STATHAM ANALYSIS OF KPMG REPORTS FOR TRANSPORT WORKERS UNION 13TH NOVEMBER 2015 PREPARED BY: BRAD STATHAM B.Com CA CHARTERED ACCOUNTANT

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1 c STATHAM Accountants Statham Accountants Pty Ltd ABN Phone ANALYSIS OF KPMG REPORTS FOR TRANSPORT WORKERS UNION Fax PO Box 714 Ormeau Qld 4208 PREPARED BY: BRAD STATHAM B.Com CA Unit 13/18 Blanck St Ormeau Qld 4208 CHARTERED ACCOUNTANT 13TH NOVEMBER ~ Chartered ~ Accountant Liability limited by a scheme approved under Professional Standards Legislation

2 Scope of review I have been engaged by the Transport Workers Union (TWU) to provide analysis of the following KPMG reports as published by the Road Safety Remuneration Tribunal as research material: KPMG guidance material- Cost model outputs (single hourly rate) KPMG guidance material- Cost model outputs (per hour and kilometre rates) KPMG detailed guidance material KPMG road transport contractor driver cost model (Excel workpapers) KPMG response to questions regarding Research project on minimum payments for road transport contractor drivers This report has been prepared for the TWU based on the information from the publications listed above, to determine whether the methodology and cost inputs used in the KPMG reports are appropriate, complete, accurate and relevant. This report has been prepared for this purpose only, and should not be used by any third parties, or substituted for different purposes, as it contains analysis which is specific to the KPMG reports listed above. The purpose of the report is to identify the strengths and weaknesses in the financial analysis of the KPMG reports, and where appropriate provide commentary on what I believe would be a more appropriate measurement. The procedures I have performed have been limited exclusively to those related to the purpose of this report, ie to identify the strengths and weaknesses in the financial analysis of the KPMG reports and determine whether the cost model is appropriate, complete, accurate and relevant. As a result: no formal audit has been conducted on the KPMG reports; and our engagement cannot be relied upon to disclose irregularities including fraud or misrepresentation of information which may be contained in these reports and calculations. This engagement will be conducted in accordance with the relevant standards and ethical requirements of The Institute of Chartered Accountants in Australia. Our report will be prepared for distribution to the TWU official representatives. The report is not available for distribution to any third party without the prior written consent of the author. We disclaim any assumption of responsibility for any reliance on our report to any person other than those parties mentioned above, and for any purpose other than for which it was prepared. Relative Responsibilities The conduct of this engagement in accordance with the standards and ethical requirements of The Institute of Chartered Accountants in Australia which means that information acquired by us in the course of the engagement is subject to strict confidentiality requirements. That information will not be disclosed by us to other parties except as required or allowed for by law or professional standards, or with express consent of the relevant parties. Our files may, nowever, be subject to review as part of the quality control review program of The Institute of Chartered Accountants in Australia which monitors compliance with professional standards by its members. 2

3 Overall summation of the reports It is my opinion that KPMG have prepared a comprehensive analysis of the costs to operate a truck as an owner driver in Australia. I have however, identified a number of omissions or adjustments which I recommend require amendment to more accurately reflect current market prices. It is my opinion that once these amendments have been included in the KPMG cost model, the amended costing and resultant rates could be used as the basis for the determination of a minimum rate for owner drivers. The KPMG reports are the most comprehensive analysis provided to the RSRT to date. Approach to modelling It is my opinion that the methodology adopted by the KPMG reports is appropriate in that the cost model seeks to calculate the following individual components to determine the total costs of operation: Cost of labour- as per Award standards Costs of owning and operate the vehicle- separated into categories of trucks Cost of owning and towing a trailer (where the trailer is owned by the contractor driver) Cost oftowing a trailer (where the trailer is provided by the hirer of the contract driver) Cost of operations in the Northern Territory, Tasmania and regional Western Australia. The cost model in it's current form seeks to calculate the costs to operate a vehicle on a cost recovery basis only. There has been no profit margin currently included in the KPMG cost model. I recommend the inclusion of a profit margin. Key inputs requiring adjustments The following is a list of key inputs which I recommend require adjustments to be made to more accurately reflect the current market prices: Application of GST in the KPMG cost model; Appropriateness of depreciation expense; Labour hourly rates and overtime; Interest rates for financing; Average fuel price; Fuel tax credit rate; Representative truck selection for each category; Truck purchase prices; Vehicle registration costs; Sickness and accident insurance premiums; Average tyre prices; Administration costs and other costs; Fuel consumption. In addition, the following areas, whilst not strictly being pncmg issues, require further review as the assumptions in the KPMG cost model have an effect on the outcome of the rates: Costs spread over 48 weeks per year; Average hours of work per week; Long distance- assumed number of hours worked per week; Lc>'lg distance- assumed kilomet es t avelled per year; Effective life of vehicles; Adequate profit margin. This reports seek to address these issues one-by-one. 3

