DIFFERENCES BETWEEN THE ADJUSTED AND ASSESSED BUDGETS FOR
GST AND FAG RELATIVITIES  1

CHANGES REQUIRED FOR THE CALCULATION OF FAG RELATIVITIES  2

SUPPORTING INFORMATION   10

 

1                The terms of reference for this update required the Commission to provide per capita relativities for distributing a combined pool of Financial Assistance Grants (FAG) and Health Care Grants (HCG) among the States in 2007‑08.  These relativities did not reflect any changes introduced as a result of the implementation of the 1999 Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (the IGA), including the agreed abolition of taxes listed for review in the IGA.  All of these were reflected in the GST relativities.

2                This working paper provides information on the FAG adjusted and assessed budgets for this update.

3                This working paper covers:

·         the differences between the adjusted and assessed budgets prepared for the FAG and GST relativities;

·         the changes in the budget structure required to simulate the situation that would have existed had the tax reforms and other changes since 1 July 2000 resulting from the IGA not taken place; and

·         the tables required to support the FAG relativities.

DIFFERENCES BETWEEN THE ADJUSTED AND ASSESSED BUDGETS FOR GST AND FAG RELATIVITIES

4                The GST relativities and the FAG relativities differed because they reflected different assumptions about taxation arrangements and expenditure responsibilities.  The GST relativities reflected the current arrangements under the IGA.  The FAG relativities reflected the pre-tax reform arrangements and were calculated on the assumption that the tax reforms had not occurred.  They:

·         did not include assessments of the costs of providing:

-         base grants under the First Home Owners Scheme;

-         GST administration;

-         subsidies for petroleum; and

-         subsidies for alcohol products.

·         included assessments of revenue capacity associated with:

-         the safety net surcharge arrangements for petroleum, tobacco and alcohol (revenue replacement payments);

-         financial institutions duty;

-         bank account debits tax;

-         stamp duty on quotable marketable securities;

-         gambling taxes at their pre-GST levels;

-         accommodation taxes;

-         revenue from wholesale sales tax tax-equivalent regimes; and

-         components of financial transaction taxes and stamp duty on unquotable marketable securities that the States will abolish in 2007‑08.

5                The FAG adjusted and assessed budgets were derived by adjusting the GST-based outcomes to remove the tax reform changes and the transfers of responsibilities.

CHANGES REQUIRED FOR THE CALCULATION OF FAG RELATIVITIES

6                Specifically, the calculation of FAG relativities for the 2007 Update involved making changes to the GST adjusted budget and consequently to the assessments.  Changes to the adjusted budget were to:

·         include financial assistance grants instead of GST revenue in the pool;

·         add in the three Revenue Replacement Payments assessment categories;

·         add to the Gambling Taxation revenue estimates of the revenue forgone by the States as a result of the introduction of the GST;

·         add to the Financial Transaction Taxes revenue estimates of the abolished financial institutions duty and bank account debits tax; and other components of the taxes that the States will abolish in 2007‑08;

·         add to the Stamp Duty on Shares and Marketable Securities revenue estimates of the abolished stamp duty on quotable marketable securities; and the stamp duty on non-quotable marketable securities that the States will abolish in 2007‑08;

·         add to the Other Revenue category estimates of the abolished accommodation taxes;

·         remove from the Other Revenue category the components of Financial Transaction Taxes and stamp duty on non-quotable marketable securities that the States will abolish in 2007‑08 (these taxes were classified to this category in the GST relativities);

·         add to the Contribution by Trading Enterprises revenue estimates of the abolished wholesale sales tax — tax equivalent regime revenue;

·         remove the First Home Owners Scheme expense category;

·         remove the GST Administration Costs expense category;

·         remove the Subsidy — Petroleum Products expense category; and

·         remove the Subsidy — Alcohol Products expense category.

7                Amendments to the adjusted budget as a result of these changes necessitated the estimation of the value of some items.  The Commission has used data from the Australian Government, estimates published in the Australian Government Final Budget Outcome (FBO) or data provided by the States.  Table 1 shows the method used in the 2007 Update.

Table 1           FAG relativities — method of estimating new and changed category averages

(a)        These were ceased from July 2000.

(b)        Gambling tax rates were reduced from July 2000.

(c)        These were ceased from July 2001.

(d)        These taxes were abolished from July 2005.

(e)        The tax will not be imposed under the average policies of the States in 2007-08.

(f)         Some components of the tax will not be imposed under the average policies of the States in 2007-08.

8                Financial Assistance Grants.  Financial assistance grants ceased from 1 July 2000 when the GST was introduced.  Table 2 shows the amounts of notional financial assistance grants used in the calculation of FAG relativities for the 2007 Update.

Table 2            FAG relativities — Notional financial assistance grants

Source:Estimates published in the Commonwealth of Australia's Final Budget Outcome.

9                Revenue replacement payments (RRPs).  Under the GST arrangements, the Australian Government ceased paying the States revenue replacement payments on petroleum, tobacco and alcohol from 1 July 2000.  Accordingly, the GST adjusted budget did not include these payments as States revenue.  To reverse this arrangement for the calculation of the FAG relativities, the Commission added back these categories, net of subsidies paid by the States, for the assessment years.

10            Tables 3 to 5 show the amounts for each RRP category assessed for the FAG relativities.

Table 3            Revenue replacement payments — Petroleum products

Source:Estimates provided by the Australian Government.

Table 4            Revenue replacement payments — Tobacco products

Source:Estimates provided by the Australian Government.

Table 5            Revenue replacement payments — Alcohol products

Source:Estimates provided by the Australian Government.

