South Australian Tax Review...Restaurants, cafes and hospitality providers are an important part of...

South Australian Tax Review

Response to Discussion Paper

APRIL 2015

RESTAURANT & CATERING AUSTRALIA

Restaurant & Catering Australia (R&CA) is the national industry association representing the

interests of 35,000 restaurants, cafes and catering businesses across Australia. R&CA delivers tangible

outcomes to small businesses within the hospitality industry by influencing the policy decisions and

regulations that impact the sector’s operating environment.

R&CA is committed to ensuring the industry is recognised as one of excellence, professionalism,

profitability and sustainability. This includes advocating the broader social and economic contribution

of the sector to industry and government stakeholders, as well as highlighting the value of the

restaurant experience to the public.

Cover images courtesy of Tourism Australia

TABLE OF CONTENTS

EXECUTIVE SUMMARY _____________________________________________________ 3

Labour intensity of tourism and hospitality operators ______________________________ 4

Employment growth in the tourism and hospitality sector ___________________________ 5

SOUTH AUSTRALIA’S TAX SYSTEM ____________________________________________ 7

Payroll tax _____________________________________________________________ 7

Broadening of the Goods and Services Tax (GST) _________________________________ 8

Implications for the tourism & hospitality sector ________________________________ 10

CONCLUSION __________________________________________________________ 11

EXECUTIVE SUMMARY

Restaurants, cafes and hospitality providers are an important part of South Australia’s economy. Cafes,

restaurants and takeaway businesses are the largest employer across all tourism-related sectors in

the visitor economy; employing 32,600 South Australians in 2,000 businesses. These businesses are

small businesses; with 92 per cent of café and restaurant owners employing 19 people or less.

In 2012-13, South Australia’s visitor economy generated $556 million in tax revenue for the state.

This includes $174 million in direct and $382 million in indirect taxes. South Australia’s visitor

economy, including service industries such as cafes and restaurants, requires a fair and equitable tax

system that recognises the labour-intensive nature of the sector.

Tourism and hospitality businesses rely heavily on labour for productivity, efficiency, and growth, and

therefore bear a disproportionate tax burden due to their labour intensity and customer service

focus. Bias towards labour taxes such as payroll tax creates horizontal inequity between service and

non-service industries. Payroll tax, PAYG, superannuation, and income tax obligations all represent a

greater proportion of hospitality business revenues compared to small businesses operating in other

sectors. With the café, restaurant and takeaway services sector projected to be one of the fastest

growing sectors in the economy, such bias encourages investment away from these service industries,

negatively impacting productivity and growth of the visitor economy.

As a fundamental principle, federal and state governments should strive to reduce the volume of

taxes in the current system by broadening the base of a select number of taxes and abandoning

inefficient taxes that create administrative red tape and compliance costs for small operators.

R&CA supports the examination of the state’s payroll tax system through the South Australian Tax

Review, and believes the payroll tax threshold should be increased to encourage small business to

expand and grow while removing additional thresholds and exemptions that create complexity, and

allow big business to game the system. R&CA recognises that discussions around the broadening of

more efficient taxes will need to take place in a federal context, and remain outside the control of

the South Australian Government. However, supporting the broadening of more effective taxes such

as the GST is a way to ensure changes to the payroll system remain revenue neutral, while reducing

the complexity of determining tax credits for small businesses, particularly in the tourism and

hospitality industry.

THE TAX SYSTEM & THE HOSPITALITY SECTOR

Tax contributions of the tourism and hospitality sector

The restaurant, café and catering sector forms a critical component of the visitor economy. The

visitor economy is defined as the direct and indirect value generated from the provision of tourism-

related goods and services1. Total consumption across the visitor economy in South Australia totalled

$6.3 billion in 2012-132. Cafés, restaurants and catering services contributed $1 billion in earnings to

the state economy, of which $592 million was directly attributed to the visitor economy3. In 2012-13,

the visitor economy generated $556 million in tax revenue for the state. This includes $174 million

in direct and $382 million in indirect taxes. Research indicates that each Australian household would

have paid an additional $1,207 in taxes without the tax revenue generated nationally by the tourism

industry4.

