ACCC Launches Comprehensive GST Surveillance
Prices of televisions, stereos, video camera and watches will fall on 29 July following a reduction in the wholesale sales tax (WST) rate from 32 per cent to 22 per cent.
The Australian Competition and Consumer Commission expects that all businesses in Australia affected by the WST reduction – manufacturers, wholesalers, retailers – will reduce prices fully and immediately on 29 July to reflect the reductions in WST, which take effect on that day.
"The WST reduction is the first stage in the abolition of WST and the introduction of the GST.
"To ensure that consumers benefit fully from the tax reduction the new law provides the ACCC with significant powers and penalties," ACCC Chairman, Professor Allan Fels, said today. "The ACCC expects that the prices on these goods will fall from 29 July 1999 with the reduction in WST. Where this does not happen business risks breaching the Trade Practices Act 1974 and incurring steep penalties.
Refunds are available from the Australian Taxation Office for retailers who have already paid the higher rate of WST on their stock on hand. They should therefore reduce prices on July 29, 1999 so that their customers get the benefit of this tax reduction immediately".
Guidelines on when Price Exploitation Occurs
To explain the operation of the new law, the ACCC today issued Guidelines required by new Part VB of the Trade Practices Act 1974 concerning the price exploitation provisions that now apply to business. The ACCC has consulted widely with business and consumers on the development of these Guidelines.
Part VB prohibits price exploitation from the New Tax System changes either from raising prices too high or not reducing them enough.
The Guidelines spell out the ACCC’s view about when price exploitation has occurred.
The Guidelines, in relation to Section 75AU (2) (b), state that:
prices should be reduced
immediately to pass on the full effect of the tax
any increase in price based on the GST should include a full offset for other indirect tax reductions;
no mark-up may be applied to the GST component of price;
prices should reflect only actual, not anticipated, price increases; and
businesses should not take the opportunity to increase the difference between costs and prices in dollar terms (the dollar margin rule).
This translates into a rule that businesses should not increase the net dollar margins on their goods and services as a result of the new tax system changes alone (net margin is defined in unit terms as being equal to the sale price less the cost of goods sold less operating and selling costs).
The Guidelines recognise that businesses may recover legitimate costs of complying with the New Tax System changes.
The ACCC has already completed a comprehensive Australia-wide survey of prices of goods subject to the drop in WST. It will do a further survey of these outlets at a suitable time after the tax changes.
GST Inclusive Price
When prices are displayed, they should be GST inclusive. In other words, the GST component in the selling price is not to be added after the sale, for example, at the cash register. The ACCC has no objection to a business stating how much the New Tax System changes comprise as an element of prices.
ACCC Compliance Strategy
The ACCC has launched its comprehensive Goods and Services Tax surveillance and information strategy. It includes:
a citizen’s hotline number - 1300 302 502 at
local call cost – to report possible price exploitation.
First calls have already been received on this line;
monitoring for the reduction in WST in 112 cities and regional centres across the nation;
issuing Guidelines on Price Exploitation - a guide to inform business on when the ACCC will regard price exploitation to have occurred;
a plain-English News for Business on misleading pricing claims;
two consumer bulletins: the first on what to expect in price reductions under the WST change from 29 July 1999; and the second on what New Tax System changes occur when;
acting against those attempting to rip-off consumers and business through scams and other illegal activities;
building its national GST staff base; and
frequently updated information on the ACCC’s website: http:www.accc.gov.au
"For the cost of a local call from anywhere in Australia consumers and business will be able to report exploitation directly to an ACCC officer.
"The ACCC will use the hotline information to come down hard on those who are clearly profiteering.
"The legislation recognises the impact the New Tax System will have on businesses. It accepts that there may be uncertainty amongst business and consumers and it will recognise that this may lead to honest mistakes.
"An important aim of the ACCC will be to educate business and consumers about the prohibition on price exploitation and to help them comply with the Act.
"The ACCC will not hesitate to use its powers to deal with contravention of the Act.
