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Senate

A New Tax System (Commonwealth-State Financial Arrangements) Bill 1999

A New Tax System (Commonwealth-State Financial Arrangements) Act 1999

Revised Supplementary Explanatory Memorandum

Requests for Amendments, Amendments Consequential on Requirest for Amendments, and Amendments and a New Clause to be Moved on Behalf of the Government

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Outline and Financial impacts

Outline

These Government amendments will amend the A New Tax System (Commonwealth-State Financial Arrangements) Bill 1999. This Bill was introduced in the Senate on 31 March 1999.

Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations

The proposed amendments create a new part (Part 1A) of the Bill which adds a schedule (Schedule 2) comprising the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations and also records the intention of the Commonwealth to comply with the Intergovernmental Agreement.

The Intergovernmental Agreement signed at the 9 April 1999 Premiers' Conference was subsequently amended to reflect changes to the tax reform package announced by the Prime Minister on 28 May 1999. The amended version of the Intergovernmental Agreement is included at Schedule 2.

Changing the GST rate and base

The proposed amendments to Part 2 of the Bill add a definition of the term changes of an administrative nature mentioned in clause 10 of the Bill, and provide that Ministerial Determinations under the A New Tax System (Goods and Services Tax) Act 1999 or the A New Tax System (Goods and Services Tax Transition) Act 1999 that affect the Goods and Services Tax (GST) base will be made in accordance with a procedure agreed by all States and Territories.

Providing GST revenue to the States and Territories

The proposed amendments provide that the total amount of GST revenue to be provided to the States and Territories will include local government assistance grants withheld by the States Territories from local government authorities which do not comply with the GST system.

An amendment is also required to remove the reference to the diesel fuel credits in the definition of the GST revenues to be provided to the States. Originally, diesel fuel credits were to be administered through the GST system. However, these credits will now be administered through an outlays programme. GST revenues are therefore no longer affected by the provision of diesel fuel credits by the Commonwealth.

Transitional arrangements

The proposed amendments to Schedule 1 of the Bill provide for the distribution of GST revenue grants in accordance with the principle of horizontal fiscal equalisation after 2001-02 and for transitional assistance to be in the form of grants and short term loans in 2000-01.

Other payments

The proposed additions to Part 3 of the Bill will provide the States and Territories with an entitlement to revenue replacement payments (RRPs) in 2000-01 which will be equal to the amount of business franchise fee safety net revenues (less administrative costs) collected after 30 June 2000 with respect to transactions taking place in 1999-2000. The proposed amendment also reflects the recent transfer of responsibility for excise collections from the Australian Customs Service to the Australian Taxation Office.

Financial impacts

Transitional Arrangements

The proposed amendments to the transitional arrangements involve an additional estimated cost to the Commonwealth budget of around $910 million in 2000-01, $136 million in 2001-02 and $459 million in 2002-03, and the basis of estimates consistent with the 1999-2000 Budget.

Other payments

The safety net arrangements added to Part 3 of the Bill will not affect the Commonwealth's budgetary position as RRPs to the States and Territories are amounts raised on their behalf (after allowing for administration costs).

Chapter 1 - Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations

Overview

1.1 The proposed amendments create a new part (Part 1A) of the Bill which adds a schedule (Schedule 2) comprising the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations and also records the intention of the Commonwealth to comply with the Intergovernmental Agreement.

Summary of the amendment

Purpose of the amendment

1.2 To fulfil the Government's commitments under clause 4 of the Intergovernmental Agreement.

Date of effect

1.3 Clause 2 of the Bill provides that this Bill, once enacted, will commence when it has received Royal Assent or after the A New Tax System (Goods and Services Tax Act) 1999; the GST Imposition Acts; and the A New Tax System (Goods and Services Tax Act Administration) Act 1999 have commenced. The Intergovernmental Agreement between the Commonwealth, the States and the Territories will commence on 1 July 1999 unless otherwise agreed by the Parties.

Background to the amendment

1.4 At the 9 April 1999 Premiers' Conference, the Prime Minister and the Premiers and Chief Ministers of each State and Territory signed an Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations. The Intergovernmental Agreement sets out Commonwealth, State and Territory commitments with respect to new Commonwealth-State financial arrangements.

1.5 In clause 4 of the Intergovernmental Agreement the Commonwealth undertook to attach the Intergovernmental Agreement to the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 and to use its best endeavours to ensure the Act will require compliance with the Intergovernmental Agreement. The States and Territories made a similar undertaking in relation to their legislation.

1.6 The 9 April 1999 Intergovernmental Agreement was subsequently amended to reflect changes to the taxation reform package announced by the Prime Minister on 28 May 1999. The amended version of the Intergovernmental Agreement is included at Schedule 2.

Explanation of the legislation

1.7 Sub-clause 9A(1) provides that a copy of the Intergovernmental Agreement is attached to the Act.

1.8 Sub-clause 9A(2) records that it is the Commonwealth's intention to comply with, and give effect to, the Intergovernmental Agreement.

