that is what the commission decided it would do. I cannot judge what the commission in fact would do if there were such an event, as I pointed out earlier.

Senator DASTYARI: You are telling me that event would be unprecedented? Do you want to take that on notice?

Mr Spasojevic : No, I do not want to take it on notice. Companies have made payments to governments for taxable years that have already passed. Those payments are recorded, of course, as receipts in the year in which they occur. As would be the case, I believe, in your royalty scenario, they would be counted as receipts in the year in which they occurred. History is already settled. To the extent that it happens, those revenues may or may not be taken into account by the commission, depending on what it decided to do in those circumstances.

Senator DASTYARI: Are you able to provide examples in the last five years of where that has happened?

Mr Spasojevic : I do not believe it has happened in the last five years.

Senator DASTYARI: Do you know when it last happened?

Mr Spasojevic : I believe it happened in 2002-03, where there was a stamp duty case resolved in Queensland.

Senator DASTYARI: Are you able to provide details of that on notice?

Mr Spasojevic : I think if you go to the relevant report you will find it in the relevant report.

Senator DASTYARI: Where is the relevant report?

Mr Spasojevic : The relevant report would be online. All those update reports are available online. It is a very rare event.

Senator DASTYARI: So you are saying the last time this happened was in 2002-03?

Mr Spasojevic : I believe that is the case.

Senator DASTYARI: And it related to Queensland?

Mr Spasojevic : Queensland stamp duty on a major property transaction.

Senator DASTYARI: And the impact of that, in the 2002-03 example that we are using as a comparison, was that it had an impact on future GST?

Mr Spasojevic : I believe that is the case, yes.

Senator DASTYARI: You believe that is the case or it is the case?

Mr Spasojevic : I am going to give you the answer that I believe it is the case, because I did not read that report before I came here. If you wanted to know about that I would have been happy to do that. So you will have to take it that my answer is that I believe that is the case though I could be mistaken.

Senator DASTYARI: How will I know that is or is not the case.

Mr Spasojevic : When you have read the report you will find it. That is what I am going to have to do.

Senator CANAVAN: I would like to ask about the change in urban transport methodology that was made in this assessment. Can you explain—I have read the report but it is still a little bit vague to me—what exactly that was?

Mr Spasojevic : Up until 2015 most public transport was treated as a business enterprise and so it was treated as something removed from general government. Following from the GST distribution review we were asked to look at that particular assessment. The commission decided that in thinking about that it would get a better measure of differences in fiscal capacity if you treated those urban public transport businesses as if they were general government and brought their investment and revenues on stream and incorporated them into the accounts. Having done that we then gathered data on the actual capital stocks and investments undertaken by urban public transport and state government operators and developed an assessment of what, on a policy-neutral basis, per capita stock for different sized cities would be, and based our assessment on that.

Senator CANAVAN: When you bought the business enterprises in, were you bringing in their net revenue for government?

Mr Spasojevic : Everything. So we basically redid the accounts as if they were parts of general government. So their revenues became general government revenues, their assets became—

Senator CANAVAN: Their costs became general government costs.

Mr Spasojevic : Their costs became general government costs and the equities we used to hold, one to another, were cancelled out.

Senator CANAVAN: How is it policy neutral when it is a policy decision of government to set the rate of fares to determine the fare box revenue from a train or a bus.

Mr Spasojevic : We do not make an assessment based on the actual fares that state has collected. We look at an estimate based on different city size fares might be.

Senator CANAVAN: So it is not actually the fare revenue going into the model.

Mr Spasojevic : No.

Senator CANAVAN: Is it a user charges type?

Mr Spasojevic : It is a user charge type of approach.

Senator CANAVAN: Full cost recovery?

Mr Spasojevic : Whatever the cost recovery is that the average state follows. We do not make a policy judgement about what fares should be, we just look at what fares are.

Senator CANAVAN: I am now getting confused. You looked at what fares—

Mr Spasojevic : What fares are on a national average basis.

Senator CANAVAN: So you are using actual fare revenue but it is averaged across states.

Mr Spasojevic : Correct. We try to remove the influence of policy on different states on their fare revenues.

