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A.C.C.C. issues preliminary draft G.S.T. pricing guidelines for consultation

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The Australian Competition and Consumer Commission has issued preliminary draft pricing GST Guidelines for consultation with all interested parties.

"The intention is that consumers are to benefit fully from reductions in Indirect tax. where that is the effect of the tax changes; consumers should not be exposed to greater than necessary price rises; and there should be no exploitation of consumers,* ACCC Chairman, Professor Allan Pels, said today.

’The ACCC considers that well Informed, competitive markets operating in a climate of low inflation and good corporate citizenship will ensure that the vast majority of businesses will act fairly.

'The proposed legislation recuires the ACCC to formulate Guidelines as to when prices may be regarded as being in breach of the price exploitation provisions. Whilst the legislation is yet to be passed, the Guidelines need to be developed prior to 1 July 1999 to ensure the objectives of the legislation are achieved since tax changes are expected to occur soon after that date.

T h e draft paper reflects the ACCC's current thinking about the key principles that the Guidelines should contain,* Professor Feis said.

T h e ACCC considers that It is preferable for the Guidelines to be as general and simple as possible, given their broad application across all sectors of the economy to businesses of all sizes and kinds. Additional Guidelines may be drafted In relation to issues affecting particular industries or sectors if the need arises.

T h e ACCC regards consultation with Interested parties as important. The ACCC will consult with key interested parties on an ongoing basis on the development and implementation of Guidelines.

*A feature of the guidelines document Is that larger firms will be invited to make voluntary commitments of compliance with the Guidelines," he said.

The statutory principle

The proposed new section 75AU of the Trade Practices Act 1974 outlines the broad Statutory test in relation to price exploitation during the transition period of the New Tax System changes. This test provides the undertying principle on which the Guidelines are based.

A corporation (or person) w ll be considered to engage in price exploitation if:


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“(a) it makes a regulated supply; and

(b) the price for the supply Is unreasonably high, having regard alone to the New Tax. System changes (so far as they have taken effect); and

(c) the price for the supply Is unreasonably high even if the following other matters are also taken into account;

(i) the supplier’s costs;

(ii) supply and demand conditions;

(ill) any other relevant matter."

Penalties for breaching the price exploitation provisions of the proposed legislation will be substantial, including fines of up to $10 million for corporations and $500,000 for persons.

The level of penalties specified in the Bill reflects the Government's concern to ensure that no supplier takes unfair advantage of the new tax system changes. The ACCC will not hesitate to use its enforcement powers if there Is blatant price exploitation.

As stated earlier, the ACCC considers that it Is preferable fur these Guidelines to be as general and simple as possible, given their broad application across all sectors of the economy to businesses of all sizes and kinds. Additional Guidelines may be drafted in relation to issues affecting particular Industries or sectors if the need arises.

Price Changes not Price Levels .

“The ACCC's focus In the transition period will be on changes in prices resulting from the tax changes, not on the level of prices," professor Pels said. "The ACCC is only interested in the response of business to the tax changes. It is not Intended that the ACCC assess how reasonable or otherwise the existing level of prices may have been.

‘The ACCC will expect suppliers to adjust their prices in response to the New Tax System changes and be able to-justify the changes made. - -

*A basic principle is that prices should reflect the nfil effect of GST and. pass through of the offsetting indirect tax reductions. Whilst prices may reflect the effect of GST, no profit markup may be applied to it".

The Pass Through Test: The net profit margin implied by prices and costs incurred in the supply of a particular good or service should not increase as a result of the New Tax System changes alone

The net profit margin will be assessed as a oercentage of costs or uf sales exclusive of indirect taxes, unless a supplier is able to demonstrate that exceptional circumstances justify a different approach to net profit assessment.

Consistent with the pass through test, businesses should not anticipate the effects of the New Tax System changes by increasing current prices, in general suppliers should not


change prices in advance of the introduction of the GST solely on the basis of expectations about all or any of:

• the introduction of the GST istelf;

• the business costs of complying with the administration of the GST;

• changes in input costs due to input suppliers anticipating the effects of the GST introduction.

The competitive market test

The statutory test recognises that there may be other factors that influence the extent of pass through in the transitional period in addition to the New Tax System changes alone. These may be indirectly related to the New Tax System changes, for example changes in administrative costs associated with implementing the tax changes (net of any government assistance received relating to these costs), and changes in production and sales volumes resulting from price changes or anticipated price changes.

Changes in costs actually incurred If reflected in prices should not affect net profit margins. Changes in demand may result in margin changes. However, in assessing the reasonableness of margin changes the ACCC will apply^a competitive market test. That is, the ACCC will consider whether any change in margin is consistent with what would be expected to occur In a competitive market. In making this assessment the ACCC will assess whether a supplier or suppliers together are likely to possess a high degree of market power which may allow them to take inappropriate advantage of the New Tax System changes.

If margins are observed to change prior to the introduction of the GST in response to forward buying and deferral of buying by consumers wilhin the transition period, the ACCC will doseiy examine subsequent pricing responses at the time of the GST introduction and afterwards. The ACCC would expect to see the effects of demand anticipation on margins to be neutral over the transition period.

Supplier justification

“The ACCC expects that suppliers will be able to justify in specific terms any change in product net margins resulting from the New Tax System changes,* Professor Feis said. “Justification should be by reference to the terms of the statutory test and the Guidelines, including consistency with competitive market operation.


“In carrying out its task of monitoring prices In the transition period, the ACCC will take Into account any publicly available econometric modelling and any other modelling that the ACCC itself undertakes or commissions. Price changes that vary significantly from an industry's expected average price movements will be an indicator for doser scrutiny by the ACCC.


Displaybg prices

“Where prices are displayed, they should be GST inclusive. This is in line with the intent of the Government. It is also consistent with the Trade Practices Act (Sections 52,53(e) and 53C). In addition, suppliers are encouraged to provide information to consumers to explain the basis for any price changes made in response to the New Tax System changes. This may Include display of the pre-GST prices as well as the GST inclusive price, where appropriate.

Compliance commitments

"The ACCC wil seek from individual businesses with annual turnovers exceeding $100 million voluntary commitments of compliance with the Guidelines.

Comments, by 11 May 1999, at the latest should be directed to:

The General-Manager Australian Competition and Consumer ACCC PO BOX 1199 DICKSON ACT 2602

Fax: 02 62431122 Copies of the draft Guideline are available from all ACCC offices or at the ACCC website:

Further information '

Professor Allan Fels, ACCC Chairman, (03) 9290 1812 or pager (016) 373 536 Ms Lin Enright, Director. Public Relations. (02) 6243 1108 or (0414) 613 520 MR 43/99 23 April 1999