4 1. GST GST treatment of expenses in the KPMG cost model I concur with the report prepared by Ernst & Young, and comments made by Mr Jauncey, that all costs in the KPMG cost models should be reported on a GST exclusive basis ie the amounts applied in the cost model should not include GST. In my experience the majority of owner drivers are registered for GST as their annual turnover is generally greater than the registration threshold of $75,000 pa. If the owner driver's annual turnover is less than $75,000 per annum, they may also choose to voluntarily register for GST to enable them to claim fuel tax credits. It is appropriate that the KPMG cost model report all expenses on a GST exclusive basis as the owner driver would receive an input tax credit for the GST component of any expense incurred which attracts GST. As a result, this input tax credit, whilst paid by the owner driver at the time of purchase, is refunded to the owner driver via the lodgement of their monthly/quarterly Business Activity Statement. The GST component is merely a pass through tax to the end consumer. It is appropriate therefore that the resultant rates from the KPMG costing models for each category of vehicle and driver will not include GST in the final hourly and kilometre rates. If the owner driver is registered for GST, the owner driver will add the GST to the appropriate rate for their category of vehicle, when they charge the hirer for their services. If the owner driver is not registered for GST, they will not charge GST to the hirer. This issue needs to be rectified as currently many of the non-labour costs in the KPMG cost model are overstated by the GST component. 2. DEPRECIATION Depreciation expense should be eliminated from the KPMG cost model I concur with the report prepared by Ernst & Young, and comments made by Mr Jauncey, that the current method of calculating the financing cost in the KPMG report overstate the cost of financing by including depreciation as well as the truck repayments. I concur with the Ernst & Young report that 'depreciation is a non-cash item that is an accounting entry rather than a movement of actual cash'. It is my opinion that only the truck repayments should be included cost model as the financing costs, not also depreciation. The depreciation component should be eliminated from the calculations. Inclusion of the truck repayments only, more accurately reflects the cash outflows from the business. It is these cash outflows that should be captured by the cost model with an adjustment provided for in the calculations where the residual financing value at the end of finance term does not accurately reflect the actual trade in value of the vehicle. In my opinion, the inclusion of depreciation in the cost model is only appropriate in circumstances where the truck is purchased outright by the owner driver ie. not financed. In these instances it would be appropriate to replace the truck repayment, with depreciation over the effective life of the vehicle as well as an interest compo.1ent equal to the rate of retu. n O capital invested. In my experience, the majority of owner drivers finance their truck purchases and therefore depreciation should be removed from the KPMG cost model, and only the truck repayments be used in the calculation of financing costs. 4

5 3. LABOUR COSTS Hourly and km rates need to be updated The KPMG cost model uses casual rates of pay per hour as per the Award conditions for labour which I agree is an appropriate method. The labour component incorporates casual loadings of 25% for local work and 15% for long distance work as per the relevant Awards. The labour rates used in the KPMG cost model are currently out of date and need updating with the hourly rates effective from the 1st July Appendix item current labour rates and classifications shows the current labour rates from the respective Awards, effective from the 1st July Casual versus full-time rate for labour It is appropriate to apply the casual rate conditions in accordance with the relevant Award, rather than the full-time rate, because the proposed orders do not seek to mandate conditions on the hirer to offer permanent work to the owner driver, nor does it propose a minimum number of hours per week, nor does it propose an earnings safety net, nor any guaranteed minimum income per week. Most owner driver's arrangements confer no obligation on the hirer for a minimum allocation of work, but rather the hirer offers work to the owner driver that it has available to it. These conditions are more akin to a casual relationship between the hirer and the owner driver, and therefore it is appropriate that the casual rate of labour has been applied. Overtime rates for hour in excess of 38 hours per week The total labour costs in the KPMG cost model assumes the casual rate of pay for each 45.2 hours per week. The KPMG cost model in my opinion has erroneously omitted overtime rates of pay at xl.5 times for the hours worked over 38 hours per week (ie in the model an average of 7.2 hours per week should be at xl.5 time the casual hourly rate of pay). Mr Jauncey has made various comments that he does not believe overtime rates are warranted for an owner driver. Mr Jauncey states, number one, I don't think it is appropriate to compare an owner driver who is utilising a vehicle for 45.2 or 46 hours a week or whatever the number that is selected is to an employee who works in a single job for a single employer and gets overtime. There may be employees who choose to work multiple jobs for different employers, to increase their weekly earnings. They won't get overtime. Someone can do 38 hours a week for Woolworths and then do another five or 10 hours of casual or part-time work for a different employer. There is no overtime there, and is actually in the untied or long-distance sector, if we're going to be making analogies, those are the closer analogies. In addition, as we've spoken about, vehicle utilisation and employee hours aren't necessarily - well, vehicle utilisation and driver hours aren't necessarily the same. People might be working 40 hours with a primary driver and 10 hours with a substitute driver. Either way the driver's labour cost is already adequately compensated in the model and in that circumstance, we say the overtime comparator is an incorrect comparator or with an employee. In response to Mr Jauncey's comments, the function of the labour component of the cost model is to adequately compensate the driver for his/her labour with reference to the average number of hours worked per week (in the case of the KPMG cost model 45.2 hours per week). The most reliable measure of this labour cost is the relevant industry Award for this occupation. These Awards set out the rates of pay and conditions for an employee driver. Whilst I acknowledge that an owner driver is not an employee, nevertheless the Award remains the most reliable measure to gather an appropriate rate of pay. It is important to note if the owner driver was not able to undertake the driving task themselves, and employed a driver in their truck, the owner would be required to pay wages to their driver in accordance with the Award conditions, which requires 38 hours at normal time as well as overtime rates for hours worked over 38 hours per week. As the KPMG cost model is based on an average of 45.2 hours work per week rate, there 5

