NO.056

GST WINDFALL FUNDING THE ELIMINATION OF STATE TAXES

Budget estimates indicate that the States and Territories (the States) will

receive total GST revenue of $37.3 billion in 2005-06. All States will receive

more revenue from the GST than the amount they would have received if tax reform

had not been implemented.

As a result of the Australian Government’s tax reforms, the States will

be better-off by $1.5 billion in 2005-06 after having eliminated over $3.6 billion

worth of inefficient state taxes, including debits tax.

The GST has already funded the abolition of financial institutions duty, accommodation

(bed) taxes, stamp duty on quoted marketable securities and, from 1 July 2005,

debits tax will no longer be imposed in any State due to the Australian Government’s

tax reforms. The growing GST windfall the States are receiving means they can

also afford to undertake further reform of inefficient taxes consistent with

the Intergovernmental Agreement on the Reform of Commonwealth-State Financial

Relations (the IGA).

On 22 March 2005, the Australian Government proposed a timetable to the States

for the elimination of the majority of the remaining inefficient taxes listed

under the IGA. If imposed in all jurisdictions, these taxes would represent

a burden of $8.8 billion over the four years from 1July2006. Some taxes have

already abolished some of these taxes. The Australian Government’s proposal

involves the abolition of $7.4 billion in stamp duties still imposed by the

States over the four years. Even after the elimination of these taxes under

the Australian Government’s timetable, the States will receive a GST windfall

of $9 billion over the six years from 2004-05.

The Australian Government’s offer of 22 March 2005 included a commitment

to provide financial assistance to ensure that no State would be worse off as

a result of further tax reform efforts. As a result of revisions to estimates

of GST revenue and the States’ Guaranteed Minimum Amounts in the Budget,

the Australian Government has extended and increased its offer of assistance.

The Australian Government will provide an estimated $563.1 million in Budget

Balancing Assistance over three years beginning 2006-07 to ensure that no individual

State is worse off due to tax reform in any one year. This increase in Australian

Government assistance and the substantial GST windfalls expected to flow to

the States make it affordable to abolish the IGA taxes.

CANBERRA

10 May 2005

Contact: David Alexander

02 6277 7340

Attachment

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

   Amount (GMA) components and GST revenue. In addition to these factors, projections

   from 2006-07 will be affected by recommendations by the Commonwealth Grants

   Commission on the distribution of GST to each of the States.

2. Where the difference between the GMA and GST Revenue (and vice versa) is

   less than zero, the amount is zero.

3. The transitional period in which the Australian Government guarantees that

   no State will be worse off due to tax reform expires on 30 June 2006. However,

   if the States agree to the Australian Government’s proposal to eliminate

   IGA taxes, the Australian Government will extend the transitional period to

   30 June 2009.

4. 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 is included in their GMA from 2005-06

   to ensure the States are no worse off. Accordingly, State gains from tax reform

   decrease in 2005-06 compared to 2004-05.

5. Consistent with the Australian Government’s proposal, GMAs from 2005-06

   include estimates of revenue foregone from stamp duties on the following:

   non-quotable marketable securities; leases; mortgages, bonds, debentures and

   other loan securities; credit arrangements, instalment purchase arrangements

   and rental arrangements; and cheques, bills of exchange and promissory notes.

6. Consistent with the Australian Government’s proposal, GMAs from 2007-08

   include estimates of revenue foregone from stamp duty on business conveyances

   other than real property.