PC report spanks online retail

In its monster retail report, the Productivity Commission has recommended (among a great many things) that the government lower the tax free threshold on online purchases of foreign goods.

Thankfully, however, it has also amply demonstrated the practical foolishness of the idea with an assessment of the costs involved in monitoring the parcels at the border. Here’s the money quote:

Taking the current collection charges as a crude proxy for all costs (and ignoring the possible need to engage a customs broker) what would happen if Australia simply lowered its threshold to a level like that of Canada — a LVT of $20? Many submissions have advocated such an approach. This would satisfy the requirements of tax neutrality by subjecting the vast majority of incoming parcels to GST and duty collection. Data on the breakdown of the number of parcels between $0 and $100 are not available. However, the Commission estimates that over 30 million mail parcels would then need to be processed — as compared to the level of 20 000 in 2009-10. Lowering the threshold to $20 would raise in excess of $500 million in tax revenues but the cost of the processing using the current system would escalate to almost $1.6 billion — three times the additional revenue collected.

Reducing the threshold to $100 would raise an additional $470 million from about 15 million parcels, but would cost consumers and businesses approximately $715 million, still far exceeding the revenue raised.

An alternative approach would be to make only a small movement towards a lower threshold — to $900 for example. At this threshold level, about $15 million in additional tax revenues would be collected at a cost of around $8.6 million. On a simple arithmetic analysis, such a threshold appears feasible. But this would leave 99 per cent of parcels with no tax and duty collected, making little difference to tax neutrality and failing to address concerns about ‘level playing field’ competition.

At this threshold level, the number of mail parcels required to be processed would be over three times the current level, and with the current processing system, even this small increase is likely to cause significant delivery delays. The costs of suchconsequential delivery delays, possible custom broker charges, and additional infrastructure costs required to store parcels while awaiting the payment of taxes and duties, is likely to see total costs exceed revenue gains even for a modest reduction of the LVT to $900. The current Australian processing system (particularly for mail) was never designed to cope with processing volumes of this magnitude and it is clear that it simply could not cope with a dramatic and sudden lowering of the threshold to a level that would be required to achieve tax neutrality.

The Commission has not been given any reason to believe that the border protection functions carried out by Customs would necessarily suffer under such a scenario.

However, it is clear that current infrastructure and systems would neither be adequate nor efficient in meeting a dramatic increase in volumes. Substantial delays in incoming parcel processing would be inevitable, affecting not only consumers shopping online, but the vast range of businesses involved in importation of goods for retail or other purposes.

On balance, the Commission is of the view that precipitate action to lower the threshold would bring with it net costs to the community. Further, a small movement in lowering the threshold would not satisfy, in any reasonable measure, the goal of tax neutrality. In the Commission’s judgement, an interim and partial reduction would be mainly symbolic and likely to consume resources that would better be devoted to exploring the best and most expeditious manner to reduce collection costs that enable a cost-effective approach to greater tax neutrality.

Unfortunately, as sensible as this objection sounds, I can’t see a measly billion dollars of tax payers money getting in the road of the retail campaign for protection tax neutrality. And now armed with the PCs endorsement of “tax neutrality” it’s a fair bet we’re about see the campaign go into overdrive.

To me, it’s kind of absurd for the PC to be taking a narrow perspective on this question at all. Boosting local retail sales on a point economic purity seems a little narrow when we know that that is precisely the opposite of what the RBA is trying to achieve doesn’t make a whole lot of sense.

Moreover, if the retail campaign were to succeed in lowering the threshold and retaining more local sales then the burden of adjustment that comes with the commodities boom will fall more heavily on other sectors, namely manufacturing, through higher interest rates and a higher dollar.

And frankly, is that what retail wants? A higher dollar? Isn’t that their problem?

Here are the key findings of the report:

There are almost 140 000 retail businesses in Australia, accounting for 4.2 per cent of GDP and 10.7 per cent of employment — the industry is one of Australia’s largest employers.

• The retail industry exhibits great diversity by: size of companies, region, format, competition within sectors and in the range of goods sold — from food to furniture to footwear. While current trading conditions are challenging, longer term trends tell a larger story. Over the last three decades, retail sales growth has trended down; consumers are spending more of their rising incomes on a range of non-retail services including financial, property, travel and entertainment.

