GAMING MACHINES ARRANGEMENT REVIEW Do you think the venue operator model is meeting the three objectives listed and why? How do you think the venue operator model could better achieve its operations? Financial Benefits of Gaming Firstly, the financial benefits of gaming are fairly and more broadly distributed to Victorian community. This should have been achieved but as a consequence of the complete failure of the auction process: The fund of $980 million fell well short of any reasonable expectation of funds raised. The payment of $980 money was in no way related to the capacity of the venue to pay or the real value of the entitlements. The method of payment $980 (over 4 years) was restrictive in the operation of the industry due to the 4 years of the payment, this in turn was detrimental to the Victorian Economy A solution to these issues would be to replace the auction system with more viable alternative(s). These alternatives will be discussed through out this document Probity The secondly consideration is the probity of the VCGLR. We believe that the VCGLR has maintained a very professional level of monitoring and overseeing the Gaming Industry to ensure the highest degree of probity within the industry. Not only are relevant information, updates and changes circulated in various forms of communication, the Commission is also very approachable, if and when any communication is required. Venue visits, in the form of audits or more informal approaches, are carried out in a professional manner. Broader Economic Activity The broader economic activity must also be taken into consideration. Economic activity has been totally restricted by the 10-year limit applied to licences. The payment of a 10-year licence over 4 years makes the non-deductable nature of these payments more difficult. With a Company Tax rate of 30%, a $1,000,000 licence payments in effect is over $1.428 million. This is equivalent to a 42.8% surcharge, in addition to the licence fee that is already paid to the Federal Government. For the great majority of venues, including clubs, the first 4-years was all about financial survival and not long term planning. The government obviously recognised this by extending payment arrangements for clubs. Do you think the current distributions are appropriate? If not, what changes would you suggest and why? 1
Metro versus Country Distributions: minimum 20% of machines in the country Initially, the number of machines in country regions was as high as 33%, but as of 30 th June 2015 this had dropped to its current level of 28.8%. This decline in machines in country areas represents approximately 2,402 machines that could be transferred from country to metro venues. Consequently, I see no reason why the 80:20 arrangements should be changed; market forces will more than likely cause a further 8% reduction for country venues and this represents a considerable number of machines. 105 Machine limit Currently there are 20 venues with between 100 and 105 machines; 17 of these are in metro areas and the remaining 3 are spread across Geelong, Ballarat and Bendigo. It is likely that the majority of these venues may have acquired their high number of machines as a result of the low purchase price of the entitlement at the auction. This enabled them to lower their NMR, resulting in a considerable saving on their gaming tax. If a more realistic price is set in 2022 there will be no need to change the limit. Again, market forces will naturally reduce the number of machines. If a venue, most likely a metro venue, wishes to maintain the maximum machines to provide a particular standard of service that will be their prerogative Club Hotel 50/50 split My colleagues and I are strong believers that this ratio should remain the same. It is important that Clubs remain an integral part of the Gaming Industry s future. Club membership means there is a large section of the community that is connected to the Gaming Industry. Some of the points below include a discussion regarding the percentage ownership of club and hotels and issues that may arise from any alterations to current policies. If the current Club/Hotel ratio was to remain at 50% participant, any issues of ownership will not be a significant. Machines Reduced: 27500 to 27,236 With the potential and likely movement of machines from country areas (to facilitate for the drop from 28.8% to 20%) into metro areas, I do not see any need for additional machines to be issued to cope with population growth in outer Melbourne areas. Are the ownership restrictions appropriate? If not, should they be increased or decreased and why? Should different ownership restrictions apply to hotel entitlements and club entitlements and if so why? Currently hotel ownership has a restriction of 35% of the hotel gaming entitlements. It is easy to argue, that the bigger the group of hotels owned and operated by the same consortium the more difficult it is to secure the same level of professional hospitality. This would be evident by head office 2
