Current Financial Arrangements

Local government revenue comes from three main sources – taxation (rates), user charges and grants from Federal and state/territory governments.

A fourth source, categorised as ‘miscellaneous’ by the ABS, consists of revenue raised through the likes of investment interest, dividend interest, income from public enterprise and fines.

Taxation arrangements

A key feature of the Australian federal system is that the Commonwealth Government levies and collects all income tax from individuals as well as from enterprises.

It also collects a portion of other taxes, including taxes on the provision of goods and services.

The revenue base of state governments consists of taxes on property, on employers’ payroll, and on the provision and use of goods and services.

The sole source of taxation revenue for local governments is taxes on property – known as rates.

The sole source of taxation revenue for local governments is taxes on property – known as rates.

In 2016-17, $488,499 million was collected in tax in Australia by the Commonwealth, state, territory and local government. Of this, local government raised just 3.6% or $17,418 million. This is despite local government being responsible for about a third of Australian governments’ non-financial assets worth more than $350 billion such as roads, lands and buildings. The Commonwealth, with 82% of the tax revenue, has just one tenth of the assets.

While rates are the only tax available to local government, the Commonwealth and states have access to around 125 other taxes (of these, 99 are levied by the Australian Government).

With around 20% of local government expenditure being spent on maintaining depreciating assets – compared with less than 6% for the states and less than 2% for the Commonwealth – it’s important that adequate funding is provided by the Commonwealth to ensure that councils are allocated a fair share of broad tax revenue for the provision of important local services and infrastructure.

Financial Assistance Grants

The Commonwealth Government recognises that the national interest is served by improving the capacity of local government to deliver services to all Australians. The Australian Government consequently supports local government through the Financial Assistance Grants program, which includes specific purpose payments (SPPs) (tied grants) and direct program funding (untied grants).

The current arrangements for Financial Assistance Grants are that they are indexed by a combination of the Consumer Price Index and the rate of population growth. However, this determination is that of the Treasurer alone.

ALGA has long highlighted that the quantum of Financial Assistance Grants funding is too low for the increasing responsibilities of local government, and that the indexation methodology does not sufficiently recognise the true cost pressures on councils.

In the 2014-15 Federal budget, the Commonwealth placed a freeze on the indexation of Financial Assistance Grants for three years. According to the Government’s own estimates, its budget move cost local communities more than $600 million worth of services and infrastructure over the three years, with the biggest impact felt by councils in regional, rural and remote Australia.

ALGA’s is calling for the Government to:

  1. restore Financial Assistance Grants funding to a level equivalent to at least 1% of Commonwealth Taxation Revenue
  2. ensure the indexation methodology of Financial Assistance Grants reflects the real cost pressures on councils
  3. renegotiate the Intergovernmental Agreement (IGA) to prevent cost-shifting of Commonwealth and state government responsibilities onto already resource-constrained councils
  4. thoroughly review the adequacy of the base and indexation methodology of Financial Assistance Grants.