Under the Commonwealth of Australia Constitution Act 1900, Commonwealth and State Governments are both able to levy taxes, with the primary restrictions being that Commonwealth taxes cannot discriminate between States or parts of States, and that duties of customs and excise may only be imposed by the Commonwealth. Excises are broadly defined as a tax on the production, manufacture, sale, or distribution of goods. For this reason, the Goods and Services Tax (GST) is imposed by the Commonwealth.
The interpretation of the allocation of taxation powers in the Constitution has been modified and clarified by various Commonwealth High Court decisions over many decades, generally with the consequence of limiting the types of taxes than can be levied by State governments. As a consequence, in practice the majority of tax revenue in Australia is collected by the Commonwealth Government. In 2014-15, around 80 per cent of taxation revenue was collected by the Commonwealth Government, compared to around 16.5 per cent by State Governments, with the remainder being collected by local government.
The most significant of Commonwealth taxes are:
- income taxes for individuals and companies
- superannuation taxes
- customs and excise duties.
While the GST is also imposed and collected by the Commonwealth, revenue from this tax is shared between the States and Territories based on an assessment by the Commonwealth Grants Commission of each State’s expenses and capacity to raise revenue. This “horizontal fiscal equalisation” assessment aims to distribute GST revenue such that each State and Territory has the fiscal capacity to provide services of the same quality to their respective populations. Although income taxation powers were surrendered to the Commonwealth in 1942, in theory the States are able to levy income tax. In practice this is unfeasible as Commonwealth funding to States has been contingent on the States not levying income tax.
Further information on Commonwealth taxes is available at the Commonwealth Treasury website.
Tax Reform in Australia
While the majority of taxation revenue is collected by the Commonwealth, the States retain spending responsibilities well in excess of their ability to raise revenue under current arrangements. In order to address this vertical fiscal imbalance, the Commonwealth provides grants to the States. In 2015-16, these grants accounted for around 38 per cent of NSW Government revenue. Because of this vertical fiscal imbalance, significant tax reform can require collaboration between the States and the Commonwealth to ensure that key expenditure responsibilities such as health, education and justice are adequately funded when revenue-raising capacity is shifted between jurisdictions.
The most significant reform to federal financial relations has been the introduction of the GST. GST is collected by the Commonwealth but distributed entirely to the States as a grant which States can use for any purpose. The GST was introduced on 1 July 2000, and replaced the federal sales tax as well as a number of State taxes such as bed taxes, financial institutions duties, and stamp duty on quoted marketable securities. It was also agreed that, as a transitional arrangement, the States would be no worse off as a result of the introduction of the GST. Consequently, until 2008-09, the Commonwealth made a number of ‘top-up’ payments to ensure that each State received a guaranteed minimum amount of funding. To ameliorate the impact of GST on homebuyers, the States also agreed to provide first home buyer grants.
The agreement which established the GST provided for further review of the need for a number of specified State taxes. Following this review, it was agreed that further taxes would be abolished, including stamp duty on leases, mortgages, cheques, and unquoted marketable securities. In NSW, the last of these IGA taxes (stamp duties on business mortgages, unlisted marketable securities and transfer duty on non-real business assets) were abolished as part of the 2015-16 Budget.