determining staffing numbers and rosters. However, there is little difference from one company controlling 35% of the market compared to, for instance, 2 companies controlling 30% each or 4 company controlling 15%. Recommendations Leave the 35% hotel requirement as it is. Also leave the requirements for clubs, maximum of 420 machines, the same. What mechanism should be used by Government to obtain its share of the value of the gaming machine entitlements: for example taxation, premium payment or other mechanism? It would be far simpler to keep all taxation revenue together, including: upfront licence fee monthly gaming tax GST, if applicable However the following should be taken out of consideration: tax on sale of entitlements a levy on entitlements or gaming machines The Government has in mind a clear revenue objective it wants to raise from the Gaming Industry, either through up front payments or payments on an ongoing basis. There are, however, several factors that the government should take into consideration. Real Gaming Revenue The Real value of the gaming revenue in 2016 is substantially lower than 2006, when taking into account growth of expenditure on wages and increases to the CPI. Gaming revenue has only risen 4.5% in Victoria from the financial year 2005/06 to 2014/15. During this time period: Wages growth was 36.66%, according to the Australia Wage Price Index: 2004-05. 85.2 compared with 2014-15. 120.4 CPI as per Australian Consumer Price Index from 2006 to 2015 indicates CPI has risen 25.26%: Index 85.9 in 2006 to Index 107.6 in 2015. Based on these financial figures above, the Gaming Industry is not as profitable as it was 10 years ago. Government Policy on Gambling 3
The Government has continually taken steps to curb problem gambling and gaming in general. Some of the major measures introduced include: The change of maximum bet from $10 to $5 Smoking restrictions Restrictions and then the removal of ATMs Signage restriction Advertising restrictions by Venues Pre commitment This is by no means a definitive list as there has been other, perhaps considered more minor restrictions, placed on venues. There are three important factors to take into account: 1. Statistical information, as provided above, has a substantial impact on the ability of venues to pay either government upfront or ongoing costs 2. Changes to government and gaming policies. For example: after the auction, the opposition suggested that the gaming revenue raised should have been closer to $3.4 billion not $980 million. Politically motivated statements should not be a factor in determining in licence extension. 3. There has to be certainty in the market place. The price of entitlements, irrespective of how the price may be broken up, need to be set with a fixed gaming tax, allowing venues to plan financially. It appears hypocritical for a government to introduce legislation to curb gaming and then, when gaming and hence tax revenue falls, increase the rate of gaming tax to supplement the lost revenue. Such political policies are detrimental to the Gaming Industry, creating financial uncertainty. The government, as part of their budgetary expectations will have a financial objective. However, this objective must be realistic for gaming venues and take into account the changes that have occurred within the Gaming Industry, including wages and CPI discussed above. Method of Payment - Method of payment introduced must be related to capacity to pay. One solution put to the AHA is that every venue should pay the same entitlement; this is a short-sighted, short-term solution designed to alleviate the failings of the auction process and merely from the perspective of a large operator. In essence, this solution suggests that it would be appropriate for a large metropolitan hotel to pay the same level as a hotel in rural or remote Victoria. The policy fails to consider: Population levels relating to the venue Hours of operation Operating Costs. The cost of operating a small venue is proportionately higher, per machine, than the operating costs of a larger venue. 4
The data published in Gaming Revenue by VCGLR data highlights the difference between small and large venues in the Gaming Industry. There is already marked disparity in gaming revenue between large metro and rural gaming venues; this policy would increase that disparity further. The Government is intent to raise a certain amount of dollars from the industry. These costs of entitlements are potential likely to consider the range of methods detailed below. However, there are further considerations that need to be taken into account: An upfront licence fee. This is non-tax deductable; therefore the Federal Government effectively create, based on a 30% tax bracket, a windfall of 42.8% of the upfront licence fee paid. GST. The venues pay 1/11 of their gaming revenue as GST. o Is this to be refunded from the Federal Government back to the State Government in the exact proportion of what it is paid. o If so, it should be clear, that this forms part of the ongoing tax that the venue operators are paying Gaming Monthly Tax Industry Tenure Later in the submission, I will put an argument for a minimum 30-year licence if perpetuity