NO.017

MEETING OF THE MINISTERIAL COUNCIL FOR COMMONWEALTH-STATE FINANCIAL RELATIONS AND THE AUSTRALIAN LOAN COUNCIL

Abolition of State Taxes

Taxpayers in seven States and Territories will pay less tax as a result of the Australian Government’s tax reforms. The Australian Government has agreed with the States on a schedule for the abolition of the majority of taxes listed for review in the Intergovernmental Agreement (IGA). Inefficient state taxes such as stamp duty on mortgages, leases, and credit and rental arrangements will be abolished, as was originally intended under the IGA. This means taxpayers will pay less tax to hire a video, to hire a car or take out a loan to buy a home.

The Australian Government is pleased that seven States and Territories have agreed to abolish these taxes. The Australian Government will continue to pursue the abolition of s tamp duty on business conveyances of real property. This is the last remaining tax listed in the IGA.

The Australian Government will also extend the transitional period from 30 June 2006 to 30 June 2009 to ensure that no State or Territory is worse off as a result of tax reform. Given current estimates, this is a sufficient timeframe to ensure the States and Territories will no longer require transitional assistance even after the abolition of the IGA taxes.

The New South Wales Government has not accepted the Australian Government’s proposed timetable on the abolition of these taxes. Productive discussions were held about an alternative timetable to abolish these taxes in New South Wales. These discussions will continue with the aim of reaching early agreement. This is welcome news for New South Wales taxpayers.

Payments to the States and Territories

Today’s meeting of the Ministerial Council for Commonwealth-State Financial Relations noted the Statement of Estimated Payments to the States and Territories (which is reproduced at Attachment A). The Statement indicates that GST and other funding provided to the State and Territory Governments will total more than $57.3 billion in 2005‑06 and more than $59.2 billion in 2006‑07. It also shows that total funding for each State and Territory government will increase from 2005‑06 to 2006‑07.

Adding payments made directly to local government and those which pass through the States to other bodies, the total funding of GST and payments provided by the Australian Government will be more than $64.6 billion in 2005‑06, increasing to more than $67.0 billion in 2006‑07.

GST Revenue Received by the States and their Gains from Tax Reform

The Ministerial Council noted that the States and Territories will receive an estimated total of $36.7 billion in GST revenue in 2005‑06 and $39.2 billion in 2006‑07. These estimates are based on the 2005-06 Mid-Year Economic and Fiscal Outlook (MYEFO) estimates of total GST revenue.

The estimates show that the States and Territories are estimated to be collectively better off by $1.1 billion in 2005-06. Only New South Wales will require Budget Balancing Assistance (BBA) in 2005‑06. All other States and Territories will receive GST revenue in excess of their Guaranteed Minimum Amount (GMA). In 2006‑07, all States and Territories will receive more GST revenue than their GMA and no State will require BBA. GST revenue is estimated to be $2.0 billion more than the States’ GMA.

Distribution of GST Revenue

In signing the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (the IGA), all States and Territories agreed that the GST would be distributed amongst them on the basis of Horizontal Fiscal Equalisation (HFE), according to the recommendations of the Commonwealth Grants Commission (CGC), which is the independent and expert arbiter on HFE.

The CGC’s recommended relativities were discussed by the Ministerial Council and all States and Territories put forward their views.

The CGC’s methodology is developed by the CGC in consultation with all the States and Territories and is based on the long-standing principle that all State and Territory governments should have the same capacity to provide quality services to their citizens. A principle that all treasurers supported at today’s meeting.

The States’ complaints about funding are a dispute between the States and Territories over the distribution of GST as between themselves. Every dollar of GST revenue goes to the States and Territories. There was overwhelming support at today’s Council for distribution in accordance with the recommendation of the CGC.

The Ministerial Council also noted the progress made by the CGC in improving its data usage, and in simplifying its methodology used to calculate relativities for introduction in the 2010 Methodology Review.

Specific Purpose Payments (SPPs)

The Australian Government has continued to maintain the aggregate level of SPP funding to the States and Territories, consistent with its commitment under the IGA.

On the basis of preliminary estimates, total SPPs will increase by around 3.5 per cent or around $937.8 million in 2006‑07. After subtracting SPPs which will be paid direct to local government, or which pass through the States and Territories to other bodies, SPPs to the States and Territories are estimated to increase by around 2.3 per cent, or $447.8 million. Detailed estimates of the proposed level of SPPs and their distribution among the States and Territories will be included in the Australian Government’s 2006‑07 Budget.

National Competition Policy Payments

The Australian Government will provide the final scheduled payments under the Agreement to Implement the National Competition Policy and Related Reforms to the States and Territories of up to approximately $834 million in 2005‑06.

Each State and Territory’s receipt of its per capita share of Competition Payments will be determined once the Australian Government has considered recommendations from the National Water Commission’s assessment of jurisdictions’ progress in implementing National Competition Policy related water reforms.

Discussion was held on the National reform Agenda and the Australian Treasurer emphasised the importance of economic reforms and noted that the Australian Government will provide funding to the States on a case‑by‑case basis once specific implementation plans have been developed. Payments to the States and, where appropriate, to local government, would be linked to achieving agreed actions or progress measures and demonstrable economic benefits.

GST Administration Issues

As the Australian Taxation Office (ATO) collects all GST revenue on behalf of the States and Territories, the IGA provides that accountability and performance arrangements will be established between the State and Territory governments and the ATO. The Ministerial Council endorsed a number of updates to the GST Administration Performance Agreement between the Australian Taxation Office and the States and Territories .

The Ministerial Council also discussed GST administration costs and related issues and agreed to the ATO’s GST administration budget of $619.1 million for 2006‑07, consistent with the requirement of the IGA that the States and Territories compensate the Australian Government for the costs of administering the GST.

Australian Loan Council Allocations for 2006-07

Today’s meeting of the Australian Loan Council endorsed the Loan Council Allocations nominated by the Australian Government and each State and Territory for 2006‑07 (Attachment B).

CANBERRA

31 March 2006

Contact: David Alexander

02 6277 7340