Tourism is key to Norfolk Island’s economic well-being and its ability to pay its way in the world. So it is important to try to understand the effects on the tourism sector of the Australian Government’s proposed changes to taxation and employment conditions on the island.
In recent weeks I have tried to address this issue by setting up a “model” of a tourist accommodation business, and trying to chart its course over the next three financial years as the various Australian Government changes are introduced. My model business consists of 10 units, is run by owner/managers (assumed to be running the business as a partnership), and employs three to four staff (some permanent, some casual). Major future changes include: income tax, depreciation allowances for businesses, and the special area zone tax offset for individuals; adjustment over time of pay rates to the minimum wage under the Australian National Employment Standards; employee superannuation; and the introduction of penalty rates and other conditions under the Australian Modern Award System (MAS).
Taking into account these coming changes, and making a number of essential assumptions about how the business functions, it is possible to project profit and loss for the business over the coming years. (Economic variables not associated with these changes, are by and large held constant.) The results of calculations for a “base case” scenario for this modelled business are set out in the Figure. They show that under the assumptions made, the outlook is indeed bleak, with individual after-tax income falling from around $27,600 in 2015-16 to around $18,500 in 2018-19: a 33 per cent drop. Yes, that’s right, 33 per cent.
In the first year of the changes (2016-17) the business shows a net benefit from the effects of the NI-GST removal, depreciation allowance and special zone tax offset, but this is rapidly eaten away by rising minimum wages, and in the year 2018-19 by penalty rates under the MAS. These numbers raise very serious concerns not only about the future income for accommodation business proprietors, but also their ability to invest and ensure their businesses are economically sustainable. In addition they indicate a reduced capacity for these businesses to engage in marketing activities to attract visitors to the island, which will also have an adverse impact on the economy more generally.
We do need to look at the assumptions being made however. In our “base case” the assumptions are in fact very “middle of the road”, even conservative. It is assumed for example that the annual minimum wage determination by the Fair Work Commission will see the Australian minimum wage rise at 2.4 per cent per year over the next three years, which is less than the average over the last four years; in the new regime (2018-19) all employees are paid no more than the minimum wage; and it is assumed that tradespersons’ hourly rates increase at only 10 per cent per year.
One assumption used in the “base case” scenario is that the employer will pay an adjustment to employee wages to cover employees’ income tax for the first two years (2016-17 and 2017-18). The reason that this assumption has been included is that several business houses on Norfolk already intend to do this, and employees are themselves negotiating with potential employers to achieve it. (If this adjustment were continued into 2018-19, then employer income after tax would drop to around $15,000.)
Fortunately, no one needs to take on faith what I have just described. There will shortly be a full description of the model including the changes being introduced, the assumptions being made and the calculations involved, available to anyone who wishes to see them. Moreover the model has also been set up as an Excel spread-sheet, so it is possible to change the assumptions and see immediately what effect they have on the outcomes. These things are currently being held by Rael Donde, President of the Accommodation and Tourism Association, who will be able to provide them.
It is hoped that this modelling may provide a starting point for an informed discussion on the future of tourist accommodation and the tourism industry on Norfolk Island, and lead to intelligent policies to support and improve them.
*Chris Nobbs is (a bio is on its way)
Note. This model could not have been developed without advice and assistance from a number of business people across the island, and I thank them heartily. The model has the endorsement of the ATA Executive.
This article first appeared in The Norfolk Islander and on Norfolk Online News, 11 June 2016. Other articles, letters on Norfolk Island at: http://www.norfolkonlinenews.com/chris-nobbs.html
