The Commission will inquire into the operation of the 2018 legislation, including whether the 2018 changes to the GST distribution system are operating efficiently, effectively and as intended and the fiscal implications for each state and territory, and for the Commonwealth, of the changes made by the 2018 legislation.
The Australian government’s Productivity Commission released an issues paper for consultation on how the federal government’s 2018 goods and services tax (GST) reforms are functioning.
Australia’s system of federal financial relations involves the transfer of revenue collected by the Commonwealth to the states. An important part of the system is the GST, collected by the Commonwealth and distributed to the states in accordance with the Federal Financial Relations Act 2009 and the Commonwealth Grants Commission Act 1973.
Since the inception of the GST in 2000, the principle of Horizontal Fiscal Equalisation (HFE) has determined GST distribution to the states (a similar HFE principle was often used prior to 2000). It has been an accepted policy position across jurisdictions that Commonwealth GST grants should aim to compensate for or narrow the gap between fiscally stronger and weaker states and territories.
In recent times, the objective of HFE was to ensure each state had the fiscal capacity to provide services and infrastructure at the same standard, if each made the same effort to raise revenue from its own-sources and operated at the same level of efficiency. The model also accounted for material factors beyond the control of state governments that may affect state revenues or spending – the demographics or relative remoteness of its population, for example.
In 2018, the Commonwealth Parliament changed the way GST revenue is distributed among the states to address concerns about the volatility of this revenue source.
Scope of the inquiry
The Commission will inquire into the operation of the 2018 legislation, including whether the 2018 changes to the GST distribution system are operating efficiently, effectively and as intended and the fiscal implications for each state and territory, and for the Commonwealth, of the changes made by the 2018 legislation.
The Commission is to investigate:
- To what extent the current arrangements are:
- Delivering a reasonable level of horizontal fiscal equalisation;
- Appropriately balancing the objective of responsiveness to changing circumstances with the objectives of reducing volatility and improving the certainty of GST revenue streams to support state fiscal planning;
- Supporting states and territories to pursue reforms, including to the efficiency of service delivery and state and territory revenue bases, and
- Fiscally sustainable for the Commonwealth and states and territories.
- Whether alternative arrangements would better achieve some or all of these outcomes.
- The interaction between GST payments and other Commonwealth payments to states, including the principles for exempting payments from the Commonwealth Grants Commission’s assessments.
Any recommendations made by the Commission should include an assessment of implementation feasibility and risks, and be cognisant of the Commonwealth’s policy commitments in relation to GST distribution. In its recommendations, the Commission should provide a range of options, including options with a funding relativity floor comparable to the current level, with and without top-up funding from the Commonwealth.
Process
The Commission should engage widely and undertake appropriate public consultation processes, including inviting public submissions and holding hearings. The Commission should engage actively with other Commonwealth entities (notably the Commonwealth Treasury and Commonwealth Grants Commission) and all state and territory governments (notably state and territory Treasuries).
The consultation is set to conclude on 27 February 2026. The Commission should provide an interim report to the government by 28 August 2026 and a final report to the government ahead of the legislated deadline of 31 December 2026.
