How GST Revenue Is Distributed to the States and Territories

Introduction

The Goods and Services Tax (GST) is a broad-based consumption tax of 10% applied to most goods and services in Australia. While the Australian Taxation Office (ATO) collects the revenue, the funds are not retained by the Commonwealth. Instead, they are distributed to the states and territories under a complex system designed to ensure each jurisdiction can provide a similar standard of services. For sole traders, small business operators, bookkeepers, and importers, understanding this distribution is not merely academic—it affects state taxes, infrastructure spending, and the economic environment in which you operate. This article provides a comprehensive, practical guide to how GST revenue is allocated, the principles behind it, and what it means for your business.

The Constitutional Basis for GST Distribution

The GST was introduced on 1 July 2000, replacing a range of inefficient state taxes such as wholesale sales tax and financial institutions duty. Under the A New Tax System (Goods and Services Tax) Act 1999, the Commonwealth collects all GST revenue. However, Section 90 of the Constitution prevents states from imposing excise duties, so the GST was designed as a Commonwealth tax with the proceeds fully distributed to the states. The Intergovernmental Agreement on Federal Financial Relations (IGA) and the Federal Financial Relations Act 2009 govern the distribution. The key principle is that GST revenue is untied—states can spend it on any priority, but the distribution aims to achieve horizontal fiscal equalisation (HFE).

The Pool: How GST Revenue Is Collected and Allocated

Collection by the ATO

Businesses registered for GST collect the tax on taxable supplies and remit it to the ATO via Business Activity Statements (BAS). The ATO deposits all net GST revenue into the GST Distribution Account. The total pool fluctuates with economic activity; for 2023–24, it was estimated at approximately $90 billion.

Allocation to States and Territories

The Commonwealth Treasurer determines the annual distribution based on recommendations from the Commonwealth Grants Commission (CGC). The distribution is made in monthly instalments, with a final adjustment after the end of the financial year. The pool is divided among the six states and two territories using a formula that accounts for population, revenue-raising capacity, and expenditure needs.

Note: Figures are illustrative. Actual amounts vary annually.

Horizontal Fiscal Equalisation (HFE) Explained

HFE is the principle that each state and territory should be able to provide a similar standard of public services (e.g., health, education, infrastructure) without imposing higher taxes than other jurisdictions. The CGC calculates each state’s fiscal capacity—its ability to raise revenue from its own sources (e.g., payroll tax, mining royalties, land tax) and the cost of delivering services. States with lower fiscal capacity receive a larger per capita share of the GST pool.

Why HFE Matters for Businesses

Businesses operating in states with high mining royalties (e.g., Western Australia) may see lower state taxes because the state receives a smaller GST share. Conversely, states like Tasmania and the Northern Territory receive higher per capita GST grants, which can fund better infrastructure and services, potentially reducing business costs. Understanding HFE helps you anticipate state tax changes and economic conditions.

The Role of the Commonwealth Grants Commission (CGC)

The CGC is an independent statutory body that advises the Commonwealth on how to distribute GST revenue. It uses a detailed methodology involving:

• Revenue assessments: Estimating each state’s capacity to raise revenue from 20+ own-source taxes and charges.
• Expenditure assessments: Estimating the cost of providing services, adjusted for factors like population dispersion, age profile, and Indigenous status.
• Disability factors: Adjustments for unavoidable cost differences (e.g., remote area delivery costs).

The CGC releases a Report on GST Revenue Sharing Relativities every five years, with annual updates. The most recent major review was in 2020, with the next due in 2025.

Expert Tip: The CGC’s methodology is complex, but its impact is direct. For example, a state with a booming mining sector (like WA) will see its GST share reduced because it can raise more from royalties. This can lead to political tension, but it ensures equity across the federation.

How Each State and Territory’s Share Is Calculated

The distribution uses a relativity factor for each jurisdiction. A relativity of 1.0 means the state receives the average per capita share. Values above 1.0 indicate a higher share; below 1.0 a lower share. For 2023–24, the relativities were:

• New South Wales: 0.87
• Victoria: 0.90
• Queensland: 1.02
• Western Australia: 0.70
• South Australia: 1.18
• Tasmania: 1.68
• Australian Capital Territory: 1.19
• Northern Territory: 4.65

The formula is: State’s share = (State’s relativity × State’s population) / (Sum of all relativities × populations) × Total GST pool. This ensures that states with higher needs or lower revenue capacity receive more.

