What the Proposed GST Overhaul Actually Means

The government unveils a fairer system by "making the pie bigger".

What you need to know
  • The new GST model reforms how revenue is divided between the states and territories
  • The changes will be rolled out over the next eight years, starting in the 2020/21 financial year
  • Commonwealth investment over $600 million a year makes the changes possible

Treasurer Scott Morrison has unveiled a new model to change how GST revenue is divided between the states and territories,  the Commonwealth must add hundreds of millions dollars into the GST pool.

The GST pool is getting bigger. Image: Getty Images
What are the changes and how do they work?

The proposal has a number of stages that will be rolled out over eight years.

Firstly, the government will top-up Western Australia's share of GST revenue to compensate for the effects of the mining boom wearing off. This is part of the reason why the system needed to change, but we will get to that later.

The Commonwealth will then add hundreds of millions of dollars to the GST pool so that the smaller states won't fall behind the bigger ones as the country transitions to the new model.

From the 2020/21 financial year, $600 million will be pumped into the GST pool and from 2024/25 a further $250 million will be added annually. The total cost of the proposal is estimated at $7 billion.

Morrison said the change is beneficial to the entire country as a bigger GST "pie" means all states get a bigger portion.

"By making the pool bigger, the pie bigger, all the states and territories benefit," Morrison said on Thursday.

The GST pie is getting bigger. Image: Getty Images.

Morrison also said by 2026/27 every state will get back 75 cents to every dollar they contribute.

The changes follow a report from the Productivity Commission ordered by  Morrison himself, that looked into the way the GST system functioned in Australia. The government will adapt eight of the nine recommendations from the commission and these will be taken to meetings with each of the states and territories which are expected to be held in September this year.

Morrison said on Thursday that the government will not be taking on the ninth recommendation, claiming it is not as fair as the proposed system they have put forward.  The ninth recommendation would see GST revenue distributed according to the average wealth of the states but Morrison claimed this would anger some of the states and territories.

Why do we need a change?

A change was needed because some states claimed they were being short changed of GST revenue.

Western Australia for example, had a mining boom which saw their GST share drop to 30 cents in the dollar per person while other states were getting more for each person.

This imbalance was a contributing factor to Scott Morrison calling for the Productivity Commission review.

The system under which the GST is distributed is called horizontal fiscal equalisation and it hasn't been updated since 2000. This lead to states who claimed they were being short changed by the system, like Western Australia, to label it outdated and unfair.

After the mining boom, WA saw just 30 cents per dollar per person in GST revenue. Image: Getty Images.

Under the proposed changes, each state will receive no less than 70 cents to the dollar per person in GST.

Morrison also confirmed that taxes will not be increased to grow the GST pool.

"The Government is not increasing the GST. The Government is not broadening the base of the GST. In fact, we're not increasing any taxes to do this."