FUTURE OF GAMING IN TASMANIA
Stage 2 Public consultation August
2021
The
inescapable nagging question that needs to be answered is why does an industry
with as few redeeming features as the gaming industry receive gold star
government assistance?
TABLE OF CONTENTS
Introduction
Executive summary
EGMs in pubs and clubs
Tax, Community Support Levy and who
pays
EGMs in casinos
Keno in pubs, clubs and casinos
ACRONYMS
EGM
Electronic gaming machine
CSL
Community Support Levy
EGM
Electronic Gaming Machine
FG
Federal Group
FGM
Future Gaming Market
GST
Goods and services tax
NG
Network Gaming (part of Federal Group)
NGO
Non-Government Organisation
SEIS
Social and Economic Impact Study
TLGC Tasmanian Liquor and Gaming
Commission
Introduction
This paper is a response to the invitation to address the implementation
of the Government's FGM policy via the proposed Gaming Control Amendment
(Future Gaming Market) Bill 2021.
Given the Bill requires legislative approval it is incumbent upon all
involved in that process to fully understand the proposals. Fact sheets have
accompanied the proposed amendments. At best they only provide modest
assistance. Understanding the existing system is a fundamental prerequisite for
assessing the possible effects of proposed changes.
The aim of the Future Gaming Market FGM
policy is to:
·
create
a sustainable industry;
·
provide the highest standards of probity;
·
ensure
returns from the gaming industry are shared
appropriately among the industry, players and the Government representing the
community; and
·
continue
to minimise harm caused by problem gambling.
It’s the third of
these aims, that returns are shared appropriately which is the focus of this
paper. The comments need to be viewed against a backdrop of the State
government’s fiscal sustainability challenges and policies for industry
development across sectors. The
inescapable nagging question that needs to be answered is why does an industry
with as few redeeming features as the gaming industry receive gold star
government assistance?
Executive summary
·
The government is proposing to gift a new
system of EGM rights to existing operators. Any taxes that need to be paid will
reduce the value of the gift. However, the burden of taxes is borne by players.
It is the government/community’s right, in fact responsibility, to determine
what is appropriate. Current operators do not have any inalienable or residual rights
to dictate the size of the gift. That would be akin to allowing a spoiled child
to bully Santa.
·
EGMs in pubs and clubs are currently very
profitable, much more than food and beverage operations which supposedly
complement gaming.
·
There is no economic basis for allowing
venues to more than double their profits from gaming when they are already
highly profitable. The best performing EGM venues, the nine pubs in the top
decile, would have averaged net profits of $1.026 million from EGMs based on
2020/21 player losses had the proposed FGM rates applied.
·
The next best use principle should be used
as a benchmark to determine an appropriate share for pub EGMs. The normal rate
of profits from food and beverage operations from the space occupied by 30 EGMs
(which most pubs have) would be approximately $60,000 per annum.
·
The top 30 per cent of pubs will still get
70 per cent, but of a much larger pie. The bottom 30 per cent of venues will still
get a 5 per cent share. Profits for all will increase enormously. Once break-even
is reached pub profits will increase by 42 cents for every $ of player losses
compared to 20 cents currently.
·
Stepped tax rates with grouping provisions
will restore fairness needed in a system that has grown into an unbalanced
money operation for the benefit of a few.
·
As an alternative to stepped tax rates, or
perhaps as a complementary measure, super profits could be clawed back via EGM licence
fees which will be set by Regulation, allowing the community to share returns
from gaming more appropriately.
·
The government is yet to identify any
spill over benefits for the rest of the economy which may justify participants
in a highly regulated government mandated activity earning super profits.
·
An EGM licence, backed by a government
mandated revenue stream is a very valuable asset. The longer the term of the expected
income stream the more valuable the asset. Perpetual licenses will give
operators huge windfall gains. The capital value of pubs attributable to EGMs
as a result of FGM is estimated to be $219 million.
·
The gambling industry says profits earned
by venues will be reinvested back into local communities to make them stronger.