Labour intensity of tourism and hospitality operators

There are approximately 2,020 restaurant and café businesses operating in South Australia, of which

92 per cent are characterised as small business (employing 19 people or less)5. Takeaway businesses

represent a further 436 operators across the state. Collectively, these organisations employ 32,600

people, of which 6.1 per cent or 9,100 are directly employed in the tourism industry6.

Tourism Research Australia’s Tourism Businesses in Australia report indicates that tourism is a labour-

intensive industry, driven by higher labour costs. The report demonstrates that as an industry, with a

high share of micro and small businesses, the Gross Value Added (GVA) per employee is low. The

average GVA for an employee in a tourism business in 2011-12 was approximately $65,000, much

lower than the average of $119,000 for all industries7. As a result, payroll tax and superannuation

obligations place a higher compliance cost burden on smaller businesses operating in this sector.

1 The Travel & Tourism Competitiveness Report 2009 World Economic Forum 2 Tourism Research Australia (TRA), Tourism Satellite Account 2011-12, p.vi 3 Tourism Research Australia (TRA), Tourism Satellite Account 2011-12; p.41 4 Tourism & Transport Forum (2014) Tourism and the Australian Economy: State & Territory Visitor Economy Impacts, 2012-13 Edition 5 Australian Bureau of Statistics, 81650. Counts of Australian Businesses, including Entries and Exits, Jun 2009 to Jun 2013 6 TRA State Tourism Satellite Accounts 2012-13; ABS Labour Force Australia, Detailed, Quarterly, cat no. 6291.0.55.033, Department

of Employment trend data.

7 Tourism Research Australia (2013) Tourism Businesses in Australia, June 2010 to June 2012, p1

Employment growth in the tourism and hospitality sector

Service Skills Australia’s Tourism, Travel and Hospitality Environmental Scan 2014 highlights that strong

domestic demand and a growing tourism base is expected to lead to phenomenal employment

growth in the visitor economy over the next five years, particularly in the café, restaurant and

takeaway food sector8. Employment growth in this sector will exceed any other in the Australian

economy, with an expected growth of 43,700 workers, or an increase of 8.5 per cent9 (See Figure 1).

These forecasts are further supported by projections released by the Department of Employment

that indicate the accommodation and food services sector alone has a projected five-year

employment growth rate of 7.1 per cent, requiring an additional 55,200 workers by November 201810.

These projections will have significant implications for the visitor economy in South Australia,

particularly with regards to labour-based taxes including payroll tax.

8 Service Skills Australia (2013) Tourism, Travel and Hospitality Environmental Scan 2014, p.21 updated with figures from the

Department of Employment (2014) 2014 Employment Projections, Industry projections to November 2018 9 DEEWR (2012) Employment Outlook to 2017, p.3-4 10 Department of Employment (2014) 2014 Employment Projections, Industry projections to November 2018

43.7

38.2

37.2

28.6

24.5

23.8

22.9

22.7

22.4

22

21.9

17.5

16.4

15.5

15

14.8

13.6

13.3

12.4

12

Café, Restaurants and Takeaway Food Services

Child Care Services

School Education

Other Construction Services

Building Completion Services

Medical Services

Other Social Assistance Services

Legal and Accounting Services

Allied Health Services

Computer System Design and Related Services

Pulbic Order and Safety Services

Building Cleaning, Pest Control and Gardening Services

Tertiary Education

Hospitals

Specialised Food Retailing

Pharmaceutical and Other Store-Based Retailing

Supermarket and Grocery Stores

Sports and Physical Recreation Activities

Electrical and Electronic Goods Retailing

Residential Care Services

Figure 1: Top 20 industry sectors ranked by projected growth to November 2017 (‘000s)

Source: Department of Employment, 2013, Employment Outlook to 2017

THE SECTOR CONTRIBUTES

$1 BILLION TO THE

STATE ECONOMY

TAKEAWAY COMPONENT,

$945 MILLION CONTRIBUTES

$592 MILLION TO

THE TOURISM INDUSTRY

AND $236 MILLION TO

TOURISM GROSS VALUE

ADDED

THE SECTOR

EMPLOYS 32,600 PEOPLE WITH 9,100 PEOPLE OR 6.1% EMPLOYED DIRECTLY IN TOURISM

CAFÉ, RESTAURANT,

& CATERING BUSINESSES

IN SOUTH AUSTRALIA

92% ARE SMALL BUSINESSES

2,020

TOURISM GENERATES

$556 MILLION

IN TAXES FOR SOUTH AUSTRALIA

AUSTRALIAN HOUSEHOLDS WOULD PAY

AN ADDITIONAL $1,207 IN TAXES

WITHOUT THE REVENUE GENERATED

FROM THE TOURISM SECTOR.

