About GST distribution

Distribution of revenue from the Goods and Services tax pool

Australia is a federation of eight states and territories with diverse economic, social and geographic circumstances. This leads to differences in the cost of providing services to residents and different capacities to raise revenue from taxes.

Yet all Australians, regardless of the state in which they live, should be able to receive comparable levels of health, education, justice, welfare, public housing and other services.

The Australian Government helps put state governments in a position to provide their residents with comparable services by distributing revenue from the Goods and Services Tax (GST) pool according to need.

It is the job of the Commonwealth Grants Commission to advise the Australian Government on how the GST pool should be distributed to ensure each state can provide comparable services, if they all make a similar effort to raise revenue from their own taxes.

Fiscal federalism

Commonwealth, state and territory governments have different spending responsibilities and sources of revenue to pay for their spending.

The spending responsibilities of states exceed their revenue raising capacity.

In contrast, the revenue raising capacity of the Commonwealth exceeds its spending responsibilities.

To fill the gap, the Australian Government transfers some of the money it raises to state governments.

Some of this money is tied to the delivery of specific services, such as hospital and schools.

The revenue the Commonwealth raises from the GST is different. It is given to state governments, and they can use the money as they see fit. Also, the amount of revenue from the GST pool given to each state reflects differences between each state’s spending needs and ability to raise revenue.

Why do states have different spending needs?

State governments provide services such as hospitals, schools, justice, public housing and transport and welfare. They also provide the infrastructure to support these services.

The cost of providing services and infrastructure can vary a lot from one part of Australia to another. For example:

Older people use hospital services more than younger people. Therefore, states with a higher proportion of older people need to spend more on hospitals

It costs more to deliver services outside major cities. States with a higher proportion of residents living in regional and remote areas need to spend more to deliver these services.

Socio-economic status influences the amount that states need to spend on a range of services, including welfare and public housing. States with a higher proportion of residents with low socio-economic status need to spend more on services.

Why do states have different abilities to raise revenue?

Taxes

State governments raise revenue from taxes on property, payrolls, mining, motor vehicles and insurance.
Economic features of states influence their ability to raise revenue from these taxes. For example:

Property prices affect the ability to raise revenue from conveyancing and land taxes. States with relatively higher property prices have a greater capacity to raise revenue from these taxes.

Wage levels affect the ability of states to raise revenue from payroll tax. States with relatively higher wages can raise more money.

Natural resources provide the ability to raise revenue from mining royalties. Minerals, such as iron ore, coal and gold are distributed unevenly across the country. States with more resources have a greater ability to raise revenue from mining royalties.

Payments from the Commonwealth

The Australian Government makes payments to the states to help meet the cost of delivering state services, such as health, education and skills, infrastructure, environmental protection and housing.

This is a significant source of revenue for states. Agreements between Commonwealth and state governments determine the amount each state receives from the Commonwealth.

Need for revenue from the GST

The Commonwealth Grants Commission assesses the spending needs and revenue raising ability of each state. It estimates how much each state would need to spend to deliver the average level of service and how much each state can raise from taxes and Commonwealth payments.

The Commission then makes recommendations to the Australian Government on how the revenue from the GST pool should be distributed. States can raise and keep the revenue from their own sources, and use this revenue, along with that provided by the Commonwealth, to fund services.

While the arrangements can be complex, the aim is simple: to provide states with the opportunity to provide their residents with comparable services.

In 2018, the Commonwealth Parliament legislated a new way to distribute GST revenue among the states and territories.

The key elements are:

a new equalisation benchmark linked to the fiscally stronger of NSW or Victoria
a GST relativity floor
Commonwealth funded top-ups to the GST pool
transitional arrangements that phase implementation of the new equalisation benchmark and give states a no-worse off guarantee.

How much does each state receive?

The chart below illustrates the assessed state budgets per person for 2024-25. The blue bar on the left shows the total assessed expenditure (expenses and investment) for each state. The bar on the right shows the sum of: assessed own-source revenue; assessed net borrowing; Commonwealth payments; and revenue from the GST pool.

Under the previous GST distribution arrangements, each state’s GST share was calculated so that its assessed revenue (including GST) equalled its assessed expenditure.

Western Australia is assessed to have revenue per person greater than assessed expenditure per person. The revenue bar on the right is taller than the expenditure bar on the left. All other states are assessed to have slightly less revenue than expenditure.

Figure 1 State government assessed expenses, revenue and GST distribution.