Giving untied grants is a policy without merit. Providing untied handouts in
perpetuity would be reckless.
·
Love Your Local was a marketing slogan
that helped win the 2018 State election. It’s unlikely to be invoked as a
guiding principle when cashed up aggregators looking for suitable milking cows
come knocking on the door trying to gain access to government mandated revenue
streams.
·
Players have largely been forgotten. The
best way to give players a more appropriate share is to slow down spin speeds,
reduce maximum bet limits, increase the returns to players and remove the
addictive features of EGMs which prey on vulnerable players
·
The proposed FGM changes can easily be
enhanced by offering low impact EGMs as part of minimising harm from problem
gambling, with a separate regimen of tax rates and license fees to incentivise the
shift.
·
Tax and CSL should be viewed as one as
being the returns to government. How those returns are spent is a separate
issue, whether to hypothecate via a CSL or make them subject to the normal
appropriation procedures.
·
Gambling taxes share many of the same
characteristics as GST. Whilst an EGM operator may collect and remit both
taxes, the economic burden of the taxes falls squarely on players. Operators
may remit the taxes, but it’s the players who pay them.
·
There is no economic basis for giving
Federal Hotels a tax concession of S16.4 million for EGMs which for historical
reasons happen to be in casinos. It’s locals who incur virtually all losses.
Any concession simply gives Federal Hotels an unfair advantage over other
providers in the increasingly competitive accommodation market in Hobart and
Launceston.
·
The tax rate for Keno in pubs and clubs is
much lower than for EGMs when the net profit percentage is likely to be
considerably higher. Keno is a de-facto lottery where losses are taxed at 80
per cent.
·
The unjustifiably low rate of tax, less
than one per cent, proposed for Keno in casinos highlights the dog’s breakfast
nature of the entire suite of proposed FGM changes. It is impossible to discern
consistently applied principles which should underpin all public policy
decisions, let alone one with such far reaching and long-lasting effects as FGM
policy.
EGMs in pubs and clubs
There are currently 93 venues with 2,305 EGMs.
Six (6) clubs have 97 EGMs. The remaining venues are pubs. Fifty (50) pubs each
have 30 EGMs, the maximum permissible. The remaining 37 have 708 in total,
varying between 10 and 25 EGMs per venue.
The government released fact sheets used
2018/19 turnover figures to explain the impact of the proposed FGM changes. NB
Turnover equals player losses. The 2020/21 player losses have
since been released by the TLGC and these will be used to explain the existing
situation and the impact of FGM changes.
Under current arrangements venues receive
a commission equal to 30 per cent of player losses from Network Gaming (NG),
the licensed operator. Any taxes are paid by NG. Venues incur fixed costs (EGM
hire fees/promo levy) of approximately $4,500 per EGM plus variable costs
(wages, electricity etc) of approximately 10 per cent of player losses. A
snapshot of venues’ P&L from EGMs is as follows:
|
|
|
||||||||||||||||||||||||||||||||||||
Most venues offer gaming alongside the normal suite of products in the pub game: Bottle shops, bars, food and accommodation. Accommodation is not the primary focus for most EGM venues, some don’t offer any. Most are traditional style pubs where accommodation is a sideline at best. Gaming is by far the most lucrative use of floor space in these venues. If instead of gaming, the floor space was used as part of food and beverage businesses, net profits would be considerably lower. Taking a line through the profitability of the food and beverage sector in the hospitality industry, net profits of $4.6 million would be a reasonable estimate of profits from areas currently devoted to EGMs. This means $60,000 from the area occupied by 30 EGMs. In other words, ’normal profits’ of $4.6 million. This leaves the balance of $8.5 million as the current super profits from EGMs in the community.