"When the GST is introduced on 1 July 2000, there will be price rises as well as price falls. It is important that consumers have an informed view of price movements. The ACCC will assist consumers by providing information on where price movements may occur.
However, in the short term (i.e. July 29) we can look forward to price reductions on a range of goods.
"As part of a major awareness and education campaign the ACCC will be informing consumers and business about the new price exploitation provisions. Three bulletins are already on-line and more will follow.
Corporate Compliance Commitments
"The ACCC will invite some of Australia’s biggest businesses to give a verifiable, public commitment not to engage in price exploitation.
"It will expect these businesses to implement systems that can be independently checked to ensure compliance. In return for these commitments the ACCC will publish the names of those businesses in a public register.
"But such a compliance commitment will not protect any business found to be engaging in price exploitation.
"Price exploitation is a serious matter and businesses that engage in it are liable for penalties, per offence, of up to $10 million for corporations and $500,000 for individuals."
"The ACCC can and will issue public notices to prevent price exploitation.
"The ACCC can issue notices which will constitute prima facie evidence in Court that a business may have engaged in price exploitation.
"The ACCC considers that well informed, competitive markets operating in a climate of low inflation and good corporate citizenship generally will ensure that the vast majority of businesses will act fairly and pass through the tax changes.
"But it will vigorously enforce the new law where businesses use the new tax system as a reason to exploit consumers".
"And the ACCC will pay particular attention to pursuing professional advisers who aid and abet their clients to exploit consumers during the transition to the new regime.
The Government expects that consumers benefit fully from reductions in tax rates, where that is the effect of the tax changes. When the GST is implemented consumers should not be exposed to greater than necessary price rises; and there should be no exploitation of consumers.
Allan Fels, Chairman, (02) 6243 1129 or pager (016) 373
Ms Lin Enright, Director, Public Relations, (02) 6243 1108
13 July 1999
Advisers Warned on GST
Numerical Examples of Price Benefits
Reduction in WST 32 Per Cent Rate
Dollar Margins and Percentage Margins, Net of Tax
PROFESSIONAL ADVISERS WARNED ON GST
Tax advisers to businesses, including lawyers and accountants need to be aware that the Trade Practices Act 1974 provides no protection for professional advisers found to be knowingly concerned in, or aiding or abetting, contraventions of the Act by businesses.
The Federal Court may impose penalties up to $10 million for corporations and $500,000 for individuals for breaches of the pricing exploitation provisions.
The ACCC in recent times has been involved in a number of cases where members of the legal profession have been allegedly knowingly concerned in, or aiding or abetting, breaches of the Trade Practices Act.
The knowingly concerned and aiding or abetting provisions are no different in respect of breaches of the new Part VB of the Act covering price exploitation.
The ACCC is especially concerned with advisers who urge that businesses should raise prices in anticipation of the GST. Not only is this bad advice with the potential to earn their customers both penalties and bad publicity, it could also have legal repercussions for these advisers.
The ACCC is aware of some reports of advisers having apparently given inappropriate advice on the price of goods and services following implementation of the New Tax System.
The following simplified examples show the application of the dollar
pass-through rule in the context of:
of the rate of WST from 32 per cent to 22 per cent on July
imposition of the GST on a good or service not previously taxed; and
simultaneous removal of WST and imposition of the GST.
Example 1: Reduction of the WST from 32 per cent to 22 per cent on July 29 1999
the change ($) After the change ($) Percentage change
Cost to retailer
Retailer's mark up
In this example before the tax change the retailer is assumed to apply a 10 per cent mark up of $13.20 to the buying cost of the goods to cover operating costs and provide a margin. A full pass through of the tax reduction of $10 occurs from the wholesaler to the retailer and from the retailer to the customer. The percentage effect on the consumer is less than on the wholesaler because $10 is a smaller percentage of the retail price than the wholesale price.
