A feature of the Federal-State system in Australia is the complex financial relationship existing between the Commonwealth and State Governments.

Taxation and Revenue Sharing

Since 1942, the Commonwealth Government has been the sole income taxing authority. While the States do have the constitutional authority to impose an income tax, the arrangements with the Commonwealth effectively preclude them from exercising that authority.

Commonwealth Payments to the States

Payments are made by the Commonwealth to the States for both general and specific purposes. States have absolute discretion over how general purpose payments are spent. Specific Purpose Payments (SPPs), commonly known as tied grants, can be either of a recurrent or capital nature. They are provided for specific purposes, either agreed between the State and the Commonwealth or effectively determined by the Commonwealth. The value of the SPPs is usually determined through the Commonwealth Budget process. Often the State has to commit to matching the grants dollar for dollar in order to receive the funds made available.