Before delving deeper into how this is
distributed between venues it may be opportune to look at how the proposed FGM
changes will impact profits overall.
|
Profit & Loss EGMs in Pubs
Proposed |
||
|
$ m |
||
|
Player losses |
117.3 |
|
|
Less taxes |
||
|
GST |
10.7 |
|
|
State taxes |
45.6 |
|
|
Losses retained |
61.0 |
|
|
Less |
||
|
Fixed costs |
20.1 |
|
|
Variable costs |
11.7 |
|
|
Net profits |
29.2 |
|
Under
proposed FGM changes player losses will be received by each venue. GST and
State gambling taxes will need to be paid by venues. After fixed and variable
costs, venues will be left with net profits of $29.2 million based on 20/21
player loss figures. Net profits from EGMs in pubs will rise by $16.1 million
or 123 per cent. Although facing a higher level of fixed costs (variable costs
such as wages etc will be the same), the increased revenue means venues will
retain 42 cents in every $ lost by players compared to the existing situation
of 20 cents in $.
Perhaps there’s some inequities across
venues that FGM proposal need to address? To answer this, a look at the breakup
across venues is required. Dividing the 93 venues between decile groups gives
the following net profit figures for each decile group[1]:
|
Player losses $m |
Profits per venue $ |
|||
|
Rank |
Existing |
Proposed |
Increase |
|
|
1 |
27.5 |
$475,088 |
$1,026,185 |
$551,097 |
|
2 |
19.9 |
$306,212 |
$671,545 |
$365,333 |
|
3 |
17.6 |
$256,338 |
$566,809 |
$310,472 |
|
4 |
13.1 |
$162,505 |
$369,760 |
$207,255 |
|
5 |
10.6 |
$105,840 |
$250,764 |
$144,924 |
|
6 |
8.2 |
$57,367 |
$143,986 |
$86,620 |
|
7 |
6.7 |
$40,731 |
$103,451 |
$62,720 |
|
8 |
5.3 |
$15,223 |
$44,968 |
$29,745 |
|
9 |
4.6 |
$12,902 |
$36,720 |
$23,818 |
|
10 |
3.9 |
$21,767 |
$51,426 |
$29,659 |
|
Total $m |
117.3 |
13.1 |
29.2 |
16.1 |
This table indicates that under existing
arrangements pubs in the top decile (the top nine pubs) are each averaging
$475,088 in net profits from gaming. The FGM proposals will lift this to an
average $1,026,185 based on player losses incurred in 2020/21, an increase of
$551,097. All decile groups will more than double their net profits.
Almost all venues will be able to make
super profits, well in excess of their colleagues in the rest of the food and
beverage industry
For this analysis groups 1 to 7 each
comprise nine pubs and groups 8,9 and 10 each comprise ten pubs. Almost all
pubs in decile groups 1 to 6 have 30 EGMs. Player losses per EGM gradually falls
from group 1 to group 6. Beyond that the number of EGMs per venue also gradually
declines, as do player losses per EGM, with one exception, that being with
group 10. This latter group has the lowest number of EGMs per venue, between 10
and 15, but average player losses per EGM are greater than for groups 8 and 9.
Overall, the pie is considerably larger
but the split across all pubs will be similar.
Under existing arrangements most of the
pubs in groups 7 to 10 are profitable but aren’t generating super profits.
Under the FGM proposals all profits will rise. Groups 7 and 10 will start
making super profits in part due to lower fees (EGM authority fees) which will
be payable on a per EGM basis.
The fees which apply to each EGM will
vary. For the first 5 EGMs a venue will pay a fee of $1,000 per EGM. From 6 to
10 EGMs the fee will be $1,300 per EGM. And so on. Above 25 EGM the fee will be
$2,500 per EGM. But such are the super profits in the industry a fee of $30,000
per EGM for the higher turnover EGMs would still leave pubs earning super
profits.
Other States have stepped rates of tax
which remove some of the super profits. As player losses increase, the tax rate
also increases, just like stepped tax rates which apply to income tax for
individuals. It would be an appropriate way to remove super profits given that
a market tender for EGM licenses, once the government’s cornerstone policy was
abandoned prior to the 2018 election.