is not acceptable. Clearly with a long-term licence, such as 30-years, the falling value of money will have a significant impact, as already discussed, therefore a pay-as-you-go system would make sense. The pay-as-you-go could be incorporated with an upfront fee as long as the fee is: A minor fee on the allocation of entitlements, may be in 2017 given entitlements do not start until 2022 A further minor fee payable at the start of August 2022 The balance of the licence fee is paid over a large proportion of the Tenure of the Term Ongoing monthly tax as determined and paid as per the current arrangement The Gaming Industry in Victoria still has not reached the end of their 4-year payment plan; when they do many venues will still have a reasonable period of financial consolidation. This financial consolidation is due to many venues needing to finance part of their commitments by additional borrowings. In addition to the Gaming Licence, Gaming Machines and in many cases, renovations have been financed by new borrowings, which also have to be repaid. Does the progressive tax structure provide for a fair distribution of the revenue from gaming machines? Should the tax bands or rates in progressive tax structure be varied and if so, how and why? Is there an alternative tax structure that should be considered? 5
The intent behind the progressive tax structure is clear: however, I do not think it is as progressive as it needs to be. Hotels Cost relating to operating a large gaming (entitlements) venue is disproportionally low compared with the operations of a small venue. Labour costs are by far the greatest cost of a gaming room operation. A gaming venue of 23 machines will have, obviously, a minimum of 1 staff member at all times and yet some gaming venues of up to 50 machines operate many hours with the same level of staff; this is also the case for a 50 machine venue compared to a 100 machine venue The tax rates although progressive are not progressive enough. If the minimum is increased and there is a decrease in the middle category, it is possible to have a trade-off that collects the same level of taxation. Imposition of levy on each Gaming Machine Unfortunately, the Levy of Gaming Machines is as a regressive tax that would require the same tax paid by a country/small venue, for example doing $6000 NMR as a City venue with a NMR of $16,000. There is an amount of revenue to be raised by the Government; we do not need to import the negative aspects of other states gaming operations to achieve this. There does not seem to be a purpose for additional charges or fees; any such action would again be detrimental to the Gaming Industry, and would especially have negative consequences for the smaller venues. Embracing additional charges or fees when there is no need is purposeless Should the tax differential for Clubs and Hotels be maintained and, if so why? Unfortunately, if you want a vibrant Club industry to continue then there may be an argument for Club tax concessions that are not afforded to hotels. However, this tax concession should be only at the bottom end of the tax scale, e.g. for the NMR up to $4000. This would provide the following benefits: a significant saving over and above what they already exist. It also takes into account that a number of Clubs now operate very much the same as hotels and any tax break in these circumstances would provide an unfair operational advantage. Community Benefits statements are not a true indication the real level of community benefits. The major component of the community benefit is the operating cost of the venue. 6
This was also the case with the operating costs of the hotel been considered a community benefit (as was the case when Hotels used to do community benefits statements). It would seem an appropriate recommendation that if a tax break for a Club is provided in recognition of their contribution to the community, then this contribution must be substantiated as a direct contribution and not part of the Club operating costs. Should any future gaming machine entitlements be issue for a 10 year, a shorter or longer fixed term or in perpetuity and why? Apart from the failure of the auction process and the inadequacy of the method of payment over such a short period of time, the next biggest issue was the 10-year term of the licence Initially, venues had to invest in gaming machines and in many case renovations to embrace the new gaming regime. However, after this initial and necessary investment, the industry growth has stagnated. This is problematic for future investment: There is uncertainty about the tenure of the licence (as indicated by this submission) and therefore future investments into the industry would be questionable With only 6-years remaining on the entitlements, major renovations or expansion across the industry are now an impossible consideration. In the event of reintroducing another 10-year licence, in another few years the industry will be confronted with the same issues and any long-term security would be negligible. Recommendations I would recommend perpetuity, or as a compromise at