On 9 February 2023, the Commission received terms of reference for a review of the methodologies it will use to inform the goods and services tax (GST) distribution from 2025–26. This report responds to the requirement that the Commission provide a draft report in 2024, in advance of the final report by 28 February 2025.
This Draft Report is the Commission’s preliminary response to the terms of reference. It includes the Commission’s draft positions on the methods and related data sources it proposes to adopt in the Final Report and provides the basis for further consultation with the states and territories (states). The Commission’s draft positions have been informed by thorough consultation with the states, including in-person visits to each state. The Draft Report provides the Commission’s proposed approach to each of the assessments and a detailed response to the issues raised by the states in the consultation process.
Introduction to the 2025 Methodology Review
Introduction to the 2025 Methodology Review
In a methodology review, the Commission reconsiders the methods and supporting principles it uses to determine its advice to the Commonwealth Treasurer on distributing GST revenue between the states.
A methodology review provides an opportunity for the Commission to ensure that its methods for assessing relative state fiscal capacities, which underpin the GST distribution, are appropriate and use the latest fit for purpose data.
Since the introduction of the GST in 2000, the Commission has completed 4 methodology reviews – 2004, 2010, 2015 and 2020. The review process generally takes 2 to 3 years. The 2025 Review is to be completed within 2 years.
As the first steps in the 2025 Review, the Commission consulted states on the review approach, work program, the concept of fiscal equalisation and the Commission’s supporting principles and assessment guidelines.
The 2025 Review takes the 2020 Review methodology as its starting point and considers the appropriateness of all the Commission’s assessment methods in the context of experience in applying those methods, changes to state fiscal circumstances and the availability of new data. This approach does not preclude considering the appropriateness of any of the assessment methods in the 2020 Review.
The Commission committed to ensuring all states have sufficient opportunity to engage with the review. This was to enable them to convey their views comprehensively and to understand the basis for the Commission’s decisions.
The main consultation with states on assessment methods and data sources occurred in 2 tranches, with the Commission releasing consultation papers and inviting submissions from states.
The Commission visited each state between late 2023 and early 2024 and held online bilateral and multilateral meetings with states during the development of the Draft Report. Detailed discussions were held between states and Commission staff on a broad range of issues.
The Commission has identified several areas of further work to be undertaken after the conclusion of the review, which have been included in the proposed forward work program. As per the 2025 Review terms of reference, the Commission will consult on any substantive changes to the revised methodology following the Draft Report later in 2024.
Fiscal equalisation, supporting principles and guidelines
Fiscal equalisation, supporting principles and guidelines
The Commission decided to retain the approach to horizontal fiscal equalisation articulated in the 2020 Review as the first step in determining GST distributions in accordance with the 2018 legislated changes.1
In determining the GST distribution among the states, the Commission’s primary task is to identify influences, referred to as ‘drivers’, beyond the direct control of states that cause their relative fiscal capacities to diverge. By assessing these influences, the Commission seeks to estimate the GST share each state requires to have the fiscal capacity to provide a comparable level of services (if it makes the average effort to raise revenue).
Recognising the practical aspects of assessing state spending needs and revenue capacities, the Commission’s approach involves minimising, as far as possible, differences in the fiscal capacities of the states to provide services.
1Treasury Laws Amendment (Making Sure Every State and Territory Gets Their Fair Share of the GST) Act 2018 (Cwlth)
Supporting principles
While the Commission’s primary task is fiscal equalisation, it has developed a set of 4 supporting principles that guide the Commission in designing and evaluating assessment methods. The supporting principles, that are subsidiary to the objective of horizontal fiscal equalisation, are:
'what states do' - the Commission’s methods should, as far as possible, reflect what states collectively do, not what they could or should do
policy neutrality - a state's policy choices (in relation to the revenue it raises or the services it provides) should not directly influence its GST share. Also, the Commission's assessments should not create incentives or disincentives for states to choose one policy over another
practicality - assessments should be based on sound and reliable data and methods, and should be as simple as possible, while also capturing the major influences on state expenses and revenues
contemporaneity - to the extent reliable data will allow, the distribution of GST in a year should reflect state circumstances in that year.
The Commission concluded that this set of supporting principles remained appropriate. Recognising that trade-offs between principles may be necessary, judgements are often required in their application.
Assessment guidelines
The Commission uses assessment guidelines to support a consistent approach to developing assessment methods, and to ensure that those methods are conceptually sound, reliable, and as transparent and simple as possible. The guidelines are also a key part of the Commission's quality assurance process. They ensure all relevant steps in the decision-making process are followed and that this process is transparent.
Flexibility to consider method changes between reviews
Flexibility to consider method changes between reviews
The terms of reference for the 2025 Review included a direction for the Commission to:
Consider if there is a case for the Commission to be given the flexibility to consider alternative methods in cases where there is a significant unanticipated shock (such as pandemic) or where major policy reforms are enacted in between reviews.
In August and September 2023, the Commission held a bilateral meeting with each state, seeking views on relevant issues to be included in the consultation paper on this topic. On 19 October 2023, the Commission issued the consultation paper on changes in methods between reviews and invited state submissions.
The Commission’s response to the issues raised by the states and its draft position are outlined in the flexibility chapter.
Next steps
Next steps
Further consultation
Submissions from states on the Draft Report are due by 7 August 2024. After considering submissions, the Commission will issue a paper outlining any significant changes to the Commission’s positions in the Draft Report. To inform the Commission’s advice on GST distribution for 2025–26, and consistent with its usual process, a new issues discussion paper will be issued later in 2024.
Final Report
The Commission will release its Final Report to the Commonwealth and states by 28 February 2025.
The Commission’s Final Report will provide information on:
the recommended GST revenue sharing relativities for 2025–26, why they have changed from 2024–25 and why they differ between states
the Commission’s response to state submissions on the Draft Report and the paper on significant issues since the Draft Report, and the Commission’s final position on its assessment methods
a standalone section providing a description of each of the Commission’s final assessment methods from the 2025 Review.
The Final Report will not duplicate information from consultation earlier in the review but will provide links to state submissions and Commission responses.
Forward work program
A number of issues were identified during consultations with states where it was considered further work should be undertaken post-review. These are outlined in the forward work program chapter of the Draft Report. Some of the issues involve emerging topics whilst in other cases the additional work and analysis that has been identified could not be completed for inclusion in the 2025 Review. The outcome of this work, which will be undertaken in consultation with the states, will inform the next methodology review.