• This diverse industry has met many competitive challenges in the past and online retailing and the further entry of new innovative global retailers are just the latest. This intensified competition is good for consumers, but is challenging for the industry which, as a whole, does not compare favourably in terms of productivity with many overseas countries. And the productivity gap appears to be widening.

• Australia also appears to lag a number of comparable countries in its development of online retailing. The Commission’s best estimate is that online retailing represents 6 per cent of total Australian retail sales — made up of 4 per cent domestic online ($8.4 billion) and 2 per cent from overseas ($4.2 billion). In some other countries, online sales figures are higher and seem set to grow further, as will also happen here.

• Retailers operate under several regulatory regimes that reduce their competitiveness. Major restrictions which require improvements are:

– planning and zoning regulations which are complex, excessively prescriptive and often exclusionary

– trading hours regulations which interfere with the industry’s ability to adapt and compete in a more globalised market

– constraints on workplace flexibility such as obstacles to the greater use of enterprise bargaining and the adoption of best practice productivity measures.

• The current level of the low value threshold (LVT) for exemption from GST and duty on imports is $1000. The exemption is judged to be a minor part of the competition story, but GST is a broad-based consumption tax, and the LVT in principle should be reduced to a low level to ensure tax neutrality.

• The current processes for collecting taxes and duties at the border are not efficient. As the threshold is lowered, costs of collection increase significantly — at very low thresholds (for example $20), the costs of collection would exceed tax revenue by over three to one. Such a cost impost on both importing businesses and consumers is unacceptable even without considering additional costs such as delays.

• The processing systems for incoming parcels to Australia need to improve, as has occurred in other countries. The Government should investigate this with a view to then reducing the LVT in a cost effective way.

Houses and Holes
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Comments

  1. The Aussie retailer just isn’t in the running.

    They can cry all they want but at the end of the day they are able to set up a web site and play with the big boys but they lack the ticker and the imagination. Far easier to just open up a store in shopping mall and fill it with whatever tat they want and chuck a sticker on it and cry that it’s unfair that people choose to shop online where it’s far more convenient and far cheaper.

    Join the internet age or join the dinosaurs.

    • The point is, if an Aussie retailer sets up a website they still have to collect GST. The overseas retailer does not.

      • If 10% were the difference I’d buy from an Aussie retailer in a heartbeat (all else being similar). But the price difference is not 10%. Not even close.

        Check out Alienware. The price differential between Oz and US is obscene and it’s an import in both countries. Apple is 10% difference (ignoring exchange rates) and that is acceptable in my books.

        Another point is that Aussie retailer sites are for the most part pathetic and when I’m in a mean spirited mood I’ll contact them and point it out. I mean, how hard is it to have a price? How about some specs? or a review? Just before Angus and Robertson folded I TRIED VERY HARD to be an online customer but they didn’t even have their eBooks catergorized and to add insult to injury their eBooks were dearer than Amazon.

        To be fair the Aussie online presence is improving but the race has already started, the competition is already out of sight and the Aussie retailers think that 14.4k is pretty darn fast and that the world owes them a free shot, hang on they weren’t ready for that one can they have another go?.

        LOL

        • Sure, Aussie retailers may well suck, but they should be allowed to lose on a level playing field.

          • ASX3K has a good point. For example, Apple products are about 10-15% more expensive to buy locally yet I have never considered buying a US product and shipping it myself.

            On the the hand I was in the market for some running shoes recently. $50US online. Local price (online or in store) was $160. Hey, if it was $60-70 locally (10-20% price difference) I would buy them locally but a 300% difference is a bit much.

            I think H&H covered a repot here previously showing typical price differences between domestic and foreign online retailers.

          • Its not a level playing field tho – cos it is not the 10% that would stop you buying offshore, it is the days or weeks of paperwork you have to go through to get your goods from customs …

            if the aussie retailers were any good they would be supplying the rest of the world tax free too – how is that for a level playing field ?

          • Well, maybe we could wind back the GST. I mean, besides reforming *some* state taxes, did it deliver any of the promised benefits? Does it actually make a difference if you have a broad-based tax system? Has a VAT helped the UK? How about a higher savings rate – no, took a GFC for that to happen.