least a 30-year licence similar to what has been granted to the Casino; this would negate any of the current issues that have arisen from the 10-year licencing agreement. What type of allocation process would be appropriate to allocate any new gaming machine entitlements and why? If one of the objectives is to have a prosperous gaming industry, which maximises the benefits to the economy via investment and employment, it would seem sensible then to give the first right of refusal to the existing entitlement holders. The current operators have done the hard work over a number of years to establish their venues through investments in infrastructure and machines. While this on its own may not justify an automatic guarantee on an extension of licence, existing owners are ready to grow the industry rather than recommence the establishment stage by new operators. The high standards of Probity would be maintained by the existing operators who would have substantially higher by capacity to meet financial requirements 7
How should the price of any new gaming machine entitlements be determined and why? Should the price of any new gaming machine entitlement be paid by a premium payment, be factored into the tax rate or be via another payment options? Please explain why. Payment options There does not have to be one payment method. Operators could have a choice between different payment methods where an upfront payment might receive a discount and paying over time may result in additional fees in the form of interest. It is critical that that percentage of both the discount and interest or discount be one that is economically viable, for example 2% above the Reserve Bank cash rate. Licence upfront fee Given the Licence Upfront Fee payment is not tax deductable, there should be potential to keep up to the 42% bonus from the Victorian Gaming industry (including Victorian Government). This is massive money and no reason why the arrangement can be made so as to minimise the amount the Federal Government takes. Average Machine Revenue Using average machine revenue seems to be an obvious measure by which to determine the pricing arrangements or capacity to pay for each venue. As mentioned earlier, the rate of tax should be fixed for part, if not all, of the period of the gaming licence. If however, payment is to be made for a 30-year licence at the start of each 10-year period, the government may have the option to vary components as long as it reflected changes in NMR not just an opportunity to make money at the expense of operators. The overall cost at the end of the 30-year period needs to be realistic. The existing market place is a reliable guide for pricing, even though the current price entitlements is only for a 6-year period. Buyers have a strong expectation that it will give them a priority for the extended licence. This is incorporated in the price that they have agreed to pay. On page 10/17 of the Consultation Paper, I quote entitlements in capped areas also tend to be more valuable because of the supply of entitlements in these areas are limited. However they are not more profitable. If premium payments are required, what are the terms of those payments and why? Any financial demands over a short time frame will do irreparable damage to the industry; the 4- year timeframe for payment under the auction system was a good example of this. Any arrangements need to be simple, financially viable, and, most importantly, transparent. Transfer Market 8
The Transfer Market seems to be working okay as indicated by the number of machines that have been transferred. The issue that the sales were up to twice as much as they were paid for at the auction is no reflection on the transfer market operation. This issue, again reflects the failure of the auction process, but it is also worth acknowledging that there were some other factors that influenced the price of machines: World economic times Bankruptcies, receiverships and/or administration of hospitality companies across Australia Reluctance from the major banks to support the hospitality industry and its reluctance to embrace or understand the change in the Victorian Gaming industry It is all very well to look at the profit after the sale of entitlements but the auction failure was a major factor in this profit realisation. Interfering with the operation of the free gaming industry market will If you interfere with this free market operation, will interfere with the normal business operations of an entire industry. Incentives to develop the industry will be drastically reduced if you limit the potential rewards for operators. The suggestion to employ the other states method of taxing venues at 33% tax to the states is picking individual items out of another State operation to try and use it as a money raising exercise for the Government. Every State is totally different in its operation of the Gaming Industry and it is impossible to select specific items such as is suggested here. It is imperative the issues that resulted from the auction process are eliminated and any future solutions and policies are kept simple. 9