6 ought to be 7.2 hours of overtime included at x1.5 times. A failure of the hirer to pay overtime rates means the owner driver is getting short-changed for their labour from the hirer, relative to an employee driver. For example, in circumstances where the owner driver employs a driver, the amount of wages paid to this driver will be $4,282 more per annum than the amount provided for in the KPMG cost model for labour (for a category C6 driver) if overtime rates are excluded. This money has to come from somewhere. It is likely in these circumstances that the short-fall will have to be found by the owner driver by reducing other expenses, such as maintenance costs. It does not appear equitable that overtime rates be excluded from the labour calculations in the cost model when an employee driver would receive $4,282 p.a. more than an owner driver for their labour, given the same number of hours worked per week, the same hourly labour rate, the same category of driver, operating the same size truck, for the same hirer, delivering to the same customers. To Mr Jauncey's comment about employees working for multiple employers, my experience with my owner driver clientele is that the majority are contracted exclusively to one hirer. I also have a lesser number of owner driver clientele who work for predominately one hirer, and a minority of owner drivers who I would consider to be freelance owner drivers (which is closer to Mr Jauncey's analogy of working for various employees during the week). These freelance owner drivers represent only a small proportion of my client base and in my experience do not represent the majority of the industry. Mr Jauncey states, Secondly, it's got to be remembered that contractor drivers have advantages which are not available to employee drivers and we need to be careful about trying to push the analogy between an employee and a contractor too far. A contractor driver has the ability, most likely to income split through company arrangements or through various other, quite appropriate taxation structures and mechanisms which are simply not available to employees. That also includes ability to take, quite appropriately and lawfully, a range of deductions which are not available to employees. In response to Mr Jauncey's comment about income splitting. An owner driver's ability or inability to split income or claim certain deductions via a corporate structure has absolutely nothing to do with the hirer's obligation to pay an appropriate rate for labour. There is an inference here that the hirer is somehow facilitating an additional fringe benefit to the owner driver by virtue of a corporate structure. This argument put forward by Mr Jauncey is a red herring and I dismiss it entirely. The truth is these corporate structures exist to ensure the hirer has no direct obligation to pay superannuation and Worker's Compensation premiums on behalf of owner drivers. Mr Jauncey states thirdly, another point has got to be remembered. Once a contractor driver hits the relevant assumed utilisation hours, whether that be 45 or 46 or some other number, all cost recovery has already been achieved in respect of all fixed capital outlays, and what that means is that the component of the rate which is attributed to fixed capital outlay then becomes effectively pure profit once the assumed utilisation hours have been met. Now, when that component is added to the labour cost, what we have is contractor driver effectively moving on in some cases under these rates, especially for the heavier movers. The contractor driver effectively moves on to triple time of three- you know, triple time and a half on the labour cost component, once we hit the 46 or the 47 hour, and that more than makes up for any lesser or non-overtime component in the hours between 38 and 45, or 46 or whatever is chosen. Of course, what we also need to remember is that if the average vehicle weekly utilisation is being taken - I'm sorry, I will rephrase that. If, as we have proposed, the assumed vehicle utilisation hours are taken as some sort of average for what truly happens in the supermarket distribution sector or in another relevant sector, then in any given week, 50 per cent of contract drivers would be at or exceeding that average, and what that means is that in any given week, if we have truly averaged 50 per cent of contract drivers doing the relevant work, we will have gone into effectively the triple time of triple time and a half payment outcome. In response to Mr Jauncey's comments about assumed extra wage compensation when an owner driver exceeds 45.2 hour per week, his logic is correct in so far as once an owner driver reaches 45.2 hours per week, 6