Senator CANAVAN: But it would be the case that all states face similar political pressures, all states massively and heavily subsidise public transport in their cities and therefore your averaging might not really mask a lot of that variation or mask a lot of the policy-neutrality you would like to.

Mr Spasojevic : I think most people are reasonably comfortable with the regression analysis that was done?

Senator CANAVAN: Could you provide the regression analysis to the committee. That would be very interesting.

Mr Spasojevic : Absolutely, it is in the report, if you go through the relevant part of it—

Senator CANAVAN: I have read the—

Mr Spasojevic : Things are in the public domain if you would like to look at the report.

Senator CANAVAN: If you could point it out to me, because I have not read the regression analysis. I have read your volumes 1 and 2. I could not find it in there.

Mr Spasojevic : If it is not in volume 2, I am surprised that the regression analysis is not in the relevant part.

Senator CANAVAN: I cannot remember seeing it. It has been a couple of months since I looked at it. There are two changes. On page 17 of volume 1, which goes through the impact of changes on Queensland, it says:

Recognising the impact of city size and urban population growth on the need for urban transport infrastructure …

That is the change we are talking about?

Mr Spasojevic : That is the change which affects the investment undertakings, and the other one, the transport one, is the actual spending on operating costs.

Senator CANAVAN: That one change, the capital and transport spending, cost Queensland $500 million?

Mr Spasojevic : Correct.

Senator CANAVAN: In effect did this change that you have taken to urban transport benefit New South Wales and Victoria disproportionally because they have the large cities of Sydney and Melbourne?

Mr Spasojevic : Victoria, I think was the major gainer because it is the most urbanised.

Senator CANAVAN: Right. I struggle to understand that, given that people in big cities have all these benefits already. Some of the decisions to invest in public transport are political ones, they are not policy neutral at all. How are these changes being policy neutral? Why should there not be a bus service in Rockhampton, where I live? Presumably you do not assume that, but you assume that people who live in Brisbane, or Sydney or Melbourne do deserve a bus network and therefore the GST that people pay in Rockhampton should help subsidise their bus?

Mr Spasojevic : No I do not think that is—

Senator CANAVAN: That is what you are doing.

Mr Spasojevic : No, I do not think—

Senator CANAVAN: That is exactly what you are doing! Let's clarify; let's just be very specific. Where have you assumed people need public transport? Which cities?

Mr Spasojevic : Wherever public transport is recorded.

Senator CANAVAN: Exists now?

Mr Spasojevic : Exists now. If there is public transport now, that forms part of the regression equation.

Senator CANAVAN: Does that include regional bus services and those sorts of things?

Mr Spasojevic : If they are public transport, yes.

Senator CANAVAN: What do you mean by that?

Mr Spasojevic : If they are not private operators.

Senator CANAVAN: If they are privately operated, they would not be counted?

Mr Spasojevic : Correct.

Senator CANAVAN: That means that if I live in a town that does not have public transport, after you have made this change some part of the GST I pay every year is now going to subsidise the public transport needs of those who happen to live in a city with public transport. Is that correct?

Mr Spasojevic : The thing is that if state governments do not provide public transport in those towns, and it is not a general government function, then the GST distribution does not recognise expenditure in those towns.

Senator CANAVAN: Can I just say it again, really clearly: we did not include this before—

Mr Spasojevic : Correct.

Senator CANAVAN: We are including this now?

Mr Spasojevic : Correct.

Senator CANAVAN: Before, the GST of someone who lived in Thargomindah was not paying for the public transport investment in Melbourne. Now after this change, they are.

Mr Spasojevic : As I pointed out, wherever there is a general government function, the GST distribution takes that into account. Wherever there is not, it is not taken into account.

Senator CANAVAN: So the answer to my question is yes.

Mr Spasojevic : The answer is exactly what I have said.

Senator CANAVAN: Can you provide, and you might need to on notice, what the gross transfers were as a result of this methodology change?

Mr Spasojevic : I believe the assessment chapter has a GST distribution of consequence.

Senator CANAVAN: I believe it does and I—

Mr Spasojevic : That would be the distribution.