            Actually, on second thoughts, were there any promised benefits? Can’t recall, and google’s out of reach…

  2. So Canada can do it, but we can’t?

    I get that it will cost more than it raises, but why do we make Aussie retailers — both online and bricks and mortar — go through the hell collecting GST and the quarterly BAS? How much does that cost?

    There are almost 140 000 retail businesses in Australia, accounting for 4.2 per cent of GDP and 10.7 per cent of employment — the industry is one of Australia’s largest employers.

    No problem there. I’m sure they’ll all find new jobs in the Pilbara.

    Disclaimer: I am not a retailer, never been a retailer, and have never had any particular fondness for the retail sector, but this is unfair.

    If we can’t even sell the stuff we import, what hope is there for us? More than a million Australians work in retail. Where do you think these people will find work in Quarry Australia?

    • Do you prefer the job losses come in manufacturing?

      It’s fine for you to rant at the unfairness of job losses wherever you want as long as you don’t admit that we spent two decades building a liability to the rest of the world that now needs to repaid.

      But it’s an illusion you’re spinning. The piper must be paid.

      The job losses are coming. It’s only a choice of where you want them.

      • I never suggested we didn’t spend two decades building a liability to the rest of the world that now needs to repaid, but kicking the retailers while they’re down, hardly seems the best solution.

        We all agree what the best solution is (apart from Fanboy) but we’ve lost the political courage to implement it, and now the forces of darkness are too strong, we’ve probably lost the opportunity forever.

        The job losses are coming. It’s only a choice of where you want them.

        Seems to me like they’re coming everywhere except mining and mining-related construction and engineering, which will only ever employ 5% of the workforce at best.

        Even health and welfare are under threat because we never had the courage to tax the miners to offset the inevitable erosion in the tax base elsewhere.

        • But Lorax don’t you know revenge is a dish best served cold! I see no problem “kicking the retailers while they’re down”. They did the same to us for 20 bloody years!

          • Fine, but retail is the biggest employer in Australia. You tell me where these people will get jobs, and if not, how we will fund their unemployment benefits.

            I have to say, there is an awful lot of greed and self-interest in evidence here. One has to ask, if we can’t even sell imported sh*t to each other, WTF can we do apart from dig up rocks?

            The Australian economy is slowly but surely cannibalising itself.

          • Lorax, you might be slightly exaggerating things here. What are the stats for online retail? Not much, right.

            Besides, you still need to pay for international shipping on most things, and there is a delay of (often) several weeks for physical goods. There might be bumps on this playing field, but it’s not all one-way.

            The problem isn’t the GST, and never has been. It’s the markup, the lack of service, the lack of range, and the lack of innovation.

            There are some players in the industry that are serious about competing and their productivity shows it. I’m talking about retailers that are looking overseas for the best examples, such as Coles/Woolies/JB. On price alone, I even find it hard to go past DSE or OfficeWorks for generic items these days!

            But even these examples would be trounced by second-string retailers in the US. If you get a chance to visit the West coast, then make your way to Trader Joe’s and see a real grocer. Fantastic customer service, with great people earning real wages (not the standard US minimum), excellent range, and very competitive prices. Then there is Safeway (US, not Woolies), with a range that would leave most Australian’s stumped for choice.

            My wife recently bought a sowing machine, and the price difference between here and the US is horrific! A very expensive machine there would be $500. Same model model sold here – $5000. Even low-end models are priced about 3 times higher. Screw you, Aussie retailers.

            *Some* Australian retailers need to look a bit harder at why they are so far behind the competition. I would suggest that those that have aren’t about to start shouting it out to everyone, they’re just going to do it.

    • I don’t think it’s unfair. Like others have said, I’d gladly pay 10% extra to buy a product within Australia and receive it a lot faster than from overseas.

      The problem is that most Australian retailers, in typical Australian fashion, would rather whinge and lobby the government than actually try to innovate their business model and develop an efficient and usable online service!

      • Besides.. what is the proportion of online sales anyway? Didn’t Commbank show it was only like 1.7%? Talk about a storm in a teacup.

        However Australian retailers would gladly pull the wool over our eyes and bleat to anyone who will listen.

  3. Whatever, it s not like a 10% tax would make any difference ! I have ordered a breast pump online yesterday $640 in Australia, $250 overseas including postage. WTF.

    Even Harley Davidson are 30% more expensive here than in NewZealand !!! Why ?