7 the fixed costs have been covered. However what Mr Jauncey has failed to grasp is that the KPMG cost model works on an average of 45.2 hours per week. So for every week the owner driver works 50 hours, there is also a week where the owner driver works 40 hours. In the week the owner driver works 50 hours he/she has more than covered his fixed costs, however in the week he/she worked only 40 hours, he/she has been unable to meet their fixed costs. The use of an average of 45.2 hour per week in the KPMG cost model compensates for these overs and unders. The KPMG cost model is not a minimum of 45.2 hour per week. It is an average of 45.2 hours per week. As a result, it is the averaging mechanism in the cost model which dictates that there is no additional windfall to the owner driver under the cost model, which could be magically re-categorised as compensation for overtime. It must be noted that cost models, including the KPMG cost model, are not designed to calculate for situations outside of the assumed parameters on the cost model. The KPMG cost model is based on an average of 45.2 per week. Various interested parties to the RSRT have attempted to argue the point raised by Mr Jauncey in relation to owner drivers working more than 45.2 hours per week should get paid less for the hours worked after 45.2 hours per week because their fixed costs were recovered within 45.2 hours. Whilst this argument is logical, it is not relevant to the KPMG cost model and the current Draft Order, because the KPMG cost model is based on an average of 45.2 hours per week, not a minimum of 45.2 per week, and additionally as far as I am aware the Draft Order is not proposing a minimum 45.2 hours of work be paid per week by the hirer to the owner driver. Casual loading on overtime Following on from the omission of the xl.s overtime rate for 7.2 hours per week, the calculation is also missing the casual loading on overtime in accordance with Clause 12.5 (d) of the Award: (d) A casual employee shall be paid for all overtime worked at overtime rates specified in clause For each hour of overtime worked a casual must also be paid 10% of l/38th of the minimum weekly wage specified for their classification in clause IS-Classifications and minimum wage rates. A casual employee will not receive the 25% casual loading referred to in clause 12.5(c) whilst working overtime. Example: Assuming the hourly rate is $10 per hour, a casual employee would be paid $12.50 per hour for ordinary hours of work and would be paid according to the following methodology when working overtime: D Time and a half-a payment of $15 plus 10% of $10, as the hourly rate, giving a total payment of $16. D Double time-a payment of $20 plus 10% of $10, as the hourly rate, giving a total payment of $21. Allowances The overnight travel allowance for long distance drivers has not been included in the calculation of the labour component. Current rate is $38.43 per occasion. The inclusion of the overnight travel allowance could add an additional cost of up to $9, p.a. It is my opinion that this is a significant issue which needs to be addressed Loading for public holidays The KPMG cost model calculations are based on operating the vehicle for 48 weeks work per annum (52 weeks less 4 weeks annual leave for the driver). If the model is calculated on this basis then loadings should be applied to labour cost for work on public holidays, as these parameters (48 working and weeks and 4 weeks holiday) infer the owner driver is working on the public holidays. If it is the intention to exclude loadings on labour for public holidays (because it is assumed the owner driver does not work public holidays), then the number of weeks the truck works per annum should be reduced by the number of public holidays per annum. As a result the total weeks worked in the cost model under these circumstances would be reduced to 46 weeks per annum, from 48 weeks per annum. 7

8 This is important because number of hours worked as an effect on the hourly rate determined by the cost model. The final hourly rate is determined by total costs I hours worked per annum. An alternate methodology, and the one I see frequently, would be to have the truck available 52 weeks of the year, and include the cost of a relief driver for the four weeks the main driver is on holidays. In this case, the total cost to operate the truck would be spread over 52 weeks of the year. This would give a lower hourly rate as the fixed costs are spread over more hours per annum. 4. INTEREST RATES Interest rates Interest rates on truck and trailer financing have reduced since the preparation of cost model by KPMG. Refer to appendix for current interest rates. I have included two current rate cards. One from ANZ and other from Westpac as a comparison. The table below demonstrates the reduction in the current interest rates. It is appropriate to update the KPMG cost model with the current interest rates. The amendment of the interest rates will have an effect on the financing costs for each asset category. 5. FUEL PRICES Diesel Fuel Rebate The KPMG report contained the now outdated diesel fuel rate of cents per litre. The KPMG cost model needs be updated to the current rate of cents per litre, effective from 1 51 August Refer to appendix for current fuel tax credit rates. Use of average fuel price data from Australian Institute of Petroleum The use of data from the Australian Institute of Petroleum (AlP) is an appropriate source from which to obtain average fuel prices. The average fuel prices reported by AlP are presented on a GST inclusive basis. The KMPG cost model should report these average fuel prices on a GST exclusive basis by removing the GST component. AlP produce an annual average price report for diesel pump prices across each State as well as Nationally, on both a calendar year basis and a financial year basis. I recommend that the appropriate average price to use in the KPMG cost model is the State average amounts (adjusted to exclude GST) from the preceding full financial year (2014/2015 finarcial ~ear). It is more appropriate to use the financial year average rather than the calendar year average as most cost models are revisited and updated on a financial year basis, not a calendar year basis. I have no objections, in principle, to the interested parties and organisations devising a mechanism to re-adjust fuel prices if there was a particularly substantial movement in the price of fuel. Comments by Mr Jauncey mentioned a movement of 5 per cent had been discussed. 8

9 6. REPRESENTATIVE TRUCKS AND PURCHASE PRICES The finance costs used in the KPMG reports are calculated based on the cost of the vehicle for each category, the financing term, the annual interest rate and residual value. Truck categories and purchase prices I do not agree entirely with the type of vehicle selected for each category, and as a result, the purchase prices quoted for these trucks. As the categories are separated based on the gross vehicle mass (GVM) of the vehicle, it would be my recommendation that the vehicle selected in each category have the GVM relevant for maximum threshold within that band. For example, the vehicle for category C2 has a GVM of between 4.5 tonnes and 9.0 tonnes, therefore the truck selected should have a maximum GVM of 9.0 tonnes. The KPMG cost model has used a representative truck with a maximum of GVM of the midpoint within the band, and not the maximum GVM for the band. It is my opinion that this not appropriate as it results in a lesser value truck selected, and therefore an understatement of truck purchase prices, for categories LVC- C4 inclusive. Below is a table detailing what I consider more appropriate representative vehicles per category: C8 mover Kenworth T409 6x4 prime mover C9 Kenworth T409 8x4 prime mover mover The KPMG cost model assumes that the representative truck for each category is satisfactory for both long distance and local work. In the real world however this is not the case. In my opinion it would be more appropriate to have different trucks for local and long distance operations in categories C6, C8 & C9. For example, it is unlikely an lveco Acco 8x4 would be used for long distance work as it is generally not suitable for this type of application. It would be more appropriate to operate a Fuso FVSl for this type of work. Similarly with category C8 trucks (bogie drive prime mover). I concur with Mr Jauncey's comments that using a T409 Kenworth on loc.dl work is not the most approfjriate representative vehicle. For lo.. al work a new truck of lesser value should be included for the C8 category which would be more in alignment with what is actually being currently used. I have proposed a Volvo FM13 as a suitable representative truck. I also provided in the appendix details of a Mercedes Benz of similar specification. Similarly, it should be noted the C8 representative truck is not suitable for a road train applications. The gross combination mass limit of the T409 Kenworth means it is too small as a road train prime mover. A T409 Kenworth is suitable for single trailer and b-double operations only. I proposed a more suitable representative truck for road train application is a Western Star with a suitable GCM in excess of 110 tonnes. The purchase 9