Chapter 2 - Changing the GST rate and base

Overview

2.1 The proposed amendments to Part 2 of the Bill add a definition of the term changes of an administrative nature which is mentioned in clause 10 of the Bill and provide that Ministerial Determinations under the A New Tax System (Goods and Services Tax Act) 1999 or the A New Tax System (Goods and Services Tax Transition) Act 1999 that affect the GST base will be made in accordance with a procedure agreed by all States and Territories.

Summary of the amendment

Purpose of the amendment

2.2 To provide greater clarity with respect to the provisions in the Bill which deal with changes to the GST rate and base, consistent with the Intergovernmental Agreement.

Date of effect

2.3 Clause 2 of the Bill provides that this Bill, once enacted, will commence when it has received Royal Assent or after the A New Tax System (Goods and Services Tax Act) 1999; the GST Imposition Acts; and the A New Tax System (Goods and Services Tax Act Administration) Act 1999 have commenced, whichever is later.

Background to the amendment

2.4 The proposed amendments to Part 2 of the Bill clarify that the 'lock-in' mechanism in relation to the GST rate and base extends to proposals to vary the GST base by way of Ministerial determinations under the A New Tax System (Goods and Services Tax Act) 1999 or the A New Tax System (Goods and Services Tax Transition) Act 1999. The Intergovernmental Agreement states that proposals to vary the GST base by way of Ministerial Determinations will require the unanimous agreement of the Ministerial Council and that the Ministerial Council is to develop practical arrangements to ensure the timely consideration of proposed Ministerial determinations.

2.5 Clause 10 of the Bill provides for the Commonwealth to make changes to the GST base during the first year of the GST if the changes are, among other things, of an administrative nature. Subsequently, changes to the GST of an administrative nature will require the approval of a majority of the Commonwealth and the States and Territories. The amendments to Part 2 of the Bill define changes of an administrative nature in accordance with the definition included in the Intergovernmental Agreement.

Explanation of the amendment

2.6 Clause 10 of the Bill states that the GST base is not to be changed unless each State and Territory agrees to the change. Sub-clause 10(1A) adds to this requirement by providing that a variation of the GST base by way of a Ministerial Determination under the A New Tax System (Goods and Services Tax Act) 1999 or the A New Tax System (Goods and Services Tax Transition) Act 1999 will be required to be made in accordance with a procedure to which all the States and Territories have agreed.

2.7 Clause 11(2) adds that, for the purpose of sub-clause 10(2) and 10(3) of the Bill, changes of an administrative nature are defined as changes involving legislation necessary to:

(a)
maintain the integrity of the GST base; or
(b)
prevent tax avoidance.

Chapter 3 - Providing GST revenue to the States and Territories

Overview

3.1 The proposed amendments to Part 1 of the Bill provide that the total amount of GST revenue grants will include local government assistance grants withheld from local government authorities which do not comply with the GST system. It also removes the reference to diesel fuel credits in the definition of GST revenues to be distributed to the States and Territories.

Summary of the amendment

Purpose of the amendment

3.2 The Intergovernmental Agreement requires the States and the Northern Territory to withhold local government financial assistance grants from local government authorities which do not comply with the GST system. Amounts withheld from local government represent GST payments or GST equivalent payments not directed to the Australian Taxation Office. Amounts withheld will therefore be added to the GST revenue pool and redistributed to the States and Territories according to the principle of horizontal fiscal equalisation.

3.3 Clause 5 of the Bill also needs to be amended to remove the reference to diesel fuel credits as these will not affect the definition of GST revenues.

Date of effect

3.4 Clause 2 of the Bill provides that this Bill, once enacted, will commence when it has received Royal Assent or after the A New Tax System (Goods and Services Tax Act) 1999; the GST imposition Acts; and the A New Tax System (Goods and Services Tax Act Administration) Act 1999 have commenced, whichever is later. The Intergovernmental Agreement will commence between the Commonwealth, States and the Territories on 1 July 1999 unless otherwise agreed by the Parties.

Background to the amendment

3.5 The Intergovernmental Agreement records the Parties' intention of having local government and their statutory corporations and authorities operating as if they were subject to the GST. The Intergovernmental Agreement also stipulates that a system will be implemented to allow States and the Northern Territory to withhold local government financial assistance grants from local government authorities which do not comply with the GST. As the amounts withheld represent amounts of GST that should have been paid, these will be added to the pool of GST revenues.

3.6 In addition, the original tax reform plan proposed to administer the diesel fuel credits scheme through the GST. However, these credits will now be administered through an outlays programme and will not be netted off the GST revenues. The definition of GST revenues provided to the States and Territories no longer needs to refer to diesel fuel credits.