    • Don’t get me started Dam. I have no intention of buying any further vehicles in this country after seeing how we are royally fleeced.

      NZ is cheaper, even before currency, and they are a smaller market, so I don’t buy ANY of the local dealers excuses.

      Retail in Oz is getting the wakeup call it deserves, high currency or not.

        • Unfortunate for individuals employed in this sector, that’s the problem. And it may be a biggie – often women second income earners supplementing the family wages – needed for mortgage payments (I have heard it said in some circles “she pays the mortgage”…).

          Hopefully retailers will pay attention to Cameron Murray’s recent post – get smarter, operate more efficiently and adapt to change. Interesting times ahead. As has been mentioned here at MB many times before – the next generation are committed online purchasers. Conventional retail minus homeATM spend are definitely in for subdued times.

  4. More than 200 years of being ripped off by retailers takes a while to change.

    Our gov’t taxes us left, right and centre. Try and import a vehicle if you want to be in a nightmare of the gov’ts creating. Products from a country without a carbon tax will get cheaper soon.

    Deflation coming to stores and online soon.

    • Overseas cars are cheaper to buy and are higher specced.

      Australia = rip off central Oi Oi Oi

  5. Qty 2 Michelin Pro Race 3 bike tyres are $190 at my local bike shop, and Online from the UK are $82. So for a 231% saving for waiting a week I go that way.

    I’m 100% convinced that Labor will tax us the max as soon as possible. The door is about to close.

  6. Why can’t the retail sector come to the realisation that they, just like the rest of the economy, are in withdrawal from the debt drug that kept them on a high for so long. GST is just a sideshow. The simple fact is that “equity mate” has not only seen a huge portion of the country tapped out for debt, but it has also brought demand forward for a whole heap of crap that no one needs anymore of.

  7. innocent bystander

    actually I don’t think online competition accounts for very much of retailers problems.
    Their problem has been brewing for ages – from a customer perspective try poor product knowledge to lack of staff and from their own perspective I am sure they struggle because of planning and zoning regulations, trading hour regulations and constraints on workplace flexibility.
    people just don’t use the interent for buying they use it for product research – if a retailer doesn’t have an internet presence they are well out of the loop.

  8. Tax equality *MUST* be achieved. It’s simply unfair that foreign retailers do not have to apply GST to goods if sold in Australia! This inequality was eliminated recently for VAT in Europe. I understand it’s not cost effective, but it is simply a question of fairness. Should have thought about before introducing GST.

    • If we are to implement fairness as a policy in Australia I have my hand up for a my affordable (on one full time wage) house on 1/4 acre block.

    • “Tax equality *MUST* be achieved.”

      Yes!

      So my income from cash and fixed interest investments should be taxed at the same rate as my capital gains. And negative gearing deductions should be quarantined to the income from the asset class that generated the losses.

      I agree that GST should be applied to all imports but I don’t agree that it’s the most important tax inequality issue that we face today. I certainly don’t think it’s worth changing when it will cost more money than it raises.

  9. this is why australia takes the cake…..

    i bought a set of AUSTRALIAN MADE bike wheels from america because it was cheaper by over $150!!

    They can send them to america and back and its still $150 cheaper than buying them anywhere in australia? somethings not right……

    • antidiscombobulator

      That REALLY takes the cake

      I would love to see ACA or TT, or better yet, 60 minutes do a story on that…

      It beggars belief

  10. There has to be a way to overcome the problems faced by the retailers. Maybe the Italian method, ie hold the parcels up for a few months as retribution for having escaped tax.

  11. Cool! some competition for the retail industry. Gerry is so angry now 🙁 poor Gerry, the ripoff is running out the door…

  12. Retailers (or their industry assoc) are tilting at windmills here – attacking an imaginary, powerless, voiceless enemy in overseas online stores.
    .
    Only Mark McInnes seems to have the brains balls to go after the shopping centre landlords.

  13. Australia is a rip off nation. Can’t think of a single item that is cheaper here then anywhere else in the world. I never buy clothes or electronics here.

    I go overseas at least twice a year to shop. Even with the airfares and accommodations added, I come out ahead. And I get to spend a couple of weeks holidaying as well.

    “Leveling” the GST playing field would not affect my behaviour whatsoever.

  14. tax equality… fairness… even playing field…protecting the retailers…

    Bull.