The Impact of GST Distribution on State Budgets and Services

GST revenue is the largest single source of state funding, accounting for about 25–30% of total state revenue. It directly funds essential services such as:

• Hospitals and health services
• Public schools and TAFE
• Police, emergency services, and courts
• Roads, public transport, and infrastructure
• Housing and community services

For businesses, the quality of these services affects operating costs. For example, better roads reduce transport costs; efficient health systems reduce employee absenteeism. A state with a higher GST share can invest more in infrastructure, potentially attracting business investment.

Recent Reforms and Debates

The GST distribution system has been subject to ongoing debate, particularly from Western Australia, which has argued that its low relativity (0.70) is unfair given its contribution to national revenue. In 2018, the Commonwealth introduced a GST no-worse-off guarantee for WA, and in 2022, legislation was passed to ensure that no state receives less than 70 cents per dollar of the average per capita share. This has increased WA’s share but reduced the pool for others. The system remains under review, with potential changes to the HFE methodology expected in the next CGC report.

Important: Any changes to the distribution formula can affect state budgets and, consequently, state taxes and services. Businesses should monitor state budget announcements for changes to payroll tax thresholds, land tax rates, or other imposts that may be adjusted in response to GST revenue changes.

Practical Implications for Businesses and Consumers

While GST distribution is a federal-state matter, it has practical consequences for your business:

• State taxes: States with lower GST shares may rely more on own-source taxes like payroll tax, land tax, and stamp duty. For example, WA has relatively low payroll tax thresholds compared to NSW.
• Infrastructure spending: Higher GST shares can fund better roads, ports, and digital infrastructure, reducing logistics costs for importers and exporters.
• Consumer spending: GST is a flat 10% nationwide, but state-specific cost-of-living differences (partly driven by GST-funded services) affect consumer behaviour.
• Compliance: Your GST obligations are uniform across Australia, but the economic environment in which you operate varies by state. Understanding distribution helps you plan for state-specific risks.

GST Calculator & Tools

At gstcalculatorau.com, we provide a suite of free tools to help you manage GST calculations quickly and accurately. Our GST Calculator allows you to add or remove GST from any amount, and our GST Database lets you search how GST applies to specific goods, services, and transactions. Here’s how to use the calculator:

Step-by-Step Guide

1. Visit gstcalculatorau.com and select the GST Calculator tool.
2. Enter the amount (e.g., $1,000) and choose whether it includes or excludes GST.
3. Click Calculate to instantly see the GST component and the total.
4. Use the Database to check if a specific item is GST-free, input-taxed, or taxable.

For importers, our Import GST Calculator helps estimate GST payable on imported goods, including customs value, duty, and transport costs. Bookkeepers can use the BAS Calculator to prepare quarterly or monthly GST returns.

Common GST Mistakes to Avoid

• Assuming GST distribution affects your GST rate: The GST rate is 10% everywhere. Distribution only affects state budgets, not your GST obligations.
• Ignoring state-specific taxes: Don’t confuse GST with state taxes like payroll tax or land tax. They are separate and vary by jurisdiction.
• Misunderstanding input tax credits: You can claim credits for GST paid on business purchases, but only if you are registered for GST. The distribution system does not affect your entitlement.
• Failing to adjust for state-based cost differences: When pricing goods or services, consider that states with higher GST shares may have lower state taxes, potentially affecting your competitors’ costs.
• Not checking the GST status of cross-border transactions: Importers must pay GST at the border. The distribution of that revenue does not change your payment obligations.

Conclusion

The distribution of GST revenue to Australia’s states and territories is a cornerstone of federal financial relations. It ensures that every jurisdiction can provide essential services, regardless of its own revenue-raising capacity. For businesses, understanding this system helps you anticipate state tax changes, assess infrastructure quality, and make informed decisions about where to operate. While the GST rate remains constant, the economic environment shaped by distribution can significantly impact your bottom line. Use the tools at gstcalculatorau.com to manage your GST compliance efficiently, and stay informed about changes to the distribution formula that may affect your state. For specific advice on how GST distribution affects your business, consult a registered tax agent.