Senator CANAVAN: It was a couple of months ago.

Mr Spasojevic : Please look at the report. I think it is provided.

Senator CANAVAN: Sorry. Chair, I might just ask for a point of order here. It is not for witnesses to tell us where to go to get information. We have the right to ask questions.

Mr Spasojevic : Indeed.

Senator CANAVAN: You are appearing before a parliamentary inquiry and not all of us have the resources and time that you do in your organisation. It was a fairly simple question, and I am happy for you to take it on notice because it is a detailed one.

Mr Spasojevic : I will provide in the reference the page to go to in the public record.

Senator CANAVAN: It is a very detailed and complex report, so I want to be sure—

Mr Spasojevic : I am sure we will send you to the relevant page.

Senator CANAVAN: I want to be sure that I have the right number. To be clear on what number I want, it is for the gross flows, not netted off by different states getting something and others being taken away; it is for the gross transfers that resulted from this, or these two, methodological changes if you want to split them into—

Mr Spasojevic : There is only one methodological change.

Senator CANAVAN: You have identified you have split them in the report into transport and capital, but—

Mr Spasojevic : But one is not a methodological change.

Senator CANAVAN: Which one is not a methodological change?

Mr Spasojevic : Bringing in the higher spending as a result of PTEs. We would not classify that as—

Senator CANAVAN: Sorry, just to be clear, I was quoting table 14 on page 17, which said, 'changes in methods' and one of those changes was capital and the other one was transport.

Mr Spasojevic : I will accept that.

Senator CANAVAN: They were both changes in methods?

Mr Spasojevic : Yes. We will send you the relevant extract.

Senator CANAVAN: Gross flows and changes for those two amounts.

This is the first time I have read one of your reports. I understand the complexity of it. It is a difficult job—I recognise that. But how do you come up with deciding that that is something we need to do? Who makes that decision?

Mr Spasojevic : The commission.

Senator CANAVAN: You do?

Mr Spasojevic : No, the commission does.

Senator CANAVAN: The commission does. What is your role?

Mr Spasojevic : I am the secretary of the commission. I am not a member of the commission.

Senator CANAVAN: The commission is a board or a panel—

Mr Spasojevic : That is correct—statutory appointed.

Senator CANAVAN: But still—how does this work within your organisation? Who comes up with the idea that we must change this methodology now to include public transport infrastructure?

Mr Spasojevic : We were asked in the terms of reference to look at this particular assessment. The states put forward cases on whether it should or should not be done. The commission read all that, spoke to the states and made a judgement call.

Senator CANAVAN: You might need to take this on notice: not so much the terms of reference, but when did the commission make a decision to do this? At what board meetings was it considered?

Mr Spasojevic : The commission does not make a decision until the very end. Everything is a disposition until the very end. So I can comfortably say that it made its final decision set when it signed the report.

Senator CANAVAN: All right. What consultation do you do? Do you just rely on state government submissions?

Mr Spasojevic : Yes.

Senator CANAVAN: Do any local governments make submissions, or local government associations?

Mr Spasojevic : No.

Senator CANAVAN: You do not ask for them to do that?

Mr Spasojevic : No.

Senator CANAVAN: I am just mindful that the impact here is not just between states; it is also within the states. Some of these towns that I live in or spend a lot of time in do not necessarily have a voice and they certainly do not understand your process. It is incredibly complex and it seems like they have been short-changed significantly by this particular methodological change.

Can I go on to the mining royalties issue? How much does WA raise in royalties a year and how much do they get to keep under the grants commission process?

Mr Spasojevic : They get to keep all their royalties. We do not touch their royalties.

Senator CANAVAN: Well, how much—

Mr Spasojevic : Which communities—

Senator CANAVAN: I think there was—

Mr Spasojevic : I believe that in 2012-13 they raised—the last estimate they have—$5.4 billion.

Senator CANAVAN: That seems lower than the estimate—do you do adjustments of some kind? Do you just take their actual—

Mr Spasojevic : Those are iron ore royalties.

Senator CANAVAN: Okay.

Mr Spasojevic : I only have the iron ore royalties number with me.