10 price of a Western Star for this application is greater than the purchase price used in the KPMG cost model for the T409 Kenworth. I have sourced new truck prices for categories of vehicles including LCV to C8 to compare them with the prices quoted in the KPMG cost model. Refer to the appendix attached for representative vehicle types including for each category a recent new truck price/quote, specifications of representative truck, and tyre prices for representative truck. Where I was unable to source a new truck price for the representative truck, I have used an alternate truck brand with similar specifications as the representative truck. I have been unable to source a quote for a C9 category vehicle From my analysis it appears that the vehicle purchase prices in the KPMG cost model for categories LCV, Cl, C2, C6 and C8 are understated. And the purchase prices for categories C3, C4, CS and C7 are overstated. These mis-statements in the truck purchase prices have an effect on the financing costs in the cost model. Due to time constraints I was unable to provide the same analysis for trailer categories. 10

11 7. FINANCING COSTS Use of four year old truck as representative purchase price The KPMG report assumes the representative truck purchased is a four year old truck for each category. The justification for using this methodology seems to be that it has been used in the Victorian cost model. I am not aware of any additional evidence to justify the use of a four year old vehicle as an appropriate purchase price to use in the KPMG cost model. In my experience there are certain inherent shortcomings in the adoption of a four year old vehicle, especially when calculating for the long distance sector. In my experience with the owner drivers in long distance sector, a typical representative C8 truck would already have 600,000-1,000,000 kms on the clock at four years old. Under the KPMG cost model it is assumed this truck will then be kept by the owner driver for an additional five years. By the end of this finance term the truck will be nine years old with total kilometres travelled in the order of some 1.5 million to 2 million kilometres. It is highly probable that this truck would need the engine, diffs and gearbox rebuilt at least once during this ownership period. It appears the KPMG cost model makes no provision for these large extraordinary expenses. In my experience as an accountant advising owner drivers, I would not recommend an owner driver purchase a used truck with 600,000-1,000,000 kms on the clock with a view to holding that truck for a further five years, doing long distance work. My experience tells me that this truck will become uneconomically viable to operate as the repairs and maintenance costs over those first five years of ownership by the owner driver will blow out due to the cost to rebuild major items, as well as many smaller items needing to be fixed to maintain this truck. It is these smaller items which are more unpredictable to determine when they may occur and in what frequency, and when added to the cost of engine, gearbox and diff rebuilds, add a significant cost to the owner driver. In addition to the actual costs of these repairs, there is also the opportunity cost of having the truck off the road to undertake these repairs. It is the unpredictable nature and size of these expenses which would lead me to advise against purchasing such a truck for long distance work. I have first-hand experience with owner drivers who have brought trucks like this, and many have struggled to stay afloat and some have gone bust. Cost of major rebuild items on a 4 year old truck If it is determined that the use of a four year old truck is appropriate by the Tribunal (which I do not agree with), then the cost to rebuild the engine, diffs and gearbox ought to be added to the estimated price of the truck at year four, and that this aggregated price be the price used as the total truck purchase price for determining the annual financing costs. By not including these items, the KPMG cost model has not adequately made provision for these large extraordinary expenses for this representative truck. By not making provision for these costs, the KPMG cost model is making the assumption that the owner driver will not incur these costs during their ownership period. This is not a valid assumption given the age and condition of a four year old truck. I have provided three examples of used 2011 T409 Kenworths. These trucks have travelled between 875,000 and 987,885 kms. Prices range from $115,000 to $167,500. As you can see from the descriptions and prices, the two trucks with rebuilt engines command the higher prices. 30% residual not indicative of current market conditions for purchase of 4 year old prime mover The assumed tinancing term in the KPMG cost model is five years, with a 30% residual. I have been advised by my finance broker colleague that at least one of the largest truck financiers in Australia would be unlikely to offer these finance terms on a four year old prime mover doing long distance work. With nil deposit as assumed in the KPMG cost model, this financier would not accept a 30% residual on this truck. It is more likely to be financed at a lower residual, or no residual basis. My preferred method of calculating truck financing costs My preferred method for determining the financing costs would be to calculate the cost of financing for a brand new truck, not a four year old truck. For long distance sector it would be more practical to assume a 11

