VICTORIAN EMPLOYERS' CHAMBER OF COMMERCE AND INDUSTRY RETAIL COMMITTEE MEETING
26 July 2000 Melbourne
The ACCC and the GST: Where to now?
Dr David Cousins
Commissioner Australian Competition and Consumer Commission
Introduction
The Commission has been, and continues to be, very busy with GST matters. In June last year, legislation was passed which fundamentally reformed our existing taxation system. Key elements of the reform relevant to the Trade Practices Act included the insertion of new Part VB into the Act to provide the Commission with power to prevent consumer exploitation and excessive profit taking in the transition to the new tax system.
One of the Government's primary concerns was to minimise the overall impact of the tax changes on the level of prices. The Government also recognised that there were concerns in the community that businesses could try to take advantage of the tax changes to increase prices beyond that justified by the tax changes alone. The Government has strongly expressed the view that consumers should not be disadvantaged by the tax changes. Prices should reflect reductions in indirect taxes where these occur and consumers should not be exposed to greater than necessary price rises. The Commission was given the role of ensuring that this was the case.
Indeed, for this purpose the Commission has been given a considerable augmentation of resources. The Commission has been allocated more than $50 million over the three years it is responsible for preventing price exploitation and profiteering as a result of the introduction of the new tax system. We have put these resources to good use. We now have a large number of full time staff GST staff making up a GST division, we have contracted 550 people to conduct price surveys pre and post July 1, and we have also established a GST Call Centre, which has 72 staff working various hours.
There have been some misconceptions about what the Commission's role in relation to the GST is, which I would now like to take the opportunity to clear up. The Commission's role is not really a question of having thousands, if not millions of Commission employed inspectors checking prices to make sure that everyone one of them is in compliance with the new law. Rather, the Commission's objective is too achieve a result whereby prices increase by no more than they need too, and where prices fall by as much as they should as a result of reductions in Wholesale Sales Tax and other cost savings related to the GST.
For the most part, the Commission believes that the desired outcome has been achieved. While it is too early to predict the final outcome for consumers, initial results suggest that most businesses have been responsible in setting new prices. A limited preliminary survey conducted by the Commission indicated that 80% of price changes were within the range estimated by the Commission and 97% of price increases were below 10%. The fact that the Commission's price line has not been bombarded with millions of calls is another indication that most businesses have acted responsibly. Further, it does appear that there was widespread anticipation of the GST in pre July 1 pricing.
I will now discuss some of the Commission's activities prior to 1 July 2000 which contributed to the smooth transition to the new tax system, and I will then move on to outline the Commission's GST focus in the coming months.
The Trade Practices Act Amendments
The New Tax System (Trade Practices Amendment) Act 1999 was passed by Parliament last June in conjunction with the tax reform bills. The Act inserts a new Part VB into the Trade Practices Act, relating to price exploitation in relation to the new tax system changes.
Price exploitation occurs if the price for a good or service is unreasonably high, having regard to the new tax system changes alone (so far as they have taken effect) and other matters, including suppliers' costs, supply and demand conditions and any other relevant matter . The term 'unreasonably high' is not defined in the Act, however the legislation (section 75AV) requires the Commission to issue Guidelines about when prices will be regarded as unreasonably high.
In order to prevent and eliminate price exploitation the Commission has been given a range of powerful statutory tools, including the ability to:
· Issue a section 75AW notice where the Commission considers that a corporation has engaged in price exploitation. This notice creates the presumption that price exploitation has occurred in any ensuing Court proceedings.
· Issue a section 75AX notice specifying a maximum price that may be charged for a good or service during a specified period. This notice will aid in the prevention of price exploitation.
· Issue a section 75AY notice requiring a business to provide certain information to the Commission.
· Monitor prices to assess the effect of the new tax system changes, and to investigate cases of price exploitation.
The new law is very strong, with heavy penalties of up to $10 million per offence for a body corporate and $500,000 per offence for any individual executive involved.
The Guidelines
The Act required the Commission to formulate Guidelines about what it considers constitutes Price Exploitation. The Commission must have regard to these Guidelines when considering whether to issue a price exploitation notice or a notice to aid in the prevention of price exploitation; and the Court may have regard to the Guidelines in any proceedings relating to Price Exploitation under sections 76 and 80. The Guidelines provide greater certainty to business about the administration of the law by the Commission.
The Guidelines were issued in July 1999. They were updated this year to reflect an amendment to the Trade Practices Act, to clarify a number of policy issues raised with the Commission since the Guidelines' initial release last July and to address some new issues. The update did not amend the underlying principles of the Guidelines. They continue to provide broadly applicable, economy wide, principles.
The guidelines are very simple and clear, and can be encapsulated by the following simple rules:
· prices should be reduced immediately to pass on the full effect of the tax reductions;
· any increase in price based on the GST should include a full offset for other indirect tax reductions;
· no markup should be applied to the GST component of price;
· prices should reflect only actual, not anticipated, tax increases;
· businesses should not take the opportunity to increase the difference between cost and prices in dollar terms (the dollar margin rule); and
· Prices should not rise by more than 10% as a result of the new tax system changes.