11            Accommodation taxes.  Accommodation taxes were collected by New South Wales and the Northern Territory until 1 July 2000.  To reverse this arrangement for the calculation of the FAG relativities, the Commission added back these taxes to the Other Revenue category for the assessment years.  Table 6 shows the data.

Table 6            FAG relativities — Accommodation tax

Source:Estimates published in the Commonwealth of Australia Final Budget Outcome.

 

12            Wholesale sales tax — tax equivalent regime.  The Australian Government abolished the wholesale sales taxes from 1 July 2000.  This reduced States' capacity to raise payments under tax equivalent regimes from then on.  To reverse this arrangement for the calculation of the FAG relativities, the Commission added back these taxes to the Contribution by Trading Enterprises category for the assessment years.  Table 7 shows the amounts.

Table 7            FAG relativities — Wholesale sales tax, tax equivalent regime

Source:Estimates published in the Commonwealth of Australia Final Budget Outcome.

13            Gambling taxes.  The Australian Government imposed the GST on gambling activity from 1 July 2000.  The States reduced their gambling taxes so that the overall tax on gambling operators and their activities did not increase.  To reverse this arrangement for the calculation of the FAG relativities, the Commission increased the States' gambling revenue for the assessment years.  Table 8 shows the amounts.

Table 8            FAG relativities — Gambling taxes adjustments

Source:Estimates published in the Commonwealth of Australia Final Budget Outcome

 

14            Financial institutions duties.  Financial institutions duties were abolished from 1 July 2001.  To reverse this arrangement for the calculation of the FAG relativities, these duties were added back to the Financial Transaction Tax category for the assessment years.  Table 9 shows the amounts.

Table 9            FAG relativities — Financial institutions duty

Source:Estimates published in the Commonwealth of Australia's Final Budget Outcome.

 

15            Stamp duties on quoted shares and marketable securities.  Stamp duties on quoted shares and marketable securities were abolished from 1 July 2001.  To reverse this arrangement for the calculation of the FAG relativities, these duties were added back to the Stamp Duties on Shares and Marketable Securities category for the assessment years.  Table 10 shows the amounts.

Table 10          FAG relativities — Stamp duty on quoted shares and marketable securities

Source:Estimates published in the Commonwealth of Australia Final Budget Outcome.

 

16            Bank account debits tax.  Bank account debits tax was abolished from 1 July 2005 (New South Wales abolished the tax in January 2002).  To reverse this arrangement for the calculation of FAG relativities, these taxes were added back to the Financial Transaction Taxes category.  Table 11 shows the amounts.

Table 11          FAG relativities — Bank account debits tax

Source:    New South Wales' data for 2001-02 to 2004-05 were estimates provided by the Australian Government. 
2005-06 data were estimates published in the Commonwealth of Australia Final Budget Outcome.

17            Stamp duties on unquoted shares and marketable securities that will be abolished by 2011‑12.  Each State reached an agreement with the Australian Government on a timetable for abolishing stamp duty on non‑quotable marketable shares by 2011‑12.  Victoria, Western Australia and Tasmania have already abolished the tax prior to 2005‑06.  By 2007‑08, the application year for the 2007 Update, only New South Wales, South Australia and the ACT will still be imposing stamp duty on unquoted marketable securities. 

18            The Commission backcasted the average tax policies expected to apply in 2007‑08 in the assessment years for the calculation of the GST relativities.  By 2007‑08 only three States will still be applying stamp duty on the transfer of unlisted shares and marketable securities.  Therefore the imposition of the duty would no longer be regarded as average State policy by 2007‑08.  As a result, these duties were removed from the Stamp Duty on Shares and Marketable Securities category and classified to the Other Revenue category in the calculation of the GST relativities. 

19            To reverse this arrangement for the calculation of the FAG relativities, these duties were added back to the Stamp Duties on Shares and Marketable Securities category.  Table 12 shows the amounts.

Table 12          FAG relativities — Stamp duty on unquoted shares and marketable securities that will be abolished in 2007‑08

Source:    CGC estimates.

20            Components of financial transaction taxes that will be abolished by 2011‑02.  Each State reached an agreement with the Australian Government on a timetable for phasing out most financial transaction taxes by 2011‑12.  Some States have already abolished some of these taxes prior to 2005‑06. 

21            For the calculation of the GST relativities, the Commission backcasted the phased abolition of financial transaction taxes across the States to reflect the average tax policies applying in 2007‑08 in the assessment years.  As a result, some revenue was removed from the Financial Transaction Taxes category and classified to the Other Revenue category.

22            To reverse this arrangement for the calculation of the FAG relativities, these duties were added back to the Financial Transaction Taxes category.  Table 13 shows the amounts.

Table 13          FAG relativities —Financial Transaction Taxes components that will be abolished in 2007-08

Source:CGC estimates.

SUPPORTING INFORMATION

23            Table 14 to 23 show the derivation of the FAG adjusted budget from the GST adjusted budget, in $ million and $ per capita.

24            Tables 24 to 33 show the derivation of the FAG assessment budget from the GST assessment budget, in $ million and $ per capita. 

25            Tables 34 to 41 contain details of the assessments for those categories where the FAG assessments differ from the GST assessments. 

26            Tables 42 and 43 show the assessed revenue raising capacity and effort ratios for these categories.

 

This chapter was prepared by the Budget Analysis and Relativities section of the Commonwealth Grants Commission.  If you have any questions about its content please contact Priscilla Kan on (02) 6229 8849 or priscilla.kan@cgc.gov.au.

 

Date:  23 February 2007