12 useful life of say five or six years, as this is typically the ownership period for long distance trucks. In my experience the economic life of prime mover in long distance applications is around 1 million kilometres which equates to five or six years average use. For local work I would assume a useful life of ten years. As a local truck does less work than long distance truck, it is my experience that local trucks have a longer economic life. It is an important consideration that many fleets impose contractual obligations on owner drivers to update their trucks. I have many owner driver clients who are required, under the terms of their contracts, to provide a truck no older than ten years of age. When their truck reaches ten years of age, they are required to purchase a new truck to fulfil the terms of their contract. For local trucks I would assume a useful life of ten years. The cost of financing would be calculated based on the monthly repayment of a brand new truck (excluding GST), financed over five years with a 30% residual at the current interest rate for the first five years. The residual would then be re-financed over a further two year period (this is the most common method to deal with the residual in circumstances where the truck is being retained after the initial finance period ends). At the end of the ten year ownership period, the truck will have a trade-in value. This trade-in value will then need to be clawed back as this will be a net cash benefit to the owner driver albeit at the end of the effective life. As a result, the cost of financing per annum over the ten year ownership period will be (cost of repayments for first five years, plus the cost of repayments to re-finance the residual over two years, less the trade in value of truck at the end of ten years) divided by 10 years. 12

13 8. REGISTRATION & INSURANCE Truck and trailer registration costs There appears to be some errors in the amounts quoted for truck and trailer registration costs in the KPMG cost model. Each State charges registration and CTP insurance differently. I have conducted a sample of the Queensland annual truck and trailer registration costs using the online equate system. The amounts quoted in the KPMG cost model were incorrect for all categories of truck and trailer represented. Refer to appendix for the sample truck and trailer registration quotes sourced for Queensland only. Below is a table demonstrating the variance in amounts for Queensland only: LCV Toyota Hilux $915 $ C1 Mercedes Benz Sprinter 310 CDI $915 $1, C2 lsuzu NPR 300 Medium $915 $1, C3 lsuzu FSD 700 S Long $915 $2, C4 cs lsuzu FTR 900 Long lsuzu FVR 1000 Medium $915 $915 $2, $2, C6 lveco Acco 8x4 $915 $2, C7 lveco Stra lis Ati 450 $1,233 $2, C8 - Single trailer rated me mover Kenworth T409 6x4 $9,843 $6, C8- B-double Kenworth T409 6x4 $11, C8- Road train Kenworth T409 6x4 $11, C9- single trailer Kenworth T409 8x4 $10,825 $6, C9- B-double $12, T1 Converter dolly, 2 axle, rigid $1,166 $1, T2 2 axle, rigid connector, $1,166 $1, T3 Dog trailer, 3 axle, rigid connector, box $1,737 $1, T4 Low loader, 3 axle, prime connector $1,166 $1, TS T6 Semi trailer, 3 axle, prime connector, curta insider B-double trailer combination, 6 axle, $1,737 $1,737 $1, $4, l7 r, 3 axle, prime connector, unit included :;>1,737 $1, The KPMG cost model does not appear to adequately address the issue that a C8 & C9 prime mover is subject to different registration costs depending on whether it is registered to tow a single trailer, or whether it is registered to tow a b-double or road train. Registration costs for C8 & C9 prime movers are higher when registered forb-double and road train use. This needs to be updated in the KPMG cost model. I also make the observation that the registration costs in the KPMG cost model do not currently include annual inspection fees for Queensland (currently $ p.a.). In Queensland these costs are paid separately to the 13

14 vehicle registration costs and relate to the annual safety inspection. I understand these costs are incorporated into the registration fees in NSW. I am unsure about the process in other States. If they are levied in addition to the vehicle registration fees, then they should be added to the cost of registration in the KPMG cost model. Due to time constraints I conducted a sample of Queensland only. Based on my observations from this sample, I recommend a full review of all State's registration costs to ensure they are accurately updated in the KPMG cost model. Truck and trailer insurance Due to time constraints I have been unable to independently source truck insurance quotes for each category of vehicle. I was unable to determine from the source documents provided by KPMG what assumptions has been used for the truck insurance quotes. Broadly, the amounts used for comprehensive truck insurance for each category are within the anticipated range of what I would expect. Sickness & accident insurance The premium for sickness and accident insurance is overstated in the KPMG cost model. A more appropriate type of insurance may be income protection insurance, as a substitute for sickness and accident insurance. Income protection insurance covers the person insured up to 75% of their gross wages. As an owner driver is generally not covered for Workers Compensation insurance it is appropriate that they take out income protection or personal sickness and accident insurance as a substitute for Workers Compensation insurance. To this end I have obtained insurance quotes for income protection insurance. Refer to appendix for income protection quotes. Income protection insurance covers the person insured for up to 75% of their gross income. The cost of the premium is dependant on a number of factors including gross wages, age, employment status, smoker/nonsmoker, occupation etc. As the premium is dependent on the gross wages of the person insured, it would be more appropriate if this cost was re-classified as a labour on-cost, not a fixed dollar amount. This would be more appropriate because under the cost model, the higher the category of driver, the more income is earned, and therefore the higher the sum insured and higher the income protection premium will be. Refer to the appendix for income protection quotes which demonstrate the insurance premiums increasing with higher sum insured. The sum insured has been determined for each category of labour to be 75% of the annual gross income. The gross income was calculated based on 45.2 hours per week (including overtime rates) for 48 weeks per year. 14

