The Battle Over the Club Tax

When Michael Egan brought down his 2003 Budget on 24 June 2003,¹ it contained massive tax increases on registered clubs. The announcement caused great consternation across the club industry and its communities and triggered major protests, including two rallies held in Sydney.

In the year leading up to the increase, the government was in discussion with the state’s registered clubs’ peak body, ClubsNSW. Pat Rogan², the organisation’s president, was assured that before any changes were made to taxes on poker machine revenue, there would be a period of consultation.

ClubsNSW CEO David Costello said both the former treasurer and the former minister for Gaming and Racing, Richard Face, had promised to consult the community before increasing the taxes. Some increase in tax was expected, and that was accepted in some quarters.

Speaking in early 2006, Costello said,

The industry has never been shy about paying a fair level of tax. But we’ve demonstrated – and the study carried out by the Allen Consulting Group bears this out — that the proposed legislation has the potential to destroy the industry.

Allen Consulting was the consulting firm engaged by ClubsNSW later in 2003 to carry out a study of the impact of the tax on the industry.

When the 2003 tax hikes were announced, Roger Cowan was one of the strongest critics. He believed the Labor government had no understanding of the potential of the club industry and that the tax increase was a short-sighted strategy that would destroy that potential.

The very people who have always been looked upon as the traditional supporters of the Labor Party were those who would be most hurt by the greedy tax grab. If there were an iota of business sense in the party, it would demand a proper study into the potential of clubs in the areas of community support, tourism, sport and recreation.

A clever government might even think of ways to maximise that potential by decreasing club taxes in such a way that its revenues would grow through increased business activity within the state, rather than destroying the potential.

They have no idea what they are destroying. But then they have the same shortsighted approach when they greedily grab extra revenue out of property transactions, and saddle motorists with tolls inflated because of secret deals with tollway operators. All these short-term grabs have dampened investment and damaged business momentum in NSW.

They were supposed to be running the biggest business in the country and they had no idea of one of the most basic principles: you must reinvest in the business to build it.

The day before the Budget was brought down, ClubsNSW representatives – including Pat Rogan – were called to Parliament House. Rogan recalls how the Treasurer told them about the changes.

I asked the Treasurer “What about our agreement? What about the review we were promised?”

Egan’s answer was, “We’ve done our own inquiries, and this is it.”

There was no more discussion. When I asked about the actual figures, I was told,  “You’ll find out tomorrow night.”

It was an especially bitter pill for Pat Rogan. He had spent more than 25 years in the NSW Parliament as the Labor member for East Hills and felt he was entitled to expect better treatment from the government.

Speaking in 2006, Rogan said it didn’t matter what anyone tried to say to Egan about the club industry.

He would say “You can talk to me all day about clubs, you’ll never convince me”.

Rogan and Egan had been comrades in parliament for 25 years. He believes that Egan was the driving force behind the campaign against the industry. Says Rogan:

Egan was vindictive, and Roger was a particular subject of his vindictiveness. Egan once told me, “Panthers will be gone in a couple of years”.

In their first story focusing on Panthers in September 2003, Sydney Morning Herald journalists Anne Davies and Paola Totaro³ describe Michael Egan as a ‘prodigious hater’.

They quoted Egan:

Panthers is no longer a community club. Penrith might be premiership material on the footy field but the registered club is a wooden spooner when it comes to supporting the community.⁴

The journalists noted that the club had made community donations of $2.26 million in 2001-02, given its football team $2.8 million, and that its net profit was $2 million. Rogan says,

Roger was always at the forefront of the fight.

Quite early on, I told him that big clubs had a problem with Egan.

On top of that, Richard Face saw Panthers’ amalgamations as head-hunting. Of course it wasn’t like that at all. All those clubs were in some type of financial difficulty, and they were approaching Panthers – at the rate of about one a week. But Face could never grasp it – he said that Panthers was “gobbling up the industry”.