Misleading and Deceptive Conduct
The Commission has been working closely with businesses and many consumer groups to ensure that businesses are particularly careful to minimise misleading and deceptive claims and therefore minimise consumer confusion during the transition period. The Commission's existing powers in relation to misleading and deceptive conduct are particularly relevant during the transition to the new tax system. In addition, new legislation has been passed which give the Commission power under Part VB to deal with misleading and deceptive conduct specifically related to the new tax system changes.
Scope of the Commission's Activities In Relation to the New Tax System Prior to July 1
Prior to July 1, the Commission's focus was on promoting compliance with the new law. This involved on-going communication with both businesses and consumers to assist business and consumers to understand their rights and obligations under the new legislation and Guidelines.
Education and awareness
The Commission conducted a comprehensive education program in recognition of the benefits of circulating as much information as possible, such as limiting confusion and inadvertent breaches of the law.
The Commission commenced its educational strategy with a new series of bulletins. 'News for Business' deals with emerging business issues and 'GST Talk' addresses consumer issues.
The Commission also worked closely with the Australian Tax Office in the roll-out of their publications and seminars. We also worked closely industry associations and other stake-holders to identify opportunities to provide tailored business material. In addition, we worked with industries that are dealing with particular issues to establish compliance strategies that are consistent with the Guidelines.
I would like to talk about the measures that the Commission took in relation ensuring that two key stakeholders, consumers and small business, were as informed as possible for the change over.
Small Business
The Commission is acutely aware of the crucial importance of small business to a smooth transition. Almost every supply chain contains a small business. Small business has less resources to seek advice and assistance during the transition and therefore are a risk area for not passing on savings. If one part of the supply chain fails to pass through savings, and just adds 10 per cent, the end result is higher prices to consumers.
The Commission recognised the potential for some smaller businesses, in the face of no affordable alternative, to just add 10 per cent. To help prevent such an undesirable and probably illegal action, the Commission released a 'small business pricing kit' to help small business pass on cost savings as a result of the new tax system changes.
In essence, the small business kit assisted small business to determine which costs should rise and fall and by how much.
Consumers
Consumers are obviously a key stakeholder for the Commission. It was crucial that consumers were informed about what to expect as a result of the new tax system changes. Informed consumers assist the market to function properly by deflating high inflationary expectations.
To this end, the Commission released a range of expected price movements for 185 common household goods and services as a result of the new tax system. A range of estimates was provided to take account of the differing dollar margins applied by businesses.
Using the price guide, Australia's 19 million consumers can gauge what price changes due to the new tax system are. Informed consumers are able to be vigilant, to shop around for the best, and fairest, price and accurately identify where price exploitation is likely to have occurred.
The price guide also assisted business to set prices that are less likely to attract consumer and regulatory concern.
Public compliance commitments
A further part of the Commission's compliance strategy was to invite Australia's biggest businesses to give a public commitment that they complied with the Guidelines. These are voluntary commitments that are in themselves not enforceable at law. The focus on big business is deliberate. In many instances big business is able to influence market prices and can provide a lead for smaller businesses. Public compliance commitments provide an assurance to the community that no unfair advantage has been taken of the new tax system changes to increase margins.
The Commission established a public register for organisations it deemed to have adopted acceptable public commitments. There are currently 33 companies on that register. The Commission now has detailed pricing methodology from these major companies. This will help to ensure that consumers receive the full benefits from falls in Wholesales Sales Tax and other cost savings under the new tax system.
Another important part of the companies' PCC is that the companies will provide the Commission with cost-saving information at least every six months so that the Commission can monitor savings achieved during the transition to the new tax system.
Registration of PCCs does not constitute endorsement of any specific price changes made by firms, nor does it preclude the Commission from taking enforcement action under the price exploitation provisions of the Trade Practices Act if the circumstances warrant.
GST Hotline
The Commission launched its consumer hotline on 14 July last year. The number is 1300 302 502. The GST Price Line gives the 19 million consumer watchdogs an avenue to seek further information and to report on any illegal activities of business. We are also handling complaints and enquires by e-mail through our website at www.accc.gov.au
The Commission has received more than 30 000 calls since July 1, which is well within the capabilities of the call centre.
The Commission is in the process of investigating the complaints it has received since July 1. Data gathered will help the Commission to quickly target those areas of the economy where exploitation may occur.
Price monitoring
We are supplementing the information from the Hotline with price monitoring and survey activities.
As part of its responsibilities the Commission has surveyed prices in connection with the reduction in the WST rate from 32 per cent to 22 per cent on 29 July 1999. The results of this survey showed that 87.4% of the prices checked by the Commission had been reduced, with follow-up surveys showing that 98% of prices had been altered.
A more comprehensive approach to price monitoring is being undertaken for the 1 July 2000 changeover. The coverage of the ACCC's monitoring, through specially-commissioned retail surveys and access to existing product-specific price databases, includes:
· most consumer items now subject to 22 per cent WST (eg 'browngoods' such as TVs, stereos);
· about 400 food and household items purchased in supermarkets;
· beer and cigarettes;