Planning for the effects of carbon tax

Like all new legislation and tax procedures, there is a degree of uncertainty about the effects on businesses.  The introduction of the Carbon Tax in July this year has many questioning it’s affect on specific industries, products and services.

Director of Accommodation, Jude Bolger investigates the implications of the Carbon Tax, highlighting current facts and issues.

Some of the Facts

First, let’s establish some facts about the carbon tax and how it will or will not affect the accommodation sector.

• The tax will only apply to Australia’s major emitters, estimated to be approximately 500 companies and is charged at $23 per tonne since 1 July 2012.
• These companies comprise mainly utility, resources and high intensity manufacturing companies.
• There is strict legislation in place by the Australian Competition and Consumer Commission (ACCC) that prevents any organisation from increasing prices that is directly attributable to carbon tax.

Despite the controls that are in place by the ACCC, it is likely that upward creep will occur in prices by companies directly affected. This will in turn affect customers of these companies such as accommodation providers.

The services or suppliers utilised by accommodation providers include utilities such as gas and electricity as well as hard capital expenditure costs on furniture and fittings that also would have been indirectly affected as suppliers feel the price creep in their expenses slowly effects pricing as adjustment occurs.

Quantification for Accommodation Providers

Quantification of the effects can be modelled in the case of accommodation providers. Let’s take the simple case of a lean 75 unit serviced apartment complex with pool and no ancillary services. The following table outlines our operating assumptions.

The following table summarises the operating performance based on the above assumptions.

• The operation achieves IBFC of 48.8%, representing an efficient served apartment operation that enjoys good operating performances.
• Included in the expenses are utility costs representing 2.5% of total revenue or $80,600 per annum. It is expected that this is one of the areas that will experience price creep. Let’s assume that, overall, utility prices increase by 30% and further indirect price rises increase total expenses by 2%. The following operating performance would then be realised:

• The 2% increase in expenses directly affects IBFC and is reduced by $64,500. Should management wish to recover these increased costs and return IBFC to the more efficient 48.8%, there are two options available: to tighten other costs or to increase prices.

If management were to increase prices in order to maintain IBFC of 48.8% it would be necessary to increase the average unit rate by 4% to $170 (ex GST) in order to recover the 2% increase in expenses, as demonstrated in the following table. We have assumed the same occupancy levels.

• While our modelling has only examined a lean accommodation model, the effects are likely to be more profound for the resorts that operate food and beverage facilities. Gross profit levels of these departments should be monitored to account for any changes to suppliers prices.

Issues Facing the Accommodation Sector

We do not advocate immediate reactions to increase prices as a result of the carbon tax as this may incur scrutiny from the ACCC if it is attributed to carbon tax.

While these regulations also apply to the services and suppliers to the accommodation sector, it will be difficult for the ACCC to monitor all of their increases in price.

Monitoring of the effects of carbon tax should be taken every six months, specifically, expenses and in particular utility costs.

Any decline in IBFC and gross profit levels should be monitored for changes over and above the rate of inflation. This will allow accommodation providers to exert more measured responses to increases arising from the effects of carbon tax.

Alleviation of the Effects of Carbon Tax

There are a number of measures that the accommodation sector can take in order to plan for the effects of carbon tax:

• Prepare budgets and operating plans to take account for potential increase to utility costs and overall expenses.
• Reduce the consumption of goods and services that are impacted by the carbon tax.
• Graduate profit levels over time so that the impact is not immediate but phased.
• Revise all costs and critically examine the discretionary items.
• Negotiate better contracts with utility providers.

In conclusion, there has been significant hype about the effects of carbon tax and has been largely driven by well funded media campaigns by those that it affects the most. The actual outcome can only be measured by monitoring of costs and for sufficient planning to occur as well as periodical analysis to trading accounts to monitor the effects.