15 Income protection costs are broadly in line with what Workers Compensation premiums would be for an employee. In Queensland Workers Compensation premium costs are calculated as 4.796% of the gross wages including overtime plus superannuation, in accordance with the Workcover Queensland published rates for the road transport industry effective from the 1 51 July lyres Tyre prices - The tyre prices quoted in the KPMG cost model appear overstated. I have undertaken an analysis of tyre prices across all categories of trucks and trailers. Across the majority of categories the average tyre price currently is less than the tyre prices quoted in the KPMG cost model. These costs should be adjusted in the KPMG cost model. The table below demonstrates the current average price for tyres is less than the amounts quoted in the KPMG cost model: C1 C2 C3 C4 C5 C6 C7 C8 20 tonnes $.36 $ C T1 T2 T3 T4 T5 T6 T7 Converter dolly Pig trailer Dog trailer Low loader Semi trailer 8-double lead trailer Refrigerated trailer Double 8-Double A-Double A-Double Double 8-Double Double 8-Double 15

16 ll.fuel CONSUMPTION On review of the KPMG cost model I considered the fuel consumption rates were reasonable for each class of vehicle. It appears from my readings of the transcripts of the RSRT that there has been significant debate about the fuel consumption rates in the KPMG cost model. There are numerous factors which can contribute the variations in fuel usage. I have conducted my own survey with my clients with respect to their current fuel consumption rates. The table below sets out the results which I received from some my clients: 17

17 12. OTHER MATTERS Operating on 48 week basis Mr Jauncey raised the matter of vehicle utilisation with the inference that an owner driver is under-utilising his asset by working only 48 weeks per annum. Mr Jauncey contends that there is no basis to automatically assume that primary driver hours equals vehicle utilisation hours. In my experience, for the majority of owner drivers, this is indeed the case. The truck is driven my one driver, and when that driver is not driving the truck, the truck is not being operated by an alternate driver. It is incorrect to make the assumption that the owner driver is somehow operating an inefficient business if this is the case. There may be many other factors outside of the control of the owner driver that may preclude the owner driver from being able to utlise the truck for longer time. Eg truck painted in hirer's colours limits the ability to work for another company, exclusive work agreements with hirers precludes working for other companies, hours of operation of the hirer, hours of operation of the customers, local council regulations about after hours operations of premises, the type of product being transported, hirer and/or customers closing down over Christmas or public holidays, availability of relief drivers etc. In my client base I have a mix of arrangements where some owner drivers are contractually obligated to provide a truck to the hirer 52 weeks per year, and others that are afforded time off to take leave without the requirement to find a replacement driver. In circumstances where the owner driver is obligated to provide the truck to the hirer for 52 weeks per year, the cost of the relief driver needs to be factored in at an appropriate rate, above Award rates of pay, as typically a premium is paid for short-term I temporary relief drivers. Average hours of work per week Mr Jauncey makes the observation that the average hours in the KPMG cost model related to data sourced from the Australian Bureau of Statistics (ABS) from There is now more recent data available from the ABS which is based on 2014 data. I concur with Mr Jauncey that as there is more recent data available, that this data from 2014 should form the basis for the average hours per week in the KPMG cost model. Long distance average hours of work and kms travelled It is my observation that the kilometres travelled annually for a long distance vehicle is low compared with my clients undertaking this type of work. Whilst I acknowledge the figure used in the KPMG report was sourced from the Australian Bureau of Statistics, I am not convinced from the source documents provided by KPMG that they have relied on sufficiently reliable evidence to specifically to determine the average hours worked within the long distance sector. Typically, my clients doing long distance work are travelling around 180, ,000 kms per annum. Typically, these clients they are working more like 60 hours per week, not 45.2 hours as per the KMPG report. The effect of increasing the kilometres travelled and hours worked for long distance work would translate to a reduction in the fixed costs on an hourly basis, and an increase in the variable costs on a per kilometre basis. i.tl~sclip!il>n,,z; -<\>(( '" ''""'.. KPMG 2 t;@pjbflltj. ". MY&t~~gi&lfl1ti3rt "' Distribution- km pa 35,000 40,000-60,000.:::>} : Distribution -weeks worked pa Distribution- avg hours worked per week Distribution- annual hours worked Long distance- km travelled pa 150, , ,000 Long distance- weeks worked pa Long distance- avg hour worked per week Long distance- annual hours worked ,880 18

