Photo by Harry Cunningham on Unsplash

Western Australia is estimated to receive $6,482 million in GST in 2023-24, marking an increase of $254 million compared to the previous financial year of 2022-23. The change reflects Western Australia’s assessed needs for GST and its share of the growth in the GST pool. It also reflects the application of the 0.7 GST relativity floor, which increases the GST distributed to Western Australia and reduces the GST distribution to all other states (Commonwealth Grants Commission, 2023).

While I agree with everything that Saul Eslake raises in his detailed and valuable history of the GST and the distortions introduced by the Morrison Government, this analysis overlooks one critical issue – it’s not solely about logic. Like many economists, Saul Eslake focuses on presenting factual arguments rather than addressing potential fallacies, which can further complicate the debate.

This would be a humorous post – except that the Western Australian Government’s claims are taken seriously, albeit only by themselves and a few partisans.

The Western Australian argument

It is challenging to dissect the argument put forth by Western Australia as it has never been clearly stated. The closest representation I could find comes from a spokeswoman for the Western Australia Government, who stated:

Western Australia continues to receive by far the lowest share of the GST at just 70 percent of our population share. If it wasn’t for GST reforms in 2018, Western Australia would have received just 15.8 percent of our population share in 2022‑23.

Inherent to this argument is the assertion that Western Australia contributes more to the GST than it receives. This viewpoint was succinctly articulated by Joe Hockey in 2015, the Federal Treasurer at the time these changes were being considered:

Frankly, the fundamental question is: does it really help the Federation for the first time to have a state receiving 30 cents in the dollar from the GST that is contributed by its citizens? (emphasis added)

This assumption could not be further from the truth. In net terms, Western Australia contributes nothing to the GST pool. While Western Australia retains the royalties, the source of their wealth and their healthy budgets, the industries that produce this wealth receive a full refund for every cent of GST paid by anyone in their supply chain.

Exporters do not collect and remit GST on anything they export. Instead, they receive a GST input refund.

GST and exports

A little understood feature of the GST is that no tax is collected from exporters, meaning all GST, irrespective of where it was paid in the supply chain, is refunded to the exporting company.

For example, the GST paid by a cleaner in a factory that provides goods to an exporter is refunded to the export company at the top of the chain. This applies to every cent of GST paid by anyone supplying the mining industry, regardless of how far down the supply chain they are situated.

The impact of these refunds is substantial. Western Australia exports alone reduce the total GST pool by billions of dollars. In 2021-22, mining exports from Western Australia resulted in a net refund of $7.2 billion (see Table 1).

Table 1: GST refunded to mining exporters, 2021-22

Fine industry Gross GST payable Input tax credits Deferred GST payments on imports Net GST
$m. $m. $m. $m.
080 Metal Ore Mining 2,665.3 8,041.5 330.3 -5,046.0
099 Other Non-Metallic Mineral Mining and Quarrying 1,582.3 3,129.0 300.3 -1,246.4
101 Exploration 482.0 1,412.8 21.9 -909.0
Total -7,201.4

Source: Selected GST items, by fine industry, 2021-22 financial year

When oil and gas exports are included, this figure is significantly higher, though analysing these figures is complex due to the production and consumption across multiple states.

If we accept Western Australia’s argument that they contribute a higher proportion of GST than they receive in grants, then similar arguments can be made for other states, though Western Australia is the largest exporter. In 2022, Western Australia accounted for 44% ($260.8 billion) of Australia’s exports. Following this, they are responsible for 44% of the refunds to exporters, despite representing only 11% of the population. Extending their logic suggests they should top-up the GST pool by over $15 billion per year.

Let us model two different approaches extending the logic used by Western Australia.

Approach 1 – Topping up the GST pool to account for export refunds – distribution by population share

The proposed formula to calculate distributions:

Net State Distribution = (Australian Net GST + Australian Export Refunds) X (State population share) – (State Export Refunds)

Essentially, all states would notionally “top up” the GST pool with any amounts refunded to exporters prior to GST distribution. The percentage of population would then be used to distribute the GST to each state.

The following is illustrative only. If this was ever contemplated, a lot more work and analysis would be required. Obviously, GST refunds for mining exports vary over the construction phase, the life of the mines, through to closure and remediation. The GST export refunds for non-mining may be higher depending on the relative value added.

GST pool for distribution: $73 billion (budget year 2021-22)

GST refunded to WA exporters: $15 billion (own calculation, see above)

GST refunded to exporters in all states: $35 billion (a simple extrapolation based on GST refunded to WA exporters)

Using these figures the calculation would be:

($73b + $35b) X 11% pop share = $11.88b – $15b = -$3.12b

This would result in Western Australia owing the GST pool $3.12 billion.

Approach 2 – GST distributions based on net GST payments in each state

Inherent in Western Australia’s argument is the belief that they should receive a distribution close to the actual GST paid within Western Australia. However, as outlined above, a large part of the GST attributed to Western Australia is refunded directly to exporters. Consequently, the amount of GST paid and not refunded in Western Australia, or the net value of GST paid in Western Australia, would be much lower (per capita) than in any other state.

As Saul Eslake outlined in his piece, estimating state GST is challenging due to the lack of granular information. However, if we had an accurate estimate of the net GST attributable to Western Australia and distributed it accordingly, it is likely they would receive significantly less than they currently do, possibly nothing at all.

This could be verified by the ATO, though some estimates would be necessary, and a different accounting structure might be required if this was seriously considered.

A proposal to use a net GST figure is no more partisan (and just as logical) as Western Australia’s claim that they receive less GST than they pay. In fact, it is arguably more logical since the current distribution is based on the net contribution to the GST pool.

Western Australia could be accused of double dipping by receiving royalties from industries that deplete the GST pool and then receiving a further GST distribution.

After considering these points, it becomes evident that either approach outlined would be fairer – and certainly as logical as the argument put forth by the Western Australian Government.

If we reject the logic of either proposition, then we should also dismiss Western Australia’s claim as spurious, if not bordering on fraudulent. Of course, we could revert to the original system: horizontal fiscal equalisation.

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