Productivity Commission to launch review into WA GST deal

On Wednesday (24 September), the Treasury released the terms of reference for the Productivity Commission’s scheduled five-year review into GST revenue distribution.

“The Productivity Commission Inquiry will look at ways in which the federal financial relations system can best promote fiscal sustainability across the states and territories and the Commonwealth,” Treasurer Jim Chalmers said.

“The PC will investigate whether the current arrangements are working efficiently, effectively and as intended, while being cognisant of the Commonwealth’s policy commitments in relation to GST distribution, and with Terms of Reference that are deliberately broad enough to enable it to look into issues raised by states and territories.”

Since the GST was introduced in 2000, the government has relied on the principle of ‘horizontal fiscal equalisation’ to distribute GST revenue to states and territories. Essentially, this principle seeks to reduce fiscal disparities between the states and territories and dictates that each should get enough revenue to provide public services.

Western Australia has a higher capacity to raise revenue than the national average due to its healthy mining royalties and larger-than-average payroll tax take, 2025–26 data from the Commonwealth Grants Commission (CGC) indicated.

“Overall, the above-average revenue raising capacity of Western Australia outweighs its above-average cost of providing services,” the CGC said.

In 2018, parliament legislated changes to the GST revenue distribution process to ensure each state got to keep at least 75 cents for every dollar of GST revenue it raised. This followed concerns from the WA government that it wasn’t getting a fair GST deal.

“An arrangement which puts any one State into the position, as it has WA in the past, where it receives less than 30 per cent of its share of the GST back as a result of fiscal equalisation cannot possibly be sustained,” Mathias Cormann, former senator for WA, said in 2018.

The 2018 change also required the Commonwealth to ‘top up’ the GST pool and ensure that no state or territory would be worse off than it would have been prior to the deal.

This is projected to cost the Commonwealth $21.8 billion from 2025-26 to 2028-29 in equalisation payments to make up revenue shortfalls in other states. Federal estimates indicate that it’s on track to cost the federal budget $60 billion over the 11 years to 2029.

With the current inquiry, the Productivity Commission has been tasked with investigating whether the current arrangements deliver a reasonable level of horizontal fiscal equalisation, appropriately balance responsiveness with revenue certainty, support states and territories to pursue reforms and are sustainable for Commonwealth, state and territory budgets.

It would also look into whether “alternative arrangements” would better achieve these outcomes.

The interim report will be due by 28 August 2026, and the final report by 31 December 2026.

“All government budgets are under pressure and that’s why the Commonwealth is kicking in billions more dollars to boost state and territory budgets in the national interest,” Chalmers said.

On Wednesday, deputy premier of Western Australia Rita Saffioti said the WA Labor government would fight to ensure the 2018 reforms were retained.

"Our government is unwavering in its commitment to maintaining a fair share of GST for Western Australia. We will be fighting extremely hard throughout this Productivity Commission review period to ensure that the 2018 GST reforms remain intact,” Saffiotti said in a release.

"We know that the Albanese Government is acutely aware and has supported maintaining the 2018 reforms, but we also know there are many on the east coast advocating for the reforms to be removed. We can't allow those critical voices to shape the debate.”

CPA Australia’s Tax Lead, Jenny Wong, welcomed news of the PC inquiry into GST distribution. However, she called on policymakers not to let decisions regarding state distribution distract from broader tax reform priorities.

“Reform of the GST is central to resolving the structural weaknesses in Australia’s tax system,” she said.

“Most tax specialists believe that increasing the GST is the key to broadening the overall tax base and reducing the reliance on personal income tax, which would put more money in people’s pockets and ultimately generate more revenue to help drive economic growth.

“It’s crucial that the inevitable wrangling between the states about how the GST is carved up does not distract from these broader objectives.”