Explanation of the amendment

3.7 Sub-clause 5(3)(ca) provides that the amount, determined in a manner agreed by the Commonwealth and the States and Territories, that represents amounts of GST that should have, but has not, been paid by local government bodies be added to the pool of GST revenues to be distributed to the States and Territories.

3.8 The amendment removes sub-clause 5(3)(d) as diesel fuel credits no longer needs to be taken into account when determining the GST revenues to be distributed to the States and Territories.

Chapter 4 - Transitional arrangements

Overview

4.1 The proposed amendments to Schedule 1 of the Bill provide for the distribution of GST revenue grants in accordance with the principle of horizontal fiscal equalisation after 2001-02 and for transitional assistance to be in the form of grants and short term loans in 2000-01.

Summary of the amendment

Purpose of the amendment

4.2 To reflect the terms of the Intergovernmental Agreement in relation to transitional arrangements.

Date of effect

4.3 Clause 2 of the Bill provides that this Bill, once enacted, will commence when it has received Royal Assent or after the A New Tax System (Goods and Services Tax Act) 1999; the GST Imposition Acts; and the A New Tax System (Goods and Services Tax Act Administration) Act 1999 have commenced, whichever is later. The Intergovernmental Agreement will commence between the Commonwealth, States and the Territories on 1 July 1999 unless otherwise agreed by the Parties.

Background to the amendment

4.4 At the 9 April 1999 Premiers' Conference, it was agreed that the transitional arrangements agreed at the 13 November 1998 Special Premiers' Conference and subsequently proposed in Schedule 1 to the Bill should be amended. The agreement reached by all Parties and reflected in the Intergovernmental Agreement was that the distribution of GST revenue grants should be solely on the basis of horizontal fiscal equalisation after 2001-02 rather than 2002-03.

4.5 Changes to the tax reform package announced by the Prime Minister on 28 May 1999 required amendments to the Intergovernmental Agreement, including the provision of additional amounts of transitional assistance to the States and Territories in 2000-01 which will be paid in the form of grants of financial assistance rather than short term loans.

Explanation of the amendment

4.6 Amendments are made to clause 3 of Schedule 1 of the Bill to provide for grants of transitional assistance to a State in 2000-01. These amendments include the addition of sub clause 3(5A) which requires the Treasurer to determine in writing the amounts of transitional assistance to be provided to a State or Territory as a short term loan or grant.

4.7 Amendments are made to clauses 4, 5 and 6 of Schedule 1 of the Bill to provide that the distribution of GST revenue grants will be in accordance with the horizontal fiscal equalisation in each year after 2001-02.

Chapter 5 - Other Payments

Overview

5.1 The proposed additions to Part 3 of the Bill will provide the States and Territories with an entitlement to RRPs in 2000-01 which will be equal to the amount of business franchise fee safety net revenues (less administrative costs) collected after 30 June 2000 with respect to transactions taking place in 1999-2000. The proposed amendments also reflect the recent transfer of responsibility for excise collections from the Australian Customs Service to the Australian Taxation Office.

Summary of the legislation

Purpose of the legislation

5.2 To provide a State or Territory with an entitlement to an amount of RRPs in 2000-01.

Date of effect

5.3 Clause 2 of the Bill provides that this Bill, once enacted, will commence when it has received Royal Assent or after the A New Tax System (Goods and Services Tax Act) 1999; the GST Imposition Acts; and the A New Tax System (Goods and Services Tax Act Administration) Act 1999 have commenced, whichever is later. States and Territories will be entitled to RRPs from 1 July 2000 following the repeal of the existing States Grants (General Purposes) Act 1994.

Background to the legislation

5.4 On 5 August 1997 the High Court ruling on tobacco franchise fees in New South Wales (Ha and Lim v. New South Wales and Walter Hammond & Associates Pty Ltd v. New South Wales) cast into doubt the constitutional validity of all State business franchise fees. At the unanimous request of the States, the Commonwealth announced 'safety net' arrangements to protect State finances. These arrangements provided for an increase in the rate of Commonwealth customs and excise duty on tobacco and petroleum products and an increase in the rate of wholesale sales tax on alcoholic beverages. All revenue collected by the Commonwealth under these arrangements is returned to the States and Territories (less administrative costs) as RRPs.

5.5 Due to the delay between the time at which a business incurs a liability to pay an amount of safety net surcharge and the time when it is received by the Commonwealth, an amount of surcharge liabilities will be paid to the Commonwealth after 30 June 2000 and will need to be provided to the States and Territories as RRPs in 2000-01.

Explanation of the legislation

5.6 Clause 14A specifies entitlement of the States and Territories to RRPs in 2000-01. The total amount of RRPs is subject to determination by the Commissioner of Taxation and the Chief Executive Officer of Customs.

5.7 A technical amendment is also made to clause 14(2) of the Bill to clarify the base amount of competition payments to be provided to the States and Territories under the States Grants (General Purposes) Act 1994 in 1999-2000.


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