Section 96 of the Australian Constitution

Section 96 of the Constitution of Australia authorises the Australian (Commonwealth) Parliament to grant financial assistance to any state on the terms and conditions that it sees fit, subject to acceptance by the state(s) concerned. The expanded use of the power under section 96 has added to Australia's vertical fiscal imbalance and enabled the Commonwealth to have a significant influence over matters that would otherwise be constitutionally State responsibilities.

Section 51 of the Australian Constitution enumerates the legislative powers of Commonwealth, with the residual powers being those of the States. However, section 96 provides the Commonwealth with the power to grant money to any state. These monetary grants are typically tied to certain terms and conditions (often legislative) that the states must adhere to in order to receive the grant. As these grants are linked to a particular purpose, they are known as 'tied grants'. In practice, section 96 has provided the Commonwealth parliament with the ability to influence policy matters that lie within the residual powers of the States (e.g. education, health, water, etc.).

Although the Australian Constitution allows both States and the Commonwealth to raise revenue, subsequent political developments and judicial interpretations have limited state taxing powers and led to Australia's vertical fiscal imbalance. The Commonwealth has significantly greater revenue-raising abilities than the states, which have spending responsibilities. The result is that states rely on Commonwealth grants to fund state-provided services such as schools and hospitals. The power to distribute funds to states on conditions has expanded the sphere of Commonwealth power through dictating policy through conditional grants. This limits the autonomy and power of the states in controlling policy.

This is largely due to the uniform federal system of income tax that was introduced in 1942 in accordance with s51(ii). Additionally, Section 51(iv) grants the Commonwealth control over state borrowings, furthering the reliance of the States on Commonwealth funding. The vertical fiscal imbalance, alongside section 96 of the Australian Constitution has effectively extended the Commonwealth's powers beyond those enumerated in section 51 of the Australian Constitution and other explicit enumerations of Commonwealth legislative power (e.g. section 52 and section 90).

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