GST Relativities and the 0.75 Floor: How the Distribution Formula Works

Introduction

The Goods and Services Tax (GST) is a broad-based consumption tax levied at 10% on most goods and services supplied in Australia. While businesses collect and remit GST to the Australian Taxation Office (ATO), the revenue is distributed to the states and territories to fund essential services such as health, education, and infrastructure. The distribution is not proportional to where the tax was collected; instead, it follows a complex formula designed to achieve horizontal fiscal equalisation (HFE). Central to this formula are GST relativities and a safeguard known as the 0.75 floor. This article provides a comprehensive, encyclopedia-style explanation of how the distribution formula works, its underlying principles, and its practical implications for sole traders, small business operators, bookkeepers, and importers.

What Are GST Relativities?

GST relativities are numerical factors used to adjust the per‑capita distribution of GST revenue among the states and territories. They reflect each jurisdiction’s relative fiscal capacity—the ability to raise revenue from its own sources (e.g., payroll tax, stamp duty, mining royalties) and the cost of providing services. A relativity of 1.00 represents the average fiscal capacity. A relativity above 1.00 indicates a weaker capacity (needing more GST per person), while below 1.00 indicates a stronger capacity (needing less).

How Relativities Are Expressed

The Commonwealth Grants Commission (CGC) calculates relativities annually. For example, in the 2023 Update, the relativities were:

Source: Commonwealth Grants Commission, 2023 Update.

These factors are applied to each jurisdiction’s population to determine its share of the GST pool. The sum of all relativities multiplied by populations equals the total pool.

The Role of the Commonwealth Grants Commission (CGC)

The CGC is an independent statutory body that advises the Australian Government on the distribution of GST revenue among the states and territories. It does not decide the total amount of GST revenue (that is determined by the economy and tax collections) but recommends how the pool should be split.

Methodology

The CGC uses a detailed assessment of each state’s revenue raising capacity and expenditure needs. It examines over 40 categories of revenue (e.g., payroll tax, land tax, mining royalties) and 60 categories of expenses (e.g., health, education, police). The goal is to ensure that every state can provide a similar standard of services if it makes an average effort to raise revenue.

Expert Tip: The CGC’s methodology is updated every five years through a major review, with annual updates in between. Businesses and bookkeepers should monitor these updates as changes in relativities can affect state government budgets and, indirectly, state taxes and charges that impact business costs.

The Horizontal Fiscal Equalisation (HFE) Principle

Horizontal fiscal equalisation is the principle that each state should have the capacity to provide the same standard of public services, regardless of its own revenue base. This is not about equalising outcomes but about equalising capacity. The GST distribution is the primary tool for achieving HFE in Australia.

Why HFE Matters for Businesses

While HFE is a fiscal policy concept, it has practical implications for businesses operating across multiple states. For example:

• State taxes: States with lower GST relativities (e.g., Western Australia) may have higher own‑source revenues (e.g., mining royalties) and can afford lower payroll tax rates, affecting business costs.
• Infrastructure spending: States with higher relativities receive more GST per capita, which can fund infrastructure projects that benefit local businesses.
• Regulatory consistency: HFE reduces the incentive for states to compete by lowering taxes, leading to more stable business environments.

How the Relativity Factors Are Calculated

The CGC calculates each state’s relativity using a three‑step process:

1. Assess revenue capacity: Estimate how much revenue each state could raise if it applied the average tax rate to its own tax base. For example, Western Australia’s large mining sector gives it a high capacity to raise mining royalties.
2. Assess expenditure needs: Estimate the cost of providing a standard level of services, accounting for factors like population dispersion, age profile, and remoteness. The Northern Territory, for instance, has high per‑capita costs due to its sparse population and Indigenous communities.
3. Calculate the relativity: The relativity is the ratio of a state’s assessed needs to its assessed capacity, normalised so that the average across all states is 1.00. A state with needs higher than capacity gets a relativity >1.00; one with capacity higher than needs gets <1.00.

Example: Western Australia

Western Australia’s relativity has been below 1.00 for many years due to its strong mining revenue. In 2023, it was 0.388, meaning it receives only 38.8% of the average per‑capita GST. This has been a source of political tension, leading to the introduction of the 0.75 floor.

The 0.75 Floor: Purpose and Mechanics

The 0.75 floor is a policy mechanism that guarantees no state receives a GST relativity below 0.75. It was introduced in 2018–19 as a response to Western Australia’s falling relativity, which had dropped to around 0.30. The floor ensures that even the strongest fiscal capacity state receives at least 75% of the average per‑capita GST.

How the Floor Works

If a state’s calculated relativity (based on the CGC’s standard methodology) falls below 0.75, the floor lifts it to exactly 0.75. The additional funding required to raise the floor is taken from the GST pool before the remaining amount is distributed to other states using the standard relativities. This means the floor is a top‑up that reduces the shares of all other states proportionally.

Important: The floor is not a permanent guarantee; it is subject to review. The current arrangement is legislated until 2029–30. Businesses should be aware that changes to the floor could alter state government revenues and, consequently, state taxes and spending priorities.

