NO.111

STATES RECEIVE GST WINDFALL

In 2004-05, all states will receive a windfall over the Guaranteed Minimum

Amount (GMA). Including the compensation for the annual payment of GST, the

states will receive a total gain from tax reform of over $1.9billion more than

the GMA. The GMA is an estimate of funding each state would have had available

to it had tax reform not been implemented.

As the GST is a secure, growing and broad based revenue source, the states’

gain from tax reform is estimated to continue growing to around $3.2billion

by 2007-08. This means that the Australian Government’s tax reform will

deliver to the states an extra $1.9billion in 2004-05, growing to around $3.2billion

in 2007-08, to spend according to their own priorities. States can use this

additional funding for essential community services such as hospitals, schools,

public transport, roads and police, and to lower their tax burdens.

CANBERRA

21 December 2004

Forward estimates of states’ gains from tax reform^(a)

1. Projections from 2004-05 will be affected by variations in Guaranteed Minimum

   Amount (GMA) components, GST revenue growth and recommendations by the Commonwealth

   Grants Commission on the distribution of GST to each of the states and territories

   in future years. See Budget Paper No 3, Federal Financial Relations 2004-05

   for details of the GMA and the distribution of GST revenue among the states

   and territories.

2. As agreed at the 26 March 2004 meeting of the Ministerial Council for Commonwealth-State

   Financial Relations, bank account debits tax is to be abolished by 1 July

   2005. The revenue forgone by the states and territories is included in their

   GMAs from 2005-06 to ensure the states and territories are no worse off. Accordingly,

   state and territory gains from tax reform decrease in 2005-06 compared to

   2004-05. However, the estimates of GMAs do not contain reductions in the following

   state taxes: non-residential conveyances; non-quotable marketable securities;

   leases; mortgages, bonds, debentures and other loan securities; credit arrangements,

   instalment purchase arrangements and rental arrangements; cheques, bills of

   exchange and promissory notes, which are the subject of review by the Ministerial

   Council in 2005.

3. Under arrangements to compensate the states for the annual payment of GST

   measure in 2004-05, $219.4 million of 2005-06 GST revenue is to be advanced

   to the states in 2004-05. This advance will be recovered from the states,

   in accordance with the A New Tax System (Commonwealth-State Financial Arrangements)

   Act 1999, by lowering payments to the states under the Act in 2005-06.

   The states will then receive an additional payment of $219.4 million to ensure

   that the total amount equating to 2005-06 GST revenue is paid to the states

   in 2005-06.

4. The transition period in which the Australian Government guarantees that

   no state or territory will be worse off due to tax reform expires on 30 June

   2006.

5. Compensation payments to the states in future years will be reviewed at

   a later stage, with the possibility of this future compensation being paid

   as an upfront lump-sum.