Example 2: Introduction of a GST with no other tax changes
Before the change ($)
After the change ($) Percentage change
Cost to retailer
GST input credit
Retailer's mark up
This example shows the effect of the introduction of a 10 per cent GST on a good or service not previously taxed. The GST is included in the wholesaler's price to the retailer, but the retailer is able to obtain an input tax credit for this. The retailer effectively adds the GST to the buy-in cost of the goods (excluding the wholesalers’ GST component, which qualifies as an input tax credit) plus the retailer’s margin. There is no margin added to the GST and the retailer’s dollar mark-up is unchanged.
Example 3: Simultaneous elimination of WST and introduction of the GST
Before the change ($) After
the change ($) Percentage change
Cost to retailer
GST input credit
Retailer's mark up
This example combines the approach of the two previous examples by assuming a wholesale tax fall from 22 per cent to zero and the simultaneous introduction of a 10 per cent GST.
This example assumes that before the changes the retailer before the change applied a 10 per cent mark up to the purchase cost of the good that is taxed at the 22 per cent WST rate. The mark up is maintained in dollar terms after the tax change. The net tax change (22.0-11.22 = 10.78) is fully passed on into the final retailer's price to the customer (134.2-123.42 = 10.78). The decline in the retail price as a result of replacing the 22 per cent WST with the GST in this case is 8.03 per cent.
The constant dollar margin rule applies symmetrically so that percentage net margins will rise if costs fall, as in this example, but fall if costs rise as a result of the New Tax System changes. The rule is likely to have the desirable incentive effects of encouraging firms to obtain cost reductions from their suppliers and tightening resistance to supplier cost increases.
(Note that the percentage margin as a percentage of costs exclusive of indirect taxes does not change i.e. $12.2 on $100 = 12.2 per cent.)
(Note that the examples assume no change in other tax-related costs e.g. compliance costs. If a $1 per unit new means in compliance costs is assumed prices could be increased by up to $1).
REDUCTION IN W.S.T. 32 PER CENT RATE
As from 29 July the Wholesale Sales Tax rate for goods listed in Items 4 to 14 of Schedule 5 of the Sales Tax (Exemptions and Classifications) Act 1992 will be reduced from 32 per cent to 22 per cent. These goods include the following:
tape recorders, video recorders, radios,
televisions and stereo players;
watches, clocks, watch bands;
cameras, including video cameras (but not film);
binoculars and opera glasses;
film and slide projectors, viewers and screens;
picture tubes for television receivers;
automatic photo booths;
slot machines for gambling and amusement operated by coins or tokens;
studs, tie bars, tie pins and cuff links;
precious metal goods and plated ware; and
parts for many of these goods.
How much will prices fall on July 29? At this stage there can be no general announcement.
As a broad indication, the ACCC would be looking to retail falls in the price of a television set in the six to seven per cent range (say $40 on a $600 set).
Price falls will vary in percentage amounts from one product to another. This is because the 10-point fall on tax applies to the wholesale price which is only a portion of the retail price. Ten points on 132 is 7.58 per cent but on 145.2 (including the retail mark-up) is 6.89 per cent.
DOLLAR MARGINS AND PERCENTAGE MARGINS, NET OF TAX
The way in which the ACCC Guidelines were expressed in the Preliminary Draft Guidelines were:
"The net profit margin implied by prices and costs incurred in the supply of a particular good or service should not increase as a result of the New Tax System changes alone.
"The net profit margin will be assessed as a percentage of costs or of sales exclusive of indirect taxes, unless a supplier is able to demonstrate that exceptional circumstances justify a different approach to net profit assessment" (page 6).
The rule was expressed in percentage terms, but exclusive of indirect tax.
A simple example of only the Wholesale Sales Tax reduction demonstrates that the application of this rule has the same result as the application of the rule announced in the Guidelines today (July 14, 1999)
Before Tax Change After
Cost of goods
indirect tax $100 $100
Tax $32 $22
Mark-up $13.20 $13.20
Price $145.20 $135.20
inclusive of tax 10% 10.82%
indirect tax 13.2% 13.2%
However, the new manner of
formulating the guideline is simpler, clearer and avoids
discussions of whether percentage margins should be
expressed inclusive or exclusive of tax.