Stepped
rates are included in the proposed Section 150AK covering tax rates on the high
roller casino(s). They have been used before for pub EGMs. In fact, Section 150
of the current Gaming Control Act 1993 contains a twostep system of taxes but
they haven’t applied since 2013 (Section 150(3)). The Section also contains
grouping provisions similar to payroll tax (Section 150(4)) which operated in
conjunction with the two-step tax system.
The FGM proposals include the repeal of
Section 150. Section 150AK is proposed to allow for a flat rate of EGM tax
across all pubs. As mentioned above the FGM proposals contain a hint of
progressivity with slightly higher fees per EGM for venues with more EGMs.
Section 148 proposes EGM fees payable per EGM be prescribed by Regulation. At least
the government has provided an opportunity for fees to increase by Regulation
should the community feel the need to claw back some of the super profits from
the industry. This could be done, for instance, with stepped fees based on the
previous year’s player losses for a venue rather than by the number of EGMs
licensed by that particular venue.
There may be as yet undisclosed economic
arguments for allowing participants in a highly regulated government mandated
activity to earn super profits. Sometimes specific industries are nurtured
because they generate spill over benefits for the rest of the economy. The
employment effects of EGMs have been consistently exaggerated. They are
certainly less than other areas of the hospitality food and beverage. There are no particular skills which will
flow from gaming to other sectors. There’s nothing special about the capital employed
to run EGM operations which will help other sectors. To date the only spill
over effects identified have been the spill over costs of social harm caused by
EGMs.
Given the scarcity of government funds to
meet the unmet demands for government services across all sectors, it is not
clear why the government has chosen to allow EGM pubs to earn super profits of
$24.6 million per annum. This is the maximum that could be removed from pubs
via extra taxes and fees, still leaving them with normal hospitality industry
rates of return.
The FGM Bill proposes EGM licenses for a
term of 20 years. However, after 15 years a venue can obtain a renewal which will
last another 20 years. In addition, each time venues change hands the new
operator will get a 20 year licence. All this means is that EGM licences will
become perpetual licences. Being able to earn super profits of $24.6 million
each year (based on 2020/21 player losses) makes EGM licenses very valuable.
Being able to sell licenses at any time as perpetual licences means the assets will
have a ready market value and the capital values of venues will rise
accordingly.
Capital values are based on expected
future profits. The industry rule of thumb is that $1 of profits will increase
capital values by $7.50.[2] This means, based on $29.2
million of profits under FGM changes, venues will have total values of $219
million attributed to EGMs.[3] The share will be roughly
in the same proportions as profits. Venues in the top 3 decile groups will get
70 per cent of the increased capital value. Federal Hotels’ twelve pubs will
have an approximate total value of $72 million attributable to EGMs. Note,
these values are only the values attributable to the gaming operations in pubs.
The alleged reason for granting 20 year
licenses is to give the industry certainty. This may have been a reasonable
proposition had venues been required to pay a market price for the licence, for
it would be reasonable to allow them time to recoup their investment. But licences
will be gifted to venues. Disposing of a licence that has been gifted would be
akin to ticket scalping. The government shouldn’t repeat its failure to
institute a suitable market mechanism for the allocation of the licenses, by
allowing licences received as gifts to be sold as perpetual assets. The only
certainty a venue operator needs is to be able to pay any contracted
commitments for EGMs, lease payments etc. A five year term is all that is required.
Legislators need to be aware that with
more profits in a given industry the more you will see aggregators moving in to
try to capture those profits. Just as large bottleshop chains such as BWS, Dan
Murphy and Federal Hotels’ 9/11 now dominate bottleshop operations, so too will
you see aggregators moving into gaming. Gaming will become even more attractive
because of the super profits from a government mandated activity and the surety
of perpetual licences.
The FGM Bill pre-empts this
inevitability by proposing a new Section 101D which will limit EGMs in common ownership to a maximum of
587, one quarter of the proposed Statewide mandated cap. The biggest winner
will be the sellers who will reap windfall gains from licences gifted to them
because they happened to be at the front of the queue when they were handed
out. The other winner will be the aggregators who will muscle their way into a
lucrative government protected racket. It needs to be remembered that an aggregator
will not necessarily need to acquire a freehold interest in a targeted venue.
