Australia Yearbook - 2001

Chapter 27—Government finance 937
Commonwealth income taxes were first
imposed during 1915 to make up for the fall in
revenues from customs duties and excises
which resulted from the disruption to world
trade brought about by World War I. This
income tax was designed by the Australian
Statistician of the time (Sir George Knibbs).
In 1942, a Commonwealth special committee on
uniform taxation recommended that
Commonwealth income tax take priority over
any State income tax and that any State retiring
from income tax collection be paid a grant in
compensation for lost revenue. A further
recommendation was that the scheme operate
for the duration of World War II plus one year
thereafter. The Commonwealth legislated to
bring the recommendations of the special
committee into effect. One condition in the
Commonwealth legislation was that any State
which did not vacate the income tax field for the
duration of the war period would not receive a
share of Commonwealth income tax revenues.
The States rejected this tax plan, and four States
challenged the validity of the Commonwealth
legislation in the High Court. The High Court
ruled that the Commonwealth income tax
legislation was valid, essentially giving the
Commonwealth constitutional priority in
taxation. A further outcome of the High Court
challenge was that the Commonwealth was no
longer bound to limit the duration of the
uniform income tax scheme, and later decided
to continue with it indefinitely. The States were
not precluded from superimposing their own
income taxes on top of the Commonwealth tax,
but if a State did so its Commonwealth tax
reimbursement payment would cease.
Commonwealth income tax rates were set at a
level which made it difficult for the States to
raise an amount equal to Commonwealth tax
reimbursements. For these reasons the States
retired from the field of income taxation.
Commonwealth and State government death
and gift duties were abolished by the early
1980s. Commonwealth land taxes were
abolished in 1952, while State and Territory land
taxes have remained in force as a source of
finance for the provision of local government
services, along with municipal rates. Since the
discontinuation of State income taxes, gambling
levies, stamp duties, payroll taxes and motor
vehicle taxes have been the main taxes for the
States and Territories.
The major part of the financing of State budgets
since Federation has come from
Commonwealth grants. The source of these
grants lies in each State’s and Territory’s share
of Commonwealth taxation revenue (mainly
income taxation up until the introduction of the
goods and services tax (GST) in July 2000) as
determined by Commonwealth–State financial
agreements.
State and Territory Governments levied
business franchise fees from 1958 until 1997
when the High Court ruled that those on
tobacco were constitutionally invalid. By
extension, all other State and Territory business
franchise fees were also constitutionally invalid.
The Commonwealth then legislated for and
collected replacement excise taxes on a uniform
basis and returned this revenue to the States
and Territories after allowing for administration
costs, to ensure that these governments were
compensated for the loss of business franchise
revenues (the ‘safety net’ tax arrangements).
This arrangement continued up until June 2000.
Under the terms of the June 1999
Intergovernmental Agreement on Principles for
the Reform of Commonwealth-State Financial
Relations (IGA), the Commonwealth imposed a
goods and services tax (GST), from 1 July 2000,
with all GST revenue to be passed to the States
and Territories. Commonwealth GST revenue
grants replace the old financial assistance grants
made by the Commonwealth to the States and
Territories. Each government’s share of GST
revenue is based on its population share
adjusted by a relativity factor reflecting per
capita financial needs. The IGA required the
Commonwealth to permanently cease its
wholesale sales tax (in addition to safety net
taxes) from July 2000 State and Territory
Governments were required to permanently
cease bed taxes, financial institutions duties, and
stamp duties on marketable securities, from
July 2000 and to adjust their gambling taxes to
take account of the impact of the GST on
gambling operators. State debit taxes will cease
on 1 July 2005 and the need to continue a
number of State stamp duties on financial
instruments and leases will be reviewed in 2005.
The Commonwealth retains income tax
revenues for its own purposes.