The Treasurer reported that the Council on Federal Financial Relations (CFFR) met in Melbourne on 3 October 2018.

The ‘tampon tax’ will be removed – Significantly, he reported, there was unanimous agreement amongst the States  to remove the GST on feminine hygiene products (the States and Territories are the beneficiaries of the GST revenue and have to agree to any change to the GST base). It was the Commonwealth, however, that placed this long standing issue on the agenda. It will be removed from 1 January 2019 (next year).

Distribution of the GST revenue between States and Territories – the discussion also covered recommendations handed down by the Productivity Commission. He noted that, in the next sitting week of Parliament, the Government will introduce legislation that will:

  • Establish a more stable and predictable equalisation standard, based on the fiscal capacity of the stronger of New South Wales or Victoria;
  • Introduce a GST relativity floor, initially set at 70 cents and ratcheting up to 75 cents in 2024-25; and
  • Permanently boost the GST pool with direct Commonwealth cash injections.

Our reforms will deliver a fairer and more sustainable GST deal for everyone and, based on the Productivity Commission’s data, will make every state and territory better off.

This will guarantee an extra $9 billion in funding over the next 10 years – this means more money for schools, hospitals, roads and police.

How is the GST ‘divvied up’ (70% of what; how can they all be better off; and why does it cost $7b…)?

Unless you’re an ‘aficionardo’ of GST distribution theory, you might have been wondering about the base, against which, one State or another might say they receive only ‘yy cents in the dollar’. I can confirm that this means many cents in the dollar, compared with a ‘per capita’ split. or at least, that is what the following portion, of an article in the Sydney Morning Herald, says.

The $66b of GST revenue is allocated by the Commonwealth Grants Commission – and the story is as follows.

Within a section excitingly named “Calculations, Capital, Cartography and Criminals” area, reams of data is collected and sifted to assess the relative cost in each state of delivering essential services, such as health, education and justice. More children means higher education costs. More older people means a bigger aged care bill. More remote and Indigenous communities inflate costs. Even the cost of capturing and incarcerating criminals is calculated.

On the other side of the ledger, states’ ability to generate revenue is also assessed. Wage bills are estimated – payroll tax being a large generator of revenue – as are the ability to tax mineral wealth and housing market turnover.

At the end, the Commission spits out a set of numbers to determine the funding needed to ensure each state and territory government can deliver a “standard” level of service to all Australians – regardless of where they live.

This week, the results of a controversial Productivity Commission inquiry into this system were released by the Turnbull government, following a leak to media.

It recommended a radical new formula for crunching the numbers, namely that the benchmark for distributions should be an average of all states. Such a formula would have lessened the degree of redistribution from stronger states to weaker states, producing a windfall for NSW of $12 billion and $10 billion for Western Australia, the latter having been – despite its recent outcries of unfairness – a net recipient of pooled funds for most of the past century, only recently becoming a net contributor off the back of the biggest mining boom in Australia’s history.

The Turnbull government’s response was swift: no. Instead, an extra $7 billion will be found to ensure no state is worse off under a new benchmark that, instead of being set as an average of all states, will be set as the fiscal capacity of NSW or Victoriawhichever is higher.

A new floor will stop distributions falling below an initial relativity of 0.70 – meaning they must receive at least 70 cents compared to the $1 they would receive if money was distributed on a per capita basisrising to 0.75.

Ultimately, Australia’s century-long system of “horizontal fiscal equalisation” will be preserved.

FJM 7.10.18

[Treasurer’s website: Media Release; LTN 190, 3/10/18; Tax Month – October 2018]

CPD questions (answers available)

  1. Has the law been passed to remove the GST on feminine hygiene products (eg. Tampons)?
  2. When will the change be effective?
  3. Did the Council also consider the Federal Government’s proposal to change the basis on which the GST will be distributed to the States and Territories?
  4. Is the underlying system based on the cost of delivering essential services to each person in the State after adjusting for their respective revenues?
  5. Was the original system aimed at ensuring each State could afford to deliver the same level of essential services?
  6. Did the Productivity Commission recommend moving the benchmark to the average for all States?
  7. Did the Government agree with that recommendation?
  8. Has the Government proposed setting the funding benchmark as that which the stronger of the two strongest state: NSW or Victoria?
  9. Are they also suggesting a distribution ‘floor’ of 70¢ in the dollar (rising to 75¢) – compared with a ‘per capital’ distribution benchmark?
  10. Does this require the Feds to distribute more than the GST revenue collected?

[Answers:1.no(onlyStateApproval);2.1January2019;3.yes;4.yes;5.yes;6.yes;7.no;8.yes;9.yes;10.yes]

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