Impact on Other States

When the floor is activated, the total GST pool is effectively reduced for the remaining states. For example, in 2023–24, Western Australia received an estimated $4.5 billion extra due to the floor, which was funded by reducing the shares of other states by about 1–2% each. This has led to ongoing debates about fairness and the long‑term sustainability of the floor.

Impact of the Floor on State Budgets

The 0.75 floor has significant implications for state fiscal positions:

• Western Australia: The floor has provided a substantial revenue boost, helping to reduce state debt and fund infrastructure projects. It has also reduced the state’s reliance on mining royalties.
• Other states: The floor reduces their GST receipts, which can lead to higher state taxes or reduced services. For example, New South Wales and Victoria have argued that the floor unfairly penalises them.
• Territories: The Australian Capital Territory and Northern Territory have high relativities (0.75 and 4.678 respectively) and are less affected by the floor, but they still bear a small reduction.

Business Implications

For businesses operating in multiple states, changes in state budgets can affect:

• Payroll tax thresholds and rates – states may adjust these to compensate for lost GST revenue.
• Land tax and stamp duty – property‑related taxes may increase.
• Infrastructure spending – reduced GST revenue may delay or scale back projects that benefit business logistics.

Recent Changes and Policy Debates

The GST distribution formula has been a subject of political debate for decades. Key recent developments include:

• 2018–19: Introduction of the 0.75 floor as a temporary measure, later extended to 2029–30.
• 2021 CGC Review: The Commission recommended retaining the floor but also proposed changes to the methodology for assessing mining revenue, which would affect Western Australia’s relativity.
• 2023–24: The floor cost other states an estimated $4.5 billion, leading to calls for reform from NSW and Victoria.
• Future outlook: The Productivity Commission is currently reviewing HFE, with a report due in 2025. Possible outcomes include a permanent floor, a phased reduction, or a complete overhaul of the distribution formula.

What This Means for Your Business

While the distribution formula may seem distant from day‑to‑day GST compliance, it influences the broader tax environment. Bookkeepers and small business owners should stay informed about state budget announcements, as changes in state taxes can directly affect cash flow and profitability.

Practical Implications for Businesses and Individuals

Understanding GST relativities and the 0.75 floor helps businesses anticipate changes in state‑level taxes and services. Here are actionable takeaways:

• Monitor state budgets: After the federal budget, each state releases its own budget. Look for changes in payroll tax, land tax, and stamp duty that may result from GST distribution adjustments.
• Plan for multi‑state operations: If your business expands to another state, factor in different state tax regimes. For example, a business moving from Western Australia to Victoria may face higher payroll tax rates if Victoria raises rates to compensate for lower GST receipts.
• Use the GST Calculator: While the distribution formula does not affect how you calculate GST on sales, our GST Calculator helps you quickly determine GST‑inclusive and exclusive amounts, ensuring accurate invoicing and BAS lodgement.
• Consult a tax professional: For specific advice on how state tax changes affect your business, speak with a registered tax agent.

GST Calculator & Tools

Our GST Calculator Suite at gstcalculatorau.com provides a range of tools to simplify GST calculations for your business. Whether you need to add GST, remove GST, or calculate GST on a mixed supply, our tools are designed for accuracy and ease of use.

How to Use the GST Calculator

1. Enter the amount (e.g., $100).
2. Select whether the amount is GST‑inclusive or GST‑exclusive.
3. Choose the operation: Add GST (10%) or Remove GST (divide by 1.1).
4. Click Calculate to see the GST amount and total.

Sample Calculation

Our database also includes a searchable index of how GST applies to specific goods and services, from food to imports. Use the search bar to find the correct treatment for your transactions.

Common GST Mistakes to Avoid

Even experienced bookkeepers can make errors. Here are frequent mistakes and how to prevent them:

• Incorrectly classifying GST‑free supplies: Basic food, medical services, and education are GST‑free. Ensure you have the correct ATO ruling for your product.
• Failing to register for GST when required: If your GST turnover exceeds $75,000 ($150,000 for non‑profit), you must register. Use our turnover calculator to check.
• Mixing up GST‑inclusive and exclusive amounts: Always clarify whether a quoted price includes GST. Use our calculator to avoid errors.
• Not claiming input tax credits on business purchases: You can claim back GST on most business expenses. Keep valid tax invoices.
• Ignoring GST on imports: Goods imported into Australia are subject to GST if their value exceeds $1,000 (low‑value threshold). Use our import GST calculator.
• Forgetting to lodge BAS on time: Late lodgement attracts penalties. Set reminders or use accounting software with BAS integration.

Conclusion

GST relativities and the 0.75 floor are fundamental to understanding how Australia’s GST revenue is distributed among states and territories. While the formula may seem complex, its principles of horizontal fiscal equalisation ensure that every jurisdiction can provide essential services. For businesses, staying informed about these mechanisms helps anticipate changes in state taxes and plan accordingly. Use the tools and resources at gstcalculatorau.com to simplify your GST compliance, and always consult a registered tax agent for personalised advice.