Senator CANAVAN: Okay. So how much is taken from them, in effect, by the distribution, if you like? I thought I saw that figure somewhere.

Mr Spasojevic : I think the normal way we would characterise that is that of the total royalties that are collected, the difference between their share of the tax base and their share of the population would be subject to a GST redistribution.

Senator CANAVAN: I have noticed those figures. I have table 1 on page 104 of your report—WA at $7.2 billion in royalties. And I also should declare, sorry, grants in lieu of royalties.

Mr Spasojevic : Sorry—page 104?

Senator CANAVAN: Yes, in volume 2.

Mr Spasojevic : I am sorry, I do not have volume 2 with me. But go on.

Senator CANAVAN: I have $7.2 billion. What does 'grants in lieu of royalties' mean?

Mr Spasojevic : The Commonwealth makes payments in lieu of royalties which WA may or may not have been entitled to for the North West Shelf. So the Commonwealth collects the royalties and makes a payment to Western Australia—

Senator CANAVAN: And they get the money.

Mr Spasojevic : And they get the money.

Senator CANAVAN: So that might account for the difference? $7.2 billion.

Mr Spasojevic : It may well account for the difference.

Senator CANAVAN: You do have a figure in your report though, don't you, that summarises how much they received and the impact? I have something here: table 16—but you do not have the report in front of you?

Mr Spasojevic : No.

Senator CANAVAN: Perhaps next time you could come with the report. Table 16 talks about the GST impact on mining revenue—are you familiar with that sort of table?

Mr Spasojevic : Yes.

Senator CANAVAN: I am asking this question because I do not particularly always understand what these numbers mean. It seems to suggest that WA loses $5.9 billion.

Mr Spasojevic : That may well be because some numbers recorded are historical numbers. They get scaled by the growth in the pool between those historic years and the application year so that we have something which is more in keeping with the size of the GST pool.

Senator CANAVAN: Yes, okay. Could you just clarify it? You are right—table 1 is 2013-14 at $7.2 billion and then for 2015-16 the GST impact shows them losing $5.9 billion associated with that.

Mr Spasojevic : Yes. That would be scaled by the growth in the pool between the historical years—

Senator CANAVAN: In 2015-16, what will be your estimation for their royalties and grants in lieu of royalties amounts?

Mr Spasojevic : I am sorry; we have no estimation of 2015-16 available.

Senator CANAVAN: But it is still going to be in the order of $7 billion? Indeed, it may have fallen a little, I suppose since 2013-14.

Mr Spasojevic : This is a very contentious issue. I am not putting my hand on my heart and saying what I think their royalties will be in 2015-16.

Senator CANAVAN: But they are losing more than 50 per cent with their royalties, you could safely say?

Mr Spasojevic : That would not be unexpected, yes.

Senator CANAVAN: I think you have made some adjustments in recent years in regard to the costs of developing a mining industry?

Mr Spasojevic : There are some mining related expenditures, which are taken into account in our calculations—that is correct.

Senator CANAVAN: Do you have an estimate of the percentage that those costs represent of the royalties raised?

Mr Spasojevic : No.

Senator CANAVAN: It might have been WA's or Queensland's submission that said it amounted to around three per cent of royalties—does that sound right?

Mr Spasojevic : That may be right. I am not familiar with that number.

Senator CANAVAN: If you could take that on notice to see if you have any calculations. If you do not have any, that is fine.

Mr Spasojevic : I do not believe we have that calculation at this point in time.

Senator CANAVAN: Are you familiar with Canada's recent changes?

Mr Spasojevic : No.

Senator CANAVAN: So you have not looked at that at all?

Mr Spasojevic : No.

Senator CANAVAN: Why not?

Mr Spasojevic : Why should I have?

