PERTH (miningweekly.com) – The Association of Mining and Exploration Companies (Amec) on Monday claimed that resolving Australia’s goods and services tax (GST) dilemma could have saved Western Australia from a hike in the gold royalty.

The Productivity Commission (PC) has released a draft report on horizontal fiscal equalization (HFE), which found that Western Australia’s share of the GST fell well short.

Federal Treasurer Scott Morrison on Monday said that while the draft report affirmed the benefits of HFE and found that Australia did better than any other comparable federal systems in the world, the PC also found that the system went too far, creating significant weaknesses.

“The PC finds that the way ‘same standard’ has been defined for HFE purpose has crept upwards over time, making the system less able to deal with economic shocks that have an uneven impact across the states, producing unforeseen and unfair outcomes, what they describe as ‘unfair equality’,” Morrison said.

He pointed out that this had included Western Australia’s GST relativity falling to less than 30c in the dollar, after the mining boom.

“While acknowledging the A$1.2-billion provided in top-up payments to Western Australia by the federal Coalition, effectively stopping the drop in Western Australia’s relativity falling below 37c, top up payments and GST floors are not considered by the PC as viable longer term solutions.

“This finding reinforces one of the core reasons I commissioned the PC to do this work back in May. We need to fix the system, not plaster over a part of it,” Morrison said.

“This is also true of the PC finding of our current HFE system holding our economy back, by creating disincentives for states and territories to pursue ‘productivity enhancing reforms that are in the national interest’. These include making their tax systems more efficient and to realizing their own resource and minerals opportunities.”

The report recommends that “revising the objective of HFE would be in the best interests of national productivity and wellbeing”.

Morrison said that as a result, the draft report established a national interest case to address the weaknesses in the HFE system that the PC had identified.

“This problem is bigger than one state or territory. It’s in the national interest to fix it,” the Treasurer said.

Rather than a major overhaul of the current system, the draft report outlines a number of draft recommendations aimed at improving the way Australia’s GST revenue is distributed to achieve our HFE goals.

This includes a draft recommendation that the commonwealth government reset the HFE objective from ‘full’ equalisation, currently interpreted by the Commonwealth Grants Commission (CGC) as bringing everyone up to the fiscal standard of the strongest state, to a more practical objective of “reasonable equalisation”.

The PC argues such an approach will deliver on the flexibility the system needs, removes disincentives for tax reform and proactive resources policy, while continuing the equity demanded by HFE.

The report also includes draft recommendations aimed at improving simplicity and transparency in the current system, including retaining the system of lagged indicators, which the CGC indicated was a more reliable and accurate basis for making the necessary GST distribution calculations.

The PC has also suggested a system of rulings by the CGC on how decisions will impact on GST distribution to assist states and territories with their budgeting.

“The government’s goal is to deliver a fairer, more durable and more efficient system for implementing HFE into the future.

“But we also need to do this in a way that gives all states and territories time to adjust. While we must continue to act to provide fairer treatment for states like Western Australia, we must similarly consider the potential impact on smaller recipient states like South Australia and Tasmania as we consider any transition plans,” Morrison said.

“Such transition plans must also appreciate that GST relativities are not static. So care should be taken in making assumptions about the specific point in time impacts on any one jurisdiction from alternative models. The government will work to assess impacts over time to avoid any policy cliffs and to smooth out impacts, wherever possible.”

Amec acting CEO Graham Short on Monday said that the draft report highlighted that if the GST dilemma had been resolved, the mining industry would not be faced with the gold royalty debate in Western Australia.

“The PC’s acknowledgment of the Western Australian GST dilemma shows that there is a path to a fairer GST distribution. Common sense must prevail. It makes no sense for the Western Australian government to make decisions that damage the engine room of our economy because of the broken GST system,” Short said.

He noted that 60% of the additional revenue raised by the proposed gold royalty hike would go to other Australian states and territories through the GST re-distribution process.



“Industry needs the federal government to resolve the GST distribution as a matter of urgency. The proposed gold royalty increase is a decision that heightens sovereign risk, and damages Western Australia’s reputation as a safe place in which to invest.”



“The proposed gold royalty hike is an unnecessary broken promise that will be paid for by Western Australians in job losses and lost opportunities,” he added.

An estimated 3 000 jobs are on the line in the gold industry as a result of the higher royalty rate. The Western Australian Chamber of Minerals and Energy has warned that, at current gold prices, five operating mines with margins of less than 10% could close and that if the gold price declined to A$1 400/oz, a further five operations could be faced with closure, with a further 2 000 jobs at risk.