18 Effective life of assets The KPMG cost model has assumed the effective life for trucks and trailers derived from Tax Ruling 2015/2 which sets out Commissioner's determination ofthe effective life of depreciable assets. Whilst on the face of it this would appear a reasonable approach it should be noted that a taxpayer may choose to use the Commissioner's determination of the effective life in the Ruling or may make their own estimate of the effective live of an asset (see section 40-95). The Commissioner makes a determination of the effective life of a depreciating asset by estimating the period (in years, including fractions of years) the asset can be used by any entity for a specified purpose and if relevant for the asset: (a) assuming it will be subject to wear and tear at a rate that is reasonable for the Commissioner to assume; (b) assuming it will be maintained in reasonably good order and condition, and (c) having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned (see section ). In determining an effective life, the Commissioner considers the following factors. This list is not intended to be exhaustive: Physicallife, Manufacturing specifications/engineering information, Use of the asset in a particular industry, Use of the asset in different industries, Industry standards, Repairs and maintenance, Retention period, Obsolescence, Scrapping or abandonment practices, Lease periods, Financial analysis, and Market value According to TR2015/2 para 46 the Commissioner only takes account of normal industry practice when estimating effective life. Taxpayers who choose to self-assess, however, can take account of their own particular circumstances of use (see section ). Para 47 states that the Commissioner only makes determinations of the effective life of new assets. The purchaser of a second-hand asset who decides its second-hand condition justifies a shorter effective life than that determined by the Commissioner can self-assess the effective life. As the representative trucks are currently a four year truck, it is not necessarily the case that ATO determinations of effective life are a reliable measure as the Commissioner only makes determinations of the effective life of new assets. The purchase of a second-hand asset may appropriately justify a shorter effective life than that determined by the Commissioner in TR2015/2. Statutory caps apply to the Commissioner's determinations of the effective live of certain depreciating asset including light commercial vehicles, trucks and trailers. Taxpayers who choose to use the Commissioner's determination of effective life for these depreciating assets must use the shorter of the capped effective life and the Commissioner's determined effective life. For most depreciating assets, you can choose to adopt the Commissioner's determination, or to self-assess the effective life. For depreciating assets affected by the statutory caps you still have this choice. However, if you choose to use the Commissioner's determination, you must then use the shorter of the capped effective life and the Commissioner's determined effective life. 19

19 The Commissioner's determination of effective life and the capped effective life of the depreciating assets affected by these statutory caps are compared in the table below. The capped effective life is shorter for all of the affected assets. Therefore, if you choose to use the Commissioner's determination, you must use the capped effective life as set out in the table below: 7.5 years 10 years 7.5 years 12 years 7.5 years 12 years 7.5 years 15 years 10 years having a gross vehicle mass greater than 5 tonnes (other than a truck that is used in ning operations and that is not of a kind that n be registered to be driven on a public road in in which the truck is on<>r":>t<>ri 15 years 7.5 years Example from ATO: John purchased a truck (with a gross vehicle mass in excess of 3.5 tonnes) on 1 January 2005 and started using it immediately in his business. John chose to use the effective life determined by the Commissioner. The effective life of John's truck as determined by the Commissioner is 15 years. As the capped effective life of the truck of 7.5 years is shorter than the Commissioner's effective life, John must use the capped effective life. The issue of effective lives of assets has no immediate effect on the cost of the truck in the KPMG cost model, but it does speak to the appropriateness of adopting a four year old truck as the representative truck. Firstly, it would appear the assumption of purchasing a four year old truck which is then retained by the owner driver for five years, puts the truck outside of the Commissioner's capped effective life for these types of vehicle, and secondly it is not correct to assume the Commissioner's effective life estimates are relevant for second-hand goods. I have included further detailed information in appendix Guidance on Effective Life of Truck & Trailers from Australian Taxation Office. 20

20 13.PROFIT MARGIN I note that no profit margin has been included or applied to the costs in the KPMG cost model. I consider it appropriate that a profit margin is applied to the total costs as determined by the KPMG cost model. The lack of a profit margin fails to take into account the risk of an owner driver being in business. The profit margin in a cost model can be considered the anticipated return to the owner after all expenses. In the context of an owner driver's business, the profit margin is the estimated net return to the owner after taking into account labour costs and the costs to operate their truck. The more risky the venture, the greater the profit margin should be to compensate the owner driver for the risk of being in business. There are numerous risks to an owner driver's business. The profit margin in the cost model should reflect the level of risk to the owner driver's business. Typical risks to an owner driver's business include: Borrowing money to purchase equipment; Having to provide director's guarantees for these business borrowings; Having to use personal assets as security for business borrowings; Using personal funds or borrowed funds for cashflow requirements in the business; No guarantee of hours of work from hirer; No guarantee of continuity of work; No minimum hours of work per week; No safety net of earnings to cover at least the fixed costs and labour; Most companies have limited or no functional complaints handling process between owner driver and hirer to resolve financial matters eg disputes over waiting time, extra picks up or drops on a trip etc; Risk of financial viability of hirer; Risk of non-payment by hirer; Risk of having equipment that the hirer no longer requires; Short notice period on termination from hirer; Cost of upgrading equipment; Cost of repainting vehicle if leaving fleet; No redundancy remuneration if longer required; Human resource obligations if hiring drivers; Occupational Health & Safety issues; Short duration of contracts where contracts are offered. This is not an exhaustive list. Currently the risk-free interest rate on assets in Australia is 2% (ie the current cash rate which is Government guaranteed). The risk-free interest rate is the rate of return on an investment with no risk of financial loss. This represents the return that an investor would expect from an absolutely risk-free investment over a given period of time. Since the risk free rate can be obtained with no risk, any other investment will have additional risk and therefore a higher rate of return. I rec"mmend that it is appropriate 6 in-lude a profit margin of at least 5% on all operating costs. If you have any questions regarding the matters outlined above, please direct them to Brad Statham on lor to Regards, BRAD STATHAM Chartered Accountant 21