House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan Mp

General outline and financial impact

A new framework for federal financial relations

The Federal Financial Relations Bill 2009 appropriates funds to provide financial assistance to the States and implements this Government's reforms to modernise federal financial relations in accordance with the new financial framework agreed by COAG in the Intergovernmental Agreement on Federal Financial Relations .

The Federal Financial Relations (Consequential Amendments and Transitional Arrangements) Bill 2009 provides for the relevant consequential amendments arising from these measures, including the repeal or amendment of inconsistent legislation.

On 29 November 2008, the Council of Australian Governments agreed to a new framework for federal financial relations which provides a robust foundation for collaboration on policy development and service delivery, and facilitates the implementation of economic and social reforms in areas of national importance.

In agreeing the new framework for federal financial relations, the Commonwealth committed to the provision of on-going financial support for the States' service delivery efforts through:

•

general revenue assistance, including the on-going provision of GST payments, to be used by the States for any purpose;

•

National Specific Purpose Payments (National SPPs) to be spent in the key service delivery sectors; and

•

National Partnership payments to support the delivery of specified outputs or projects, to facilitate reforms or to reward those jurisdictions that deliver on nationally significant reforms.

The new federal financial framework commenced on 1 January 2009.

GST payments

The Bills provide an appropriation for the Commonwealth to make GST payments to the States equivalent to the revenue received from the GST in respect of financial years starting from 1 July 2009 and for these payments to be distributed in accordance with the principle of horizontal fiscal equalization.

Each State will receive its adjusted population share of the GST revenue. The adjusted population of each State will be calculated by multiplying the State's population, determined by the Australian Statistician, by a GST revenue sharing relativity, determined by the Minister.

•

These provisions are equivalent to the current GST payment provisions in the A New Tax System (Commonwealth State Financial Relations) Act 1999 .

The Bills provide for the repeal of parts of the A New Tax System (Commonwealth State Financial Relations) Act 1999 , with effect from 1 July 2009, and for the Act to be renamed the A New Tax System (Managing the Rate and Base of the GST) Act 1999 to reflect better its abbreviated content.

•

Once amended, the on-going provisions of this Act will be limited to the procedures for managing the rate and base of the GST.

National Specific Purpose Payments

The Bills provide an appropriation for the Commonwealth to make an on-going financial contribution from 1 January 2009 to support State service delivery in the areas of:

•

healthcare;

•

schools;

•

skills and workforce development;

•

disability services; and

•

affordable housing.

National Partnership payments and general purpose financial assistance

The Bills provide for the Minister to credit amounts to the COAG Reform Fund for the purpose of providing financial assistance to the States in the form of National Partnership payments and general purpose financial assistance.

While the annual Appropriation Acts will not appropriate amounts to be paid as National Partnership payments and general purpose financial assistance, the maximum amount that the Minister may credit to the COAG Reform Fund in a particular financial year will be specified in an annual Appropriation Act related to that year.

The COAG Reform Fund will be used to disburse National Partnership payments and general purpose financial assistance to the States under the new federal financial framework.

Date of effect : 1 April 2009. A transitional period will apply from 1 January 2009 until the new legislation is in place. During this period, Treasury will bring forward GST payments to match the cash flow which the States would have received if the necessary appropriations had been in place. However, if new appropriations are not in place by 30 April 2009, GST revenue may not be sufficient to sustain the Commonwealth's transitional payments commitments to the States.

Proposal announced : This measure was announced on 26 March 2008 and agreed by COAG on 29 November 2008.

Financial impact : As part of the funding package agreed by COAG, additional appropriations of $6.3 billion are provided in these Bills over five years.

The Federal Financial Relations Bill 2009 provides appropriations for the Commonwealth to provide an additional $5.8 billion in National SPP funding to the States over five years to improve services for all Australians. The total appropriation for National SPPs in 2009-10 is $17.9 billion.

The Federal Financial Relations Bill 2009 provides for the Commonwealth to make GST payments to the States equivalent to the revenue received from the GST. These provisions are equivalent to the current GST payment provisions in the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 .

The Bills do not provide an appropriation for general purpose financial assistance or National Partnership payments, although they do provide for a global limit on National Partnerships in 2008-09 of $8 billion, general purpose financial assistance in 2008-09 of $500 million and National SPPs in 2008-09 of $4 billion. Future year global limits will be provided in annual Appropriation Acts.

The Federal Financial Relations Bill (Consequential Amendments and Transitional Provisions) Bill 2009 provides for the appropriation under the Health Care (Appropriation) Act 1998 to be increased by $500 million.

Compliance cost impact : Nil.