Senator CANAVAN: you are making very complicated and detailed judgement decisions which have large impacts on Australians. In that process, I would have thought you would have looked around the world and seen what other countries are doing and how they are treating it. Canada is a very similar economy to ours in terms of its reliance on mining royalties. It is also a federation like ours and has a horizontal fiscal equalisation process like ours. I am a bit surprised that you have not looked at Canada. They have certainly made changes, is my understanding, in the last two years in regard to these issues. Does that mean that not only you have not looked at it but your commission members and panel members have not received board papers or had some discussion at their meetings about—

Mr Spasojevic : I think the difference is that we were asked to achieve horizontal fiscal equalisation which is not the objective of the Canadian process. They have a partial equalisation model and the commission takes what it is asked to do in the terms of reference, which is achieve horizontal fiscal equalisation.

Senator CANAVAN: But it is your conclusion that everything they do is just completely irrelevant to us.

Mr Spasojevic : No. I am just saying that the commission has been asked to achieve a certain policy objective, that is not the objective in the Canadian system and so what the Canadians do is not relevant to what the objective the government has set the Commonwealth Grants Commission.

Senator CANAVAN: So what Canada does is completely irrelevant?

Mr Spasojevic : I believe it has a partial equalisation system, that is not the policy objective the commission is asked to achieve.

Senator CANAVAN: No it is not, but this specific issue of how you estimate the costs of developing an industry to try to get the net profit from having a mining industry and therefore be as policy neutral as possible is exactly the question that Canada looked at, and they have come up with this 50 per cent discount on royalties. So indeed that point is not my point; I have not read the Canadian papers but I read it in the Queensland and the WA submissions to your organisation.

Mr Spasojevic : Correct.

Senator CANAVAN: So it surprises me that you have not looked into it when it was an issue raised by those governments..

Mr Spasojevic : The commission took a slightly alternative approach which was to actually asked those states how much they did spend to develop their mining industries. Neither of those states were particularly able to quantify a large expenditure on the development of their mining industries—certainly nothing like the 50 per cent number the Canadians did. So actually basing it on what the states themselves said they spent, the commission reached the judgement it did. I believe that is quite a legitimate and reasonable process for an Australian commission to go through which is to actually ascertain from the states involved what they did.

Senator CANAVAN: I have not asked the state government, but I would imagine it would be extremely difficult to split out costs relating to mining and costs relating to agriculture and other industries. When you build a road, it is for a range of reasons not just for one example. I am particularly interested in how this process and methodology is going to impact your assessment of coal seam gas. My understanding is that in your next methodology you will start to consider that—is that correct?

Mr Spasojevic : You might be one step ahead of me. I have not received terms of reference to do any new methodology.

Senator CANAVAN: There was a comment in one of these things saying that that will be looked at next time.

Mr Spasojevic : That may be something to look at.

Senator CANAVAN: Right. Take Queensland, for example, because it is the only state with a sizeable coal seam gas industry. If the process that we have in place now continues, what percentage of Queensland's royalty revenue will it be looking to lose?

Mr Spasojevic : I do not think I can estimate that—

Senator CANAVAN: It is going to be more than 50 given WA loses more than 50 per cent?

Mr Spasojevic : I cannot estimate it but what I can say is that we would look at something like their share of the tax base compared to their share of the population base, and that difference is what would be subject to equalisation. It would be the standard process for all calculations.

Senator CANAVAN: You look at the population base when you look at royalty revenue?

Mr Spasojevic : We look at the population base in relation to all revenues because it is the difference between a population base and its share of the tax base which drives the GST distribution.

Senator CANAVAN: I thought that was a separate question. Do you not look at mining independently?

Mr Spasojevic : Sorry, I was answering the question which you asked, which was what proportion—

Senator CANAVAN: Okay.

Mr Spasojevic : They would lose the difference—

Senator CANAVAN: I will be clear, I only want to look at ceteris paribus: keeping all other things equal. What would be the impact on Queensland's coal seam gas revenues if this process were applied? Would it be in the order of 50 per cent or more under this process?

Mr Spasojevic : I cannot answer that because I do not know what share of the national tax base of coal seam gas would be attributable to Queensland. Until that data is available it is just not possible—

Senator CANAVAN: You are not starting to look at this at all? You know it is coming.

Mr Spasojevic : Not at this point in time.