    What is it exactly that protects the customer from retailers lobbying and jacking prices through the roof? What protects the customer from the local dealers’ extortionary practice of refusing to service “imported goods” even when they are under global warranty?
    (their service consisting basically of them sitting on your item for 2 weeks and then sending it back to Japan – on a boat)
    What protects me from them only keeping in stock the mainstream items that are most profitable to them? “No I dont have that in stock but I can order it for you”
    – From China
    – On the back of a sea turtle
    – Four weeks
    Why thanks buddy, but you know what? I can do that myself nowadays and save me your 200% commission, sorry but you will actually have to work for your money from now on. Like the rest of us.

    Yeah it’s an uneven playing field. For the CUSTOMER. They should subsidise people ordering online to make it even.

    And jobs in the retail sector are the worst paid jobs anyway, and basing your economy on consumption, particularly consumption based on duopolies, jacked prices and extortions while merrily sending your manufacturing o/s is a recipe for disaster.

  15. I invite the majority of people who have commented above to step up this discussion. As a retailer I will put aside the strong emotive arguments (attacks) and offer the folowing to engague your thinking

    1. If your argument is that retailers are ripping you off then folow the money. Nett retail margings in Australia are under 10%.
    2. There will be a reason for the price differences. If you think you can do better then open a shop. Just keep in mind that 80% of retail businesses fail within 3 years and the owners often loose their houses in the process. Good luck.
    3. If, for example Steve’s comment above, is atempting to paint a broader picture then I and most retailers would agree. The cost of doing business in Australia is high (see point 1).
    4. A lot of my fellow shop keepers were working on less than 2% nett margin and are facing ruin. When we walk away who will you paint a target on next? Watch the empty shops grow over the next 6 months.
    5. Australian retail is highly compeditive. If you buy books and use http://www.booko.com.au as your bargin sniffer you will almost always find one of us matching Amazon or Book Depositry prices. Considering Australia was the battle ground for a discount war between the two that is impressive. Ohh and if you buy from one of us we help to pay for roads and hospitals and your gouberment wages.

    On a personal note, next time you speak to your local friendly shopkeeper ask him or her why, if the return is so poor do they own/ run a retail business? In most cases their answer is “I like people”

    • Good points learner.

      I think the greatest problems with retailing are high labour costs, high input costs and high regulatory burden.

      This has been imposed by both sides of politics, using unsound economics to do so (a combination of corporate and social welfare).

      As I said before, I thought the EU was the high mark for taxes, regulation and bureaucracy gone wild, but even in its deflationary funk, its a paradise compared to the environment the Aussie retailer finds itself..

      • Devilled Advocate

        Learner

        As someone who ran their own downstream business (manufacturing/wholesale) for almost 8 years I strongly agree with you.

        Its definitely not about rip offs but rather a reflection on how much it costs to run a business in this country and a reflection of our high standards of living.

        I think 98% of my customers would have been lucky to be making decent wages and thats working 60+ hours per week with huge risks attached.

        Think about it – when your house is on the line are you really dumb enough to ignore the sky writing around you?

        They have to charge what they do simply to keep the lights on.

        Post GFC smarter retailers trimmed all the fat out of thier business and even these ones would be lucky to be netting a 10% annual profit.

        The other issue is that Australia is simply too far away and too small for any manufacturers to set up a subsidiary and most sell to a distributor who simply has to mark up product 30 – 50% to make it worth handling.

        Retailers in turn will mark up the product 30 -50% (water sports products) but competition brings this back a lot.

        By way of contrast the reason why stuff is so much cheaper in the US/EU is due to the size of the market, very efficient logistics, much cheaper labour etc

        Again we sold a lot of product to the US via our own subsidiary and our own product ended up selling 30%+ cheaper than the local market.

        Labour here costs ~20 – 25/hour for very basic unskilled labour – US – $8….you get the drift pretty quickly.

        When we saw 5 or our best customers fail/sell up inside 18 months we also saw the writing on the wall and sold – very glad we did as we would have to scale back to 2002 with two people in order to survive..the business we sold too is the biggest in the industry and scaled down from 50m turnover to just over 30m….I dont see things picking up any time soon (ever?) as I do believe that this is a structural change.

        Im inclined to think that the only retailers who will make it long term are those that offer excellent service and trim all of the fat out of thier business so they can still sell competitively.