Obtaining a leasehold interest over a designated area will be sufficient.
Given
the huge super profits that have been generated by EGMs over the past 25 years
there is scant evidence the community has received lasting benefits.
As
for the players they have hardly rated a mention. The
best way to give players a more appropriate share is to slow down spin speeds,
reduce maximum bet limits, increase the returns to players and remove the addictive
features of EGMs which prey on vulnerable players. All of these matters
could easily be incorporated within other proposed FGM changes.
Whilst the above analysis suggests all
venues will be better off with FGM, the full effect on smaller venues is highly
conditional on a few factors.
·
The
outlays required to satisfy all the monitoring requirements.
·
The
costs to perform the regulated fee functions such as installing servicing and
updating EGMs
·
The
costs of the market based functions currently provided by Network Gaming such
as signage, training selection and financing of EGMs.The smaller more remote
venues will probably face higher costs.
·
Higher
costs to finance EGMs than would be the case for larger operators is likely. The
same will apply to leasehold operators. Clubs will also find financing EGMs
challenging. There was a suggestion that the new network operator might assist,
but whether that will eventuate is uncertain.
·
Management
time to oversee all of the above.
However, the biggest unknown for all venues
in the transition to a new system is who will own the equity in the EGMs at
changeover date. From a legal viewpoint Network Gaming owns the EGMs, which are
probably on average, half paid for via existing finance arrangements. So, will
current operators own the equity in existing EGMs or will they have to pay Network
Gaming to acquire the equity in each EGM which their patrons, the humble
players, have already dutifully paid?
The government’s fact sheet estimates it
will be $8.5 million better off with FGM changes. Not only is this a trifling
amount given the profits that will be remain in the industry, but the government
has glossed over the extra costs needed to regulate an industry with 100
licensees compared to the current sole licence system. Having Network Gaming
with the sole licence has made the task of regulators so much easier. That will
change with FGM.
Federal Hotels’ Greg Farrell was correct
when he told a parliamentary hearing in August 2017 that he viewed the
Community Support Levy (CSL) as merely a hypothecation of tax. To think of it as a separate impost is time
wasting and pointless. It’s the total of the two, the tax and the CSL which is
the only relevant metric. Governments choose to hypothecate amounts as levies
because it bypasses the parliamentary appropriation process and allows amounts
to be spent on specified purposes.
CSL is a cosmetic feel-good arrangement.
It makes the government appears as if it’s doing something to support problem
gambling by allocating 50 per cent of the CSL for that purpose. Industry members
(apart from Federal Hotels) also like the arrangement because not only are they
seen to be doing something about problem gambling, but it’s coming out of their
pockets. The industry mistakenly believe they pay the CSL. NGOs concerned about
the social aspects of gambling all seem to accept this notion and hence the
discussion about the CSL is always conducted on industry’s terms.
However, the proposition is patently false.
Gambling taxes are like GST. Whilst a supplier of goods may collect and remit
GST to the ATO, the burden of the GST falls squarely upon the purchasers of the
goods, the consumer. With gambling, a gambling operator will collect player
losses from players, remit some as GST to the ATO and remit a further amount
the State government as gambling tax. Operators remit the taxes, but the burden
falls squarely on players. GST and gambling taxes are identical in this regard.
Yet
the industry huffs and puffs about how it pays the CSL and therefore ought to
have a say in how it’s spent. Nonsense. That’s not how it works.
At the expiration of existing EGM
arrangements and the commencement of the new FGM system, venues will be gifted
a licence to operate with several conditions. One of those implicit conditions
is they will remit GST as required. Another condition is that they will remit
gambling taxes as legislated to the State government. At no stage can operators
claim the tax comes out of their pockets. They are just the intermediaries
legally responsible for collecting and remitting GST and gambling taxes.