CAFÉ, RESTAURANTS

& CATERING,

$1,040 BILLION

SOUTH AUSTRALIA’S TAX SYSTEM

R&CA supports the government’s objective of ensuring the tax system provides sufficient revenue

to deliver high quality infrastructure and services to the community now and into the future. R&CA

understands businesses must pay their fair share of state taxes; at the same time the tax system must

not hinder the growth, productivity, or entrepreneurship of small business owners.

R&CA recognises South Australia is the third lowest taxing jurisdiction in comparison to other states

and already has one of the most competitive payroll tax regimes according to the Commonwealth

Grants Commission. Support for reform in this context must be measured to provide realistic

solutions.

R&CA’s greatest interest in the review pertains to payroll tax, given the sectors labour intensity and

reliance on its workforce for productivity. Inefficiencies in the current system are likely to be

exacerbated further by the expected growth in the sector in the future.

Payroll tax

One of the greatest tax reform priorities for the state must be payroll tax. R&CA’s 2014 Industry

Benchmarking Report found that staff wages and on-costs can represent up to 45.3 per cent of business

expenses11.

As a labour intensive industry, hospitality businesses bear a disproportionate burden of state taxation

through the payroll tax system. The payroll tax threshold acts as an artificial deterrent from business

expansion and employment growth, as the compliance and payroll tax costs act as incentive for

businesses to remain inefficiently small12.

The Henry Tax Review into Australia’s Future tax system considers payroll tax to be a consistent and

dependable tax base, but highly inefficient due to tax‐free thresholds, exemptions and complexity

across state borders. The Henry Review found that payroll tax is the third most inefficient tax after

royalties and crude oil excise and insurance taxes, which cause in excess of 40 cents of economic

damage for every dollar of additional revenue raised13. The Henry Review recommends that state

11 R&CA (2014) Industry Benchmarking Report, Financial Results 2012-13 12 Australian Chamber of Commerce and Industry (2014) Board of Taxation Review: Tax Impediment facing small business, May 2014 13 Commonwealth of Australia (2010) Australia’s future tax system – Report to the Treasurer December 2009 Part One Overview, p.13 as quoted in Australian Chamber of Commerce and Industry (2014) Board of Taxation Review: Tax Impediment facing small business, May 2014

payroll taxes should be replaced with revenue from more efficient broad‐based taxes that capture

the value‐add of labour14.

R&CA believes reducing and ultimately abolishing payroll tax is necessary if small businesses are to

remain competitive in the state. However, increasing the payroll tax threshold in the interim would

reduce the compliance cost for small- to medium-sized hospitality operators while this longer term

objective is being realised.

Other grossly inefficient state taxes such as insurance levies which cause individuals and businesses

to be under-insured – aggravating pre-existing market failures – and conveyancing stamp duties which

cause businesses to minimise their transactions and investment in property, should also be slated for

abolition.

Broadening of the Goods and Services Tax (GST)

Since the delivery of the 2014-15 Federal budget, discussions have arisen over the potential

broadening and increase in the Goods and Services Tax (GST). While R&CA recognise the

administration of the GST remains the jurisdiction of the Australian Government, there are significant

implications for the state if this occurs. Analysis conducted by KPMG over page reveals the economic

impact of changes to the GST, and the implications for smaller inefficient taxes such as conveyancing

duty, insurance tax and payroll tax15.