Many in the club industry didn’t regard Face highly as the minister responsible for clubs.  They thought he did to make any real attempt to get a proper understanding of the industry workings.

To Cowan and others in the club industry, statements made by Egan around the time of the Budget indicated that he did not fully understand the role of clubs in the community, the way they operated or the profits they made. He certainly was quick to disregard all the rationale presented by those opposed to the tax.

For instance, unlike regular company tax, it was clubs’ revenue that was being taxed, not their profits. ‘This tax applies irrespective of profit’, says David Costello. ‘And it poses a serious threat to the financial viability of many clubs.’

Roger Cowan had first-hand experience of Treasury’s level of understanding of the way that clubs work. In the late 1990s, he had organised a meeting with the Treasurer, and was in the waiting room outside his office.

There was a woman also waiting for the Treasurer. She told me that she was there for the meeting; Egan apparently wanted somebody from his department to sit in. I think she said she was the head of the Treasury department, but it was certainly some high-level job.

While we were waiting, we got into a conversation about some of the difficulties of running clubs and trying to make a profit. I made the point that it’s not as easy to make a profit as some people think it is.

She looked quite surprised and said, “Why would you need to worry about that? You’re a non-profit organisation – you don’t have to worry about making a profit”.

At first I thought she was joking, but then I realised she was quite serious.

I told her, “Well, if we don’t make a profit, we make a loss, and if we keep making losses, we go out the back door. We have to make a profit!”

This was a person high up in the Treasury department, and she just did not have a clue about the way clubs work.

Rogan says that Egan had his own perception of what a club should be – small, intimate, friendly, like the old-style local club, where everyone knew everyone else. Old Fred Smith came in at the same time every day and sat in his same chair; the staff knew everyone by name, and vice versa. He claims that Egan held the view that the club industry had lost its way.

But clubs had to grow. The members demanded it. The clubs that were getting the crowds were the ones that had better facilities, better food, good entertainment. If members don’t get what they want from their club, they’ll go somewhere else. Clubs are like companies in that they are directed by their members – who are the shareholders.

The club industry’s criticism of Egan was reinforced by Treasury documents later obtained by ClubsNSW under Freedom of Information.

Documents obtained by ClubsNSW under Freedom of Information reveal that just six weeks before Michael Egan announced his billion dollar tax increases, senior Treasury officials Michael Clark-Lewis, (Director, Revenue Strategy) and Robert Carling (Executive Director, Economic and Fiscal), had signed off on a top rate of 30.59 per cent. The rate for the top-earning clubs at the time was 26.25 per cent (on a post GST basis).

When the figures were presented to the Treasurer, he would not accept them. He sent the officials away to rework the figures. The top rate in the revised option – again signed off by Clark-Lewis and Carling – was 34.59 per cent. The recommendation was again rejected.

Eventually the Treasury officials appear to have got the message.

On the third attempt, they came up with a tax rate increase ranging up to 49.09 per cent for the top clubs.

Pat Rogan claims Egan had a special place in the Carr Government:

Egan was a unique character in the ALP, one of the untouchables in the Carr government. All the other ministers had to go to the Premier to get things checked off. But this did not apply to Egan.

In fact, Rogan claims it was the other way around. Egan ran his own race, and Bob Carr had to go to him. He also believes that at one stage the Premier was willing to have another look at the tax, but Egan said no.

Rogan remembers Egan once being asked,

“What about due diligence, what about the social impacts of the tax?”

His answer: “We don’t have to do things like that.”

No independent study of the kind sought by the industry was commissioned by the government. In fact, in 2004 – in answer to criticisms that there had been no economic study of the impact of the tax increases on either clubs or the community – Michael Egan said there was no need for an independent analysis of the tax.

He told a budget estimates committee at Parliament House in September that year that the only economic analysis of the tax had been that of ‘commonsense’.

Egan repeated the statement in an interview on Sydney radio station 2GB on the day of the second Axe the Tax rally.

The assessment can be made on a commonsense basis, and I’ve made that.

Also in September 2003, ClubsNSW commissioned the Allen Consulting Group to conduct a study on levels of taxes that could be sustained by the industry. Allen Consulting had previously done work for the government, a fact that ClubsNSW felt would help give its findings credibility.

The Allen Report, released in May 2004, painted a bleak picture for the club industry. It predicted job losses of 24,000 in the first seven years of the tax, along with massive cuts to community funding and many club closures.

The report gave what it called a conservative estimate of clubs’ overall contribution to the NSW community. This was $1.8 billion annually, including all taxes paid by clubs. On top of this, clubs also provide sports and fitness facilities; venues for socialising and meeting friends; food and beverage at reasonable prices and quality, said the report. The figure does not take into account the many volunteers who work with clubs, particularly in junior sport. Clubs also provide free or subsidised services – such as the use of meeting rooms and other club facilities – to community clubs and  organisations.

In addition to cash donations of $102 million annually, the report noted that a great deal of in-kind support often accompanied those donations, making the total contribution difficult to quantify.

The report contained a scale of taxation levels that the authors saw as sustainable by the club industry. The figures were in line with the first set of figures presented to Michael Egan by Clark-Lewis and Carling before the 2003 Budget. Cowan laments the need to investigate sustainable tax rates imposed by a state government wearing blinkers.

It is short-sighted and illogical to set an objective of finding out what tax rate is sustainable. That is like saying “what is the highest tax the industry can afford to pay?”. The object should be to identify the potential of the industry in areas that would also generate government income. The next step is to see how that potential could be used in a way that would provide wins for all concerned — the government coffers, community amenities, tourism, other business sectors.

If the federal government took such a narrow approach it would increase company tax to 50% or so. But it wants to encourage investment and business growth, and make Australia so prosperous that taxes roll in from all directions. Imagine the investment that would occur in NSW if poker machine taxes were only 15%, for example. The result would be a big boost to tourism, sporting facilities, employment, sales tax, payroll tax, and support for charities. There would be wins everywhere. In the long run the government might actually gain financially by setting reasonable tax levels.

Reasonable is a long way below the ridiculous rates now in place. The same argument applies in real estate and property taxes. A government just can’t be an armed bandit and the builder of business at the same time.

Unfortunately, such changes would require the sort of long-term thinking that seemed to have no place in the greedy Carr-Egan government.

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1. The tax increases announced in the June 2003 NSW Budget applied to what the legislation and government described as gaming machine “profits” — broadly, the amount wagered through poker machines less the prizes paid to players. In conventional business terminology, this was closer to gaming revenue or gross gaming revenue: operating expenses such as wages, premises, administration and other costs had not been deducted. This distinction was central to the clubs industry’s objection that the tax applied irrespective of whether a club itself made a profit. The increases were to be phased in progressively over eight years and were heavily weighted towards larger, higher-earning clubs. Clubs earning less than $200,000 from gaming machines remained exempt, while those earning between $200,000 and $1 million received a slight reduction in their tax rate. Approximately 515 clubs earning more than $1 million bore the increases, with the marginal rate for the highest-earning registered clubs eventually intended to reach 40 per cent.
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2. Pat Rogan (1936-2015) was prominent Australian Labor Party politician who served as a member of the New South Wales Legislative Assembly for East Hills from 1973 to 1999. He later served as the Chairman of ClubsNSW. He was posthumously honored with the Order of Australia Medal (OAM) for his extensive service to local communities and NSW clubs.
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3. Paola Totaro worked in a media role (press secretary, media advisor) for Bob Carr while he was the Opposition Leader (1988-1995). She had left The Daily Telegraph and had not yet joined the Sydney Morning Herald. She continued to follow the Panthers story through the Inquiry.
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4. See 27-28 Sep 2003 Sydney Mroning Herald — A league of their own. ↩︎

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