        For me it simply wouldnt be worth it.

        DA

        • This is all roughly in agreement with the general thrust of the critics, in that the GST of overseas goods isn’t the problem, and the retailers need to think harder about what they actually need to do.

          That includes things like improved supply-chain management, making better use of low-cost locations, more efficient staffing practices (is cheap labour really the solution, or do you just need more of them to get anything done?). Many of them are competiting on the wrong things, for example, I don’t care if you’ve got a store in the all of the Westfields – if that costs you too much, move out! I don’t care if you’re open all hours – if that costs you too much, change your hours! Actually look at where the costs are, and do those costs add to revenue?

          So why don’t I go into retail? You can’t do everything, but in my work I look for ways to improve my productivity in order to reduce the clients’ costs. Retailers should be doing the same, instead of asking for protection.

        • Hang on, you are comparing the US minimum wage ($7-$8) to the australian minimum wage which only recently went up to $15.51, and can be as low as $7.34 if you are between 16 and 20 (like the students and backpackers that many retailers employ)
          http://www.fairwork.gov.au/pay/national-minimum-wage/pages/default.aspx

          Besides this is only the minimum wage, it doesnt mean that if you relocate to the US all of a sudden you will find hordes of people who would happily work for $8 an hour.
          And there’s another side to this, if you drop all workers’ wages, you are also dropping the purchasing power of a large chunk of your customers and concentrating this power to a small number of owners. That cant be good for your sales, or the economy, not to mention if it’s socially fair.

          As for profit margins. I had a look at Harvey Normans financial reports for the years 2001-2003 (pre-shopping online explosion) and it showed net profit margin (after all costs and expenses and before tax) of 23% to 45%.
          http://www.harveynormanholdings.com.au/annualreports.htm
          This is the kind of margins people are complaining about, not small importers who know their product, offer personalised services and actually add some value. I’m sure most of those are copping it as well and thats bad, but the main thing is that the monopolies and duopolies that control consumer goods are copping it too.

          As for the distributors/middlemen that have to charge high prices to survive, what value do they add for items that can be posted cheaply? None. So why should we keep subsidising their loss making businesses by paying inflated prices and what will we lose if we cut them? Please dont tell me the jobs because I would much rather focus on building something better for the next generation than shitty minimum wage paying retail jobs. And at the end of the day (if needs be – in the meantime) I would much rather pay more tax to cover their unemployment benefits directly rather than pay 100% more on all my purchases so that someone can make a crappy wage after somebody else has kept their profit margin (without adding any value to anybody).

          • I don’t know why people like to beat up on the little minimum-wage guy sitting on the bottom of the cost pyramid, while ignoring the high cost elephants sitting on top of their heads. I guess it is just human nature.

          • Devilled Advocate

            Jud

            Im not aruguing with you just pointing out why it is so and that no one is setting out to rip anyone off – retail needs to change – thats a given. The skywriting is there for all to see.

            As for min wage – that cost includes all the loadings for sick/annual leave etc – it works out to almost 3 times what they pay in the US.

            Ive posted on this in the past but I think as a country we need to agree on what we want the country to look like in 50 years and put everything towards getting there – this involves getting up an alternate revenue stream to mining and farming and getting back to being the smart lucky country – Oh and politicians that have a titanium spine…

            I think the pending tsumani will really show us that being a property “equity mate” mogul isnt quite what its cracked up to be.

            DA

          • Yeah sorry I’m not arguing either, just trying to gather my thoughts and reach some sort of a conclusion.

  16. If the retail industry were serious about a level playing field, why don’t they campaign to abolish the GST? Not only could they immediately drop their prices 10%, but probably by a larger amount given the savings from reduced administrative costs.

    • No, the GST is a much better tax than the corporate/income tax.

      What would “save” the retailers there would be raising the income tax “free” zone to say $50,000 (and abolishing all family tax and middle class welfare), and eliminate the corporate tax up to say $250,000 annual profit. And eliminate all taxes on savings/bonds/fixed interest products.

      Consumption taxes are better(sic) than income taxes.

      • The Prince,

        I agree, far better to tax consumption than investment and savings.

        Nonetheless, reducing regulations would help also, eg. by what right can govts determine business hours?

        • The same right (or rather, obligation) that they have to prevent murder. Humane working conditions is a human right.