14 Commonwealth of Australia (2010) Australia’s future tax system – Report to the Treasurer December 2009 Part One Overview

15 KPMG (2011) CPA Australia: Economic Analysis of the Impacts of Using GST to Reform Taxes, September 2011

Scenario Revenue Generation Impact on living standards Impact on inefficient taxes

12.5% GST

replacing some less

efficient taxes

$10.5 billion in

additional revenue

$1.6 billion higher

Abolition of:

Insurance duty and fire insurance duty

Motor vehicle taxes – stamp duty and registration

10% of commercial conveyancing duty

15% GST

replacing some less

efficient taxes

$20 billion in

additional revenue

$4.7 billion higher

Abolition of:



commercial conveyancing duty

40% of payroll tax

20% GST

replacing some less

efficient taxes

$40 billion in

additional revenue

$4.6 billion higher

Abolition of:



commercial conveyancing duty

all of payroll tax

Uniform GST

replacing some less

efficient taxes

Broadening to

include consumption

of products that are

currently GST-free

$11.5 billion in

additional revenue

$4.0 billion higher

Abolition of:



50% of commercial conveyancing duty

From the table above, and a preliminary examination of GST distribution should the GST be increased

to 12.5 per cent (below), it is evident that an increase or broadening of the GST would more than

cover the increased payroll tax bill should the payroll threshold be increased or further reforms

occur to reduce the compliance cost to small businesses.

NSW

VIC

QLD

WA

SA

TAS

ACT

NT

TOTAL

$m $m $m $m $m $m $m $m $m

Estimated 2013-14 15 479 11 243 10 696 2 451 4 558 1 786 1 018 2 751 49 980

Illustrative 2014-15 16 416 11 585 11 554 2 215 4 874 1 881 1 090 3 086 52 700

12.5% GST

(indicative*)

20 520 14 481 14 443 2 769 6 093 2 351 1 363 3 858 65 875

*Note: Figures based on Report on GST Revenue Sharing Relativities 2014 Update. Calculation of GST revenue does not reflect changes in GST

distribution that may occur as a result of fiscal capacities of State governments, and should not be taken as a true or reliable estimation of

distributed revenues.

IMPLICATIONS FOR THE TOURISM & HOSPITALITY SECTOR

A broadening of the GST base would deliver considerable cost savings for hospitality businesses.

Restaurants, cafes and caterers face considerable complexity in determining and claiming GST credits,

as GST only applies to a proportion of their inputs. This is particularly true in relation to determining

GST paid on produce in a restaurant business. For example, there is no GST on raw chicken, however

GST is applicable to value-add products such as smoked chicken, cooked chicken or diced chicken

products. This means to determine their GST liability, restaurant owners are forced to work through

invoice by invoice the GST paid, while small businesses in other sectors can simply assume that all

their inputs attract GST.

For a restaurant or catering business, the process of claiming a credit for the GST component of the

purchase price of the item is varied and complex. The broadening of the tax base to include fresh

food and produce for this sector would represent savings to businesses by reducing red tape and the

administrative burden associated with calculating GST paid for tax purposes.

While this has been addressed to some extent by the ‘averaging’ method made available by the ATO,

greater simplification of the GST would remove the additional burden altogether, while reduce the

state’s reliance on inefficient taxes such as payroll tax.

CONCLUSION

R&CA welcomes the opportunity to provide comment to the South Australian Tax Review. The

review provides a timely opportunity to examine the tax system so as businesses remain competitive,

while supporting the development of infrastructure and services in the state.

As a labour-intense sector, the tourism and hospitality sector suffers a disproportionate tax burden

through the payroll tax system. This is in addition to other inefficient taxes such as conveyancing tax

that does not facilitate the easy transfer of businesses between owners. R&CA believes the payroll

tax threshold should be increased to provide a greater opportunity for smaller businesses to expand

their operation and hire additional staff. In addition, no further exemptions or additional thresholds

should apply as it provides an opportunity for larger companies, ones with the capability and financial

means, to game the system to their advantage.

Supporting the broadening of more effective taxes such as the GST is one such way to ensure changes

to the payroll system remain revenue neutral for the state. For the tourism and hospitality industry,

this would also lead to further cost savings by reducing the complexity in determining tax credits

that apply in their businesses. R&CA recognises that such reform lies outside the jurisdiction of the

state government, but has the capacity to significantly change the tax landscape in the state.

RESTAURANT & CATERING AUSTRALIA

PO Box 121

SURRY HILLS NSW 2010

T | 1300 722 878

F | 1300 722 396

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