Senator CANAVAN: You know it is coming, but you sit back and wait for the government to tell you; it just seems a bit strange. The real reason I am very worried about this particular aspect is how this affects policy neutrality, which is meant to be your core principal. No other state has developed a coal seam gas industry. Many other states have just as good, if not better, coal seam gas resources. If Queensland is penalised for developing this industry, I think that will have quite a serious impact on the incentives of other states to do the same. It is a hard thing to look at, but is that something you are going to consider?

Mr Spasojevic : I think that is one of the reasons why the commission has flagged that the development of this industry was something that it would need to keep its eye on in future updates and reviews. It would be consulting the states on what an appropriate assessment would be once some revenue flows start to impact on the system.

Senator CANAVAN: I will be watching with interest as a Queensland senator. Finally, you have adopted a mineral-by-mineral approach in this methodology. Can you explain why you have moved away from the aggregated mineral approach? I notice in your report that you say it is more policy neutral, but there are the other considerations that have led you to do this?

Mr Spasojevic : I think a mineral-by-mineral approach allows the best reflection of HFEs—what the commission has pointed out.

Senator CANAVAN: I am sorry, I just missed that.

Mr Spasojevic : If you go to mineral by mineral, where every mineral has its own effective tax rate, which is what we observe, you get a better reflection of HFE. The thing the commission was concerned about was policy neutrality of that approach when you have certain minerals falling predominately in one state or another, like iron ore in Western Australia. Would this create an opportunity for Western Australia to exert policy non-neutrality on the system? The commission, I think, has now come to a judgement that it does not believe that this will be the case. It drew some comfort from Western Australia's own decision to raise royalty rates on iron ore, even though it knew it would have an adverse GST consequence for it, as some evidence that policy neutrality would not be a significant determinant of what states' royalty policy is. And so it moved to the assessment method which was a better reflection of HFE.

Senator CANAVAN: By that corollary, a better reflection of policy neutrality in your view?

Mr Spasojevic : There was a trade-off, which the commission was happy to make, that it thought it would be getting a better HFE outcome, which is its only objective—

Senator CANAVAN: What is the trade-off? What is the consideration other than policy neutrality?

Mr Spasojevic : Policy neutrality is a guiding principle, the objective is HFE. If you have to compromise HFE to achieve policy neutrality you are giving up your objective for a secondary consideration. If the commission considers it would achieve HFE without an adverse impact on policy neutrality—

Senator CANAVAN: Can you just define HFE for me? What does it mean?

Mr Spasojevic : It is the principal by which we achieve horizontal fiscal equalisation so that all states are pooled in a capacity to deliver a standard set of services if they make the same revenue effort.

Senator CANAVAN: One more thing: Senator Ketter raised the issue of Tasmania and the new capital city of Melbourne that it has. When you were speaking about the costs of Tasmanian goods et cetera, do you factor in the Tasmanian Freight Equalisation Scheme?

Mr Spasojevic : Not in any way, no.

Senator CANAVAN: So Tasmania gets greater recognition because it is far away from an area that supplies goods, like Melbourne, and we as the Commonwealth government actually subsidise the transport of those goods. So is it not double dipping?

Mr Spasojevic : I do not believe so, because we would treat it as exercising the same costs as road difference from a place like Melbourne and going north. I think the FES compensates for the sea costs. So we would still be remote. You still have to move the stuff. It does not remove that cost; it just recognises—

Senator CANAVAN: So you calculate the road costs?

Mr Spasojevic : No, we just treat people in degrees of locational difference as calculated by ARIA.

Senator CANAVAN: I am not quite following that answer.

Mr Spasojevic : We apply things like how much more state governments spend, say, on schools for people living in different areas of remoteness.

Senator CANAVAN: But you did mention goods earlier.

Mr Spasojevic : That is the rationale, but we do not have any measure of what freight costs are. We tried that in the past but it is just not reliable.

Senator CANAVAN: Thanks.

Senator DASTYARI: I would just point out that the website only goes back to 2004 in terms of where the reports. If there is a way that we can get it from earlier, that would be fantastic.

Mr Spasojevic : I will check that for you.

Senator DASTYARI: Thank you.

CHAIR: Thank you very much, Mr Spasojevic and Mr Markham. That concludes our session for today.

Committee adjourned at 18:46