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Review Underway for Australia's GST Distribution Amidst State Disagreements and Western Australia's Special Deal

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Federal Review Underway for Australia's Contentious GST Distribution System

A comprehensive federal review of Australia's Goods and Services Tax (GST) distribution system is currently underway, scrutinizing the intricate financial arrangements between the Commonwealth and states and territories. Conducted by the Productivity Commission, this review comes amidst significant debate, particularly as Western Australia (WA) staunchly defends its 2018 special GST deal. Other states, notably New South Wales and Queensland, have voiced strong dissatisfaction with recent GST allocations, citing concerns over fairness and transparency, even as the Commonwealth Grants Commission continues its complex task of distributing the $103 billion national pool.

Understanding GST Distribution

The GST is a federal tax, collected centrally by the Commonwealth government, but then fully transferred to the states and territories. The system's primary goal, guided by the independent Commonwealth Grants Commission (CGC), is to achieve Horizontal Fiscal Equalisation (HFE).

Horizontal Fiscal Equalisation (HFE) aims to ensure all states and territories have a similar capacity to provide comparable public services to their populations, irrespective of their revenue-raising capacity or expenditure needs.

This principle frequently leads to states with higher assessed needs receiving a greater share of GST per capita.

The 2018 Western Australian GST Arrangement

In 2018, the federal government introduced a special GST arrangement for Western Australia, which the current Albanese government has since extended. This deal guarantees WA a minimum share of GST revenue, ensuring it never receives less than the lower of Victoria's or New South Wales's share, and never falls below a relativity score of 0.75. To mitigate the impact on other states from WA's increased share, the Commonwealth implemented a "no worse off" provision, supplementing their payments.

Under this unique arrangement, WA is projected to receive $7.8 billion in the current financial year, representing approximately 8 percent of the total GST pool. This is a substantial increase compared to the estimated $1.7 billion it would have received under standard rules. Looking ahead to 2026-27, WA is allocated $9.3 billion, significantly higher than the $2.7 billion it would receive through standard distribution. This deal has reportedly cost federal taxpayers $36 billion to date and is projected to cost approximately $60 billion over the next five years.

Arguments For and Against Western Australia's Deal

WA's Stance: Preserve the Deal

The Western Australian government asserts that the 2018 agreement must be preserved, warning that any changes could deter crucial investment in the state. WA advocates for a shift from full HFE to a partial HFE model, arguing that this would allow states to retain more benefits from their policy decisions and investments, thereby encouraging economic growth. The state's submission highlighted that some other countries have adopted a partial HFE model.

WA estimates it has made a net contribution of $32 billion to the federation since 1942-43.

The state attributes the "no worse off" guarantee's cost primarily to increased iron ore prices, which significantly benefited the federal budget. WA Treasurer Rita Saffioti underscored the state's substantial economic contributions, including delivering approximately 17 percent of national economic growth and 50 percent of national exports.

Criticisms of the Arrangement

Economist Saul Eslake has publicly criticized WA's partial HFE proposal, emphasizing that Australia's comprehensive HFE contributes to national quality by reducing disparities in living standards across the country. He noted that the special deal could potentially allow Western Australian residents to enjoy better public services and lower state taxes compared to other Australians.

Despite receiving significant GST allocations under this special deal, Western Australia remains the only state with a budget surplus, reporting $2.5 billion in 2024-25 and projecting continued surpluses.

Recent GST Distribution Outcomes and State Reactions

The latest $103 billion GST carve-up, allocated by the Commonwealth Grants Commission, indicates that all states and territories are projected to receive increased GST revenue in 2026-27 compared to the previous year, thanks to overall growth in the national GST pool.

  • Western Australia's share is set to increase from 8.3 percent to 9.1 percent, with a relativity score of 0.82 for 2026-27, matching New South Wales.

  • New South Wales (NSW) is projected to receive $26.2 billion, approximately $1.5 billion less than Victoria, despite having a larger population. Its share of the national pool is set to decrease to 25.5 percent from 26.7 percent. The CGC cited "above-average growth in land values" and lower-than-estimated natural disaster relief spending as contributing factors. NSW Acting Treasurer Courtney Houssos described the allocation as evidence the GST system was "broken and unfair," calling for urgent reform and greater transparency.

  • Victoria is projected to receive $27.9 billion, a gain of $1.5 billion from the previous year. Its relativity score for 2026-27 is 1.06. Victorian Premier Jacinta Allan expressed reservations about WA's arguments, highlighting Victoria's status as a growing state with significant infrastructure and service needs, and noting it collects less revenue per capita than WA.

  • Queensland is projected to experience the largest dollar increase in GST distribution, receiving $1.7 billion more. Its share is set to increase from 17.4 percent to 18 percent, attributed to a decrease in mining royalty revenue. Queensland Treasurer David Janetzki stated his state had been "dudded" by the allocation, demanding an overhaul of the model. He pointed out that despite a 20 percent increase in the national GST pool over three years, Queensland was the only jurisdiction allocated less in this round compared to 2023-24.

  • Other states and territories, including Northern Territory (5.24), Tasmania (1.89), South Australia (1.35), and the Australian Capital Territory (1.16), will receive more than their population share based on relativity scores.

Proposed Changes and Future Outlook

Western Australia has put forward a proposal that if changes are made to the GST distribution, a 25 percent reduction in the value of mining revenue factored into the calculation should be considered. WA argues this would significantly improve states' incentives to develop mining industries and could potentially halve or even eliminate the cost of the "no worse off" guarantee within a decade.

The federal Productivity Commission is actively conducting its review of GST sharing, with an interim report anticipated in November and final recommendations due to the federal government next year. Western Australia's special GST deal is scheduled to conclude in 2029, and the state government is intensely lobbying for its extension.