GST distribution reforms

I, the Hon Jim Chalmers MP, Treasurer, pursuant to Parts 2 and 3 of the Productivity Commission Act 1998, and Section 4 of the Treasury Laws Amendment (Making Sure Every State and Territory Gets Their Fair Share of GST) Act 2018 (the 2018 legislation), request the Productivity Commission (the Commission) undertake an inquiry into the 2018 Goods and Services Tax (GST) distribution reforms. The inquiry will also examine ways in which the federal financial relations system can best promote fiscal sustainability across the states and territories (the states) and the Commonwealth, while delivering the best outcomes for all members of the Australian community.

Background

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 Goods and Services Tax (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.

The main reforms legislated via amendments to the Commonwealth Grants Commission Act 1973 in 2018 were:

• changing the equalisation benchmark so that each state’s relativity is at least as high as the relativity of the fiscally stronger of New South Wales or Victoria
• ensuring an additional minimum GST revenue-sharing relativity (now 0.75)
• requiring the GST pool to be ’topped-up’ by the Commonwealth into perpetuity, and for that ’top-up’ to grow at an indexed rate
• during a transition period of six years from 2021-22 to 2026-27, any state that received less than it would have received under the previous GST distribution system would be entitled to additional ‘no worse off’ (NoWO) payments.

The 2018 legislation also provides for a review of the operation of the Act by the Productivity Commission by 31 December 2026.

In November 2024, the NoWO was extended to 2029-30 through a Funding Agreement with all states except Western Australia.

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:
  1. Delivering a reasonable level of horizontal fiscal equalisation;
  2. 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;
  3. Supporting states and territories to pursue reforms, including to the efficiency of service delivery and state and territory revenue bases; and
  4. 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).

In undertaking the review, the Commission should have regard to previous inquiries where relevant, including the 2018 Horizontal Fiscal Equalisation inquiry, along with any relevant Government reforms and reform directions.

Deliverables

The Commission should provide an interim report to Government by 28 August 2026 and a final report to Government ahead of the legislated deadline of 31 December 2026.

The Hon Jim Chalmers MP
Treasurer

[Received 24 September 2025]