Federal Treasurer Joe Hockey is seeking advice on how to make the GST distribution for mining states like Western Australia fairer.

Mr Hockey has written to the Commonwealth Grants Commission asking it how to change the system to take better account of volatile mining royalties.

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In the letter, Mr Hockey said he wanted advice on how to ensure a states’ share of GST in a given year was appropriate for their fiscal circumstances that year.

The Treasurer wants the commission to consider the treatment of GST where revenue from a particular source is a large and volatile proportion of a state or territory’s revenue.

It will form part of the Commission’s review of the GST system next year.

WA Premier Colin Barnett has welcomed the review as he said the state had been missing out.

He said under the existing system, GST relativities were calculated on commodity prices measured at three-year intervals, which meant WA’s GST return was based on sharply higher iron ore royalties than the state was actually receiving.

In a statement, Mr Barnett said the collapse of the iron ore price has wiped $7.1 billion in revenue from the state’s budget over the forward estimates.

The Premier said the WA Government had been raising the issue of the GST distribution with the Federal Government for many years.

“This is the most promising sign we have had out of Canberra on the GST issue to date,” he said.

“The GST has become a source of instability rather than the stable form of revenue that it was designed to be.

“While the long-term solution is a distribution model based on population, this is an important first step.”