It’s more than just a semantic point as
to bears the burden of gambling taxes. It’s of fundamental importance when
deciding on what taxes and at what level. Industry have been allowed to
bellyache about how much tax they pay when the reality is it’s the punters who
pay.
EGMs in casinos
When releasing the draft FGM Bill, Minister
Michael Ferguson told us the release of the reform package followed “an
extensive body of work, with licence fees and tax rates that apply for Far
North Queensland casinos (a comparable market) used as a benchmark.”
It is not clear why the government needed to go
a voyage of discovery to North Queensland to find a benchmark. There is no
sound public policy basis why casinos in regional areas currently need
assistance and why this benchmark was adopted. We don’t need to attract more
capital for new casinos packed with EGMs as they’re prohibited. Tourists don’t
come to Tassie to play EGMs. The latest
SEIS report estimates tourists possibly only contribute 1.5 per cent to total
gambling losses in Tasmania. Even if they
came to Tasmania to play the pokies, the tax rate is irrelevant. Players play
regardless of the tax rate. It’s locals who play casino EGMs so why should
casino EGM be taxed (tax plus CSL) at a rate 22 cents in the $ less than EGMs
in the community. Based on 2020/21 player losses in casinos of $74.66 million,
Federal Hotels’ concession for its casino EGMs, compared to EGMs in the
community, is $16.4 million.
Even if the $16.4 million of tax
concessions were removed and casino EGMs paid the same rate of taxes as pub EGMs,
there would still be super profits remaining, possibly as much as $15 million
assuming casino EGMs are as profitable as pub EGMs.
Keno in pubs, clubs and casinos
It is reasonable to assume Keno in pubs
and clubs is considerably cheaper to operate than EGMs. By its very nature it’s
run by a sole operator specifically Network Gaming. Keno is for all intents and
purposes a lottery. Keno like lotteries such as Tattslotto, Powerball etc are
games owned by the listed gambling behemoth Tabcorp. TasKeno is believed to be
licensed by Tabcorp to Network Gaming.
In South Australia a statutory body
called the Lotteries Commission of South Australia run Tattslotto, Keno and
other games licensed by Tabcorp. Gambling taxes and profits are paid to the
owner, the SA government. Keno taxes of 46 per cent are hypothecated into a
Hospitals Fund.
It is not clear why the FGM proposes to raise EGM taxes to 20.31 per cent. Based on 2018/19 player losses for Keno in pubs of $33 million a tax concession for pub Keno compared to pub EGMs of 18.5 per cent amounts to $6 million. It wouldn’t be difficult to identity a hundred worthy causes for that amount of money.
However it’s the proposed lowering of tax
on Keno losses in casinos that leaves most observers searching for words. A proposed
tax rate of 0.91 per cent is 38 percentage points lower than for EGMs in pubs. Admittedly
the forgone amount is only small beer as Keno in casinos is not a big earner.
The amount forgone may not be much more than $1 million. Regardless, shouldn’t
any tax be soundly based? Is this another benchmark discovered in the Far
North? Keno is little different from a lottery, yet lotteries are taxed in
Tasmania at around 80 per cent.
(Disclosure: The writer is a
non-executive director of a tourism business with EGMs)
[1] Data obtained by
Andrew Wilkie for player losses for each venue in 2015/16 was used to estimate
losses across the decile groups for 2020/21.
[2] A capital multiple is used to calculate a value for a given
income stream depending on the desired rate of return. A return of 12.5 per
cent implies a benefit multiple of 8. One is the inverse of the other. A rate
of return of 20 per cent implies a benefit multiple of 5. The chosen multiple
here is 7.5 which implies a targeted rate of return of 13 per cent which is an
accepted benchmark in the hospitality industry.
[3] Federal Hotels’
Greg Farrell told a parliamentary hearing in August 2017 an independently
verified model estimated capital values of EGM pubs would increase by an
average of $1.5 million per venue which implies about $150 million in total.
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