After wide consultation with stakeholders, including industry and consumer representatives, the Australian Competition and Consumer Commission today issued updated Guidelines about price changes brought about by the New Tax System to take effect on 1 July 2000.
"The Guidelines are firm and fair", ACCC Chairman, Professor Allan Fels, said.
"The Guidelines provide strong protection for consumers but are fair to business and simple, clear and easy to understand.
"They make clear the vital importance for business to pass on to consumers all tax and cost falls attributable to the New Tax System. The Guidelines require business to offset any justified price rises with savings from the New Tax System changes.
"Essentially the Guidelines say that if the New Tax System changes cause tax and costs to fall by one dollar, then prices should fall by one dollar. If after taking into account tax and cost reductions resulting from the new tax system, the costs of a business rise by one dollar, then prices may rise by no more than that amount.
"In any event the Guidelines now explicitly state that no price may rise by more than 10 per cent because of the New Tax System changes.
"On one hand consumers are protected as business cannot add to profits as a result of the tax changes", he said. "On the other hand, the rule is fair to business because it can recover any net tax and cost increases, and maintain existing profits".
Professor Fels said that while the principles remain unchanged, the Guidelines have been updated to take account of new legislation and matters arising from the ongoing consultation process.
The updated Guidelines, originally issued in July 1999, clarify matters raised by interest groups on details such as pricing points, dual ticketing and compliance costs. Anticipatory pricing amendments that became law in December 1999 are also included in the updated Guidelines.
Professor Fels said that the updated Guidelines in relation to the New Tax System changes require that:
- businesses should reduce prices to pass on the full effect of any net tax reductions;
- any increase in price based on the GST should include a full offset for indirect tax reductions and other New Tax system related benefits, such as diesel fuel rebates and grants;
- no mark-up should be applied to the GST component of price;
- prices should reflect actual, not anticipated, tax increases;
- businesses should not take the opportunity to increase the difference between costs and prices in dollar terms (the dollar margin rule), and
- in any event, no price should increase by more than 10 per cent as a result of the New Tax system changes.
"The Guidelines translate into a simple rule that businesses should not increase the net dollar margins on their goods and services as a result of the New Tax System changes alone.
"The ACCC will take a very hard line indeed on any business that adopts the attitude that tax increases should be passed on in full to consumers while tax and cost savings due to the New Tax System should be pocketed for the benefit of their own bottom line. This would constitute the worst kind of profit taking.
"The Guidelines make this clear. They have the virtue of being straightforward and easy for business and consumers alike to understand. They have been updated after extensive consultation with business and consumer interests".
Why Price Exploitation is Unlikely
There are a number of reasons why it is unlikely there will be large numbers of instances where consumer exploitation will occur:
- in the present low inflation environment it will be difficult for many businesses to raise prices, let alone seek to capture additional profits;
- in many markets competition will protect consumers as businesses compete on price to win business and market share;
- where an individual business seeks to over charge for GST ethical competitors will in many cases seek to expose them either by advertising their own ethical charging or by informing the ACCC Price Exploitation Hotline*;
- in many cases businesses will be anxious to demonstrate to consumers that their price adjustments accord with the Guidelines. In some cases they will go further and offer a competitive deal to consumers by absorbing part of the tax rise;
- a sense of corporate responsibility;
- awareness of high consumer interest, and
- where competition and other market factors do not protect consumers, there are powerful laws passed by Parliament to expose and prosecute any business that exploits consumers.
Professor Fels said the New Tax System was not to be used as an opportunity to raise profits and exploit consumers, or other businesses.
"Some business people have expressed concerns about the strength of the laws. However, all Australian Parliaments have passed these laws - the only topic of debate being whether the laws should be even stronger.
"The strength of the laws shows the intent of Parliaments and the public that no consumer price exploitation can be tolerated.
"A number of practical examples are provided in the Guidelines to illustrate how prices should be adjusted by business in response to the New Tax System.
Pricing Points and Averaging Margins
"These Guidelines clarify for business issues about the effect of averaging margins across a range of closely related goods and services.
"Broadly the ACCC does not favour averaging or adjusting prices to convenient price points, preferring all pricing to be transparent. However, it does accept that in particular circumstances the practice may be acceptable and have some merit.
"Most consumers are likely to want the tax change effects to be transparent and applied equally across all products, rather than loaded onto particular items for commercial or marketing reasons.
"Not to be transparent is likely to lead too consumer suspicions that price averaging is working to their disadvantage.
"For example, suppose the net effect of the tax changes for a particular product is five per cent. Consumers are more likely to be impressed by a business that applies the five per cent to every product than by one that for no good reason increases some prices by seven per cent and others by three per cent.
"The Guidelines nevertheless specify the particular circumstances in which price averaging and moving to price points such as $1.99 or $2.99 or multiples of five or 10 cents, is acceptable.
*The ACCC Price Exploitation Hotline is 1300 302 502 and is open 8 am to 6 pm Monday to Friday
SEE 'ACCC GUIDANCE ON PRICE DISPLAY' FOR COMMENTS ON HOW BUSINESS SHOULD DEAL WITH PRICE DISPLAY ISSUES.