New tax regime needed to ‘level the playing field’ and support industry change report says

In late 2018, Clubs Queensland engaged KPMG to independently review and provide a report which looks into the future of community clubs in our state. While it is clear there are plenty of challenges ahead for our sector, the report acknowledges amongst many things, a pressing need for changes to the existing tax regime to support this change.

A taxation system which continues to favour casinos and other forms of competition, must be reviewed and the “playing field levelled” if Queensland community clubs are to remain relevant and thrive.

A comprehensive report, conducted by KPMG and commissioned by Clubs Queensland to assess the future sustainability of more than 1,000 community clubs, has confirmed enormous disparity between the taxation and legislative structures clubs operate under compared to casinos throughout the State.

The Sustainability of Queensland Clubs report, which is due for imminent release, found that the short and long term sustainability of community clubs in Queensland will depend on legislation, innovation and diversification to continue to serve their 2.4 million members across urban, regional and rural Queensland.

But it also clearly shows that the vast majority of Queensland’s community clubs face tax burdens on gaming machine revenue which are well in excess of that paid by two of the four operating casinos in the state.

The clubs sector
There are almost 1,000 community clubs across Queensland paying in excess of $512.6 million in State Government taxes including gaming taxes every year. 

The KPMG report states the intrinsic value of community clubs across Queensland “extends beyond the quantifiable economic worth, to the cultural, social, physical and mental wellbeing of Queenslanders.” 

“They provide direct economic benefit through employment, relationships with small business and the industry’s contribution to Queensland Treasury through taxation revenue.

“With increased competition from online betting applications, proposed / ‘under construction’ integrated resorts, plus local hotels all competing for Queensland’s gambling market share, stakeholders have raised concerns that the current regulatory regime means community clubs are not operating on a level playing field.”

In 2015, the social impact of community clubs was estimated to be worth $851 million, or around $770,000 per club which includes in-kind donations; the provision of essential community assets and facilities owned and operated by the club industry - from bowling greens to accommodation, sporting fields and entertainment venues and; and volunteer labour.

Before October 2012, clubs with gaming revenue between $300,001 and $1.4 million all fell into the 25.91% tax bracket, but the introduction at this time of an additional tax bracket by the LNP government increased the tax burden for some community clubs.  This captured many more than the espoused ‘treasury modelling’ touted at the time.

The changes meant clubs with revenue between $300,001 and $850,000 remained in the 25.91% tax bracket while clubs with revenue between $850,001 and $1.4 million were catapulted into the higher tax bracket of 30.91%. 

Currently there are 36 community clubs in Queensland which fall into the top two tax brackets which includes the 35% bracket for revenue in excess of $1,400,000.

It is worth noting that these were the first changes made to the taxation of club poker machines since tax brackets were first introduced for them in 1997.  These changes have been to the detriment of community contributions delivered by clubs on the ground.

“As a result, the current base level thresholds are over 20 years old and have not been reviewed to determine the appropriateness of the brackets and if the rates are still fit for purpose,” the KPMG report states.

While tax brackets for community clubs have changed, this has not been the case for casinos which operate under a different tax regime. 

Two of the four casinos currently operating in Queensland - The Cairns Reef Casino and the Ville Resort-Casino at Townsville both pay 20% on revenue from gaming machines (with 10% payable on revenue from table games and junket groups).

Brisbane’s Star Treasury Casino and The Star Gold Coast pay 30% tax on gaming machine revenue, with 20% incurred for table game revenue and 10% for junket groups.

To give this context, community clubs with gaming machine revenue of $9,501 pay 17.91% in tax while community clubs with gaming machine revenue of more than $1.4 million pay 35% tax on gaming machine revenue.

At the same time, clubs continue to be constrained by legislation against that of the operation of casinos including for example:
  • Clubs face stricter limits on the number of machines allowed per venue than casinos 
  • Clubs have maximum bet limits of $5; casinos have no legislated limits
  • Clubs have a maximum return to players of 92%; casinos have no legislated maximum
  • Clubs have a maximum cash feed into machines of $199.99; casinos have no maximums
  • Clubs must limit jackpots to $25,000; casinos have no limit
  • Clubs are regulated by trading hours for liquor and gaming; casinos are not
The Queensland Government has given approval for an additional three new casino licences for the State, one of them being the new Queens Wharf development in Brisbane’s CBD.  Queens Wharf and the availability of two remaining licenses should be cause for alarm for the club sector.

“A 2016 report by Synergies Economic Consulting examined the impact that the three additional casino licences and proposed IRDs (integrated resort developments) would have on the financial viability of Queensland’s community clubs,” the KPMG report said.

“The Synergies report found that these developments would result in more than $100 million in lost club revenue and place approximately 63 clubs in serious financial risk.

“Further, the local community would likely forgo approximately $38 million in social capital community contributions and would also reduce State revenue from club taxation by $36 million per annum.”

Other threats to the sector
We are in an age where most often we can also get what we need and want from the comfort our own homes from wagering a bet on sport or the ‘sport of kings’ horseracing, to ‘ordering in’ food and alcohol, to meeting up with friends online, to washing the car (Airtasker), to getting around (Uber).

These all significantly challenge the relevance of today’s community clubs if you consider it strategically and practically.
“Without innovation and a supportive regulatory environment, community clubs are at significant risk of being unable to maintain the same level of contribution that communities have come to rely upon,” the report states.

“Evidence gathered from stakeholders suggests the value of clubs, and the enormous benefits they provide to the communities in which they operate, is being challenged by aging government regulation, increased competition, changing consumer preferences and limited capability and capacity within the sector.”

Combined, these indicate the survival of Queensland’s community clubs is largely dependent on relevance, currency, innovation, diversification, appealing to new demographics and governance.

“The KPMG report highlights that for community clubs to survive and thrive in Queensland, we need to push for innovation and legislative certainty, which reflects the changes we are seeing in the industry, by way of disruption and fast changing consumerism,” Clubs Queensland CEO Doug Flockhart said.

“The report confirms that the sector faces disruption from a number of areas including rapidly evolving technology, competition from online gambling platforms, and new casino offers, thus a genuine legislative and operational reset is required to reflect these changes.”

Supportive changes to the taxation regime for community clubs were pleasingly introduced in 2016, when the State Government recast the system of gaming tax payable on a ‘per premise’ basis rather than per licence basis.  This is an example of appropriately change, that genuinely makes a difference around the financial viability of amalgamation and assists with investment in new greenfield community club offers. 

“The outcome of this is that venues with multiple sites, would not pay tax based on combined revenue,” the report states. “As of June 2018, there were 42 clubs currently benefiting from the amalgamated entities taxation change."

Legislative change
There are a number of areas identified as needing legislative review from club opening hours so they can compete with 24-hour casinos and online gaming, to taxation schedules for clubs where returns to club members through services are reduced because of taxation obligations.

“Regulatory change is required to allow clubs to respond to their changing demographic,” KPMG said. “Ultimately, the long-term financial sustainability may be a challenge for many licensed club venues if regulations - for example gaming machines and planning policy continue to restrict clubs’ ability to respond to change.”

The report makes specific mention of three pieces of legislation governing gaming and alcohol services as being “barriers” to developing long term sustainability for the industry”.

These are:
  1. The Interactive Gambling Act 2001
  2.  The Wagering Act 1998
  3. The Charitable and Non-Profit Gaming Act 2001
“In Queensland, clubs and other land-based gambling providers are competing against online offerings, which also impacts food and beverage sales and other entertainment options,” KPMG said. “Australia currently allows licensed operators to offer racing and sports betting, and the sale of lottery tickets online.

“As a result, the current legislative framework in Australia does not allow for the provision of online casino type games. Should these games be contemplated, the Federal Government would first need to consider amending the Interactive Gambling Act 2001, in order to legalise digital offerings within Australia.”

The Interactive Gambling Act of 2001 (IGA) was amended in 2017 to combat illegal offshore gambling and confirmed it is illegal to provide gaming services in Australia without a license.

“Until this is reviewed, we will have no capacity to initiate industry partnerships for digital gambling which could be designed to ensure the longevity of community clubs,” Flockhart said.

“While industry partnerships have been a mainstay of many sectors for decades, it is something we cannot explore until we have the clarity the industry is demanding.”

Another issue needing clarity is the legislative definition of gaming.

The Charitable and Non-Profit Gaming Act 1999, under which community clubs are licensed for gaming, defines a game as being where “winners are decided entirely or partly by chance; or by a competition other their activity having an outcome depending on chance”.

“The impact of this legal definition means that there is a lack of clarity and growing uncertainty regarding the legality of eSports and skill-based games as skill is a consideration in the outcome, unlike poker machines for example which are based purely on chance” the report states.

This is relevant, while gaming machines have been attractive to older and middle-aged demographics, younger demographics are instead more interested in skill-based gaming.

“If community clubs are to remain relevant by providing patrons what they want, and what they can access through other gaming facilities, the legislation under which we operate must reflect the changes in technology and patron appetite,” Flockhart said. “These changes also need to be actioned quickly given the trading conditions faced.”

With appropriate legislative change, for many clubs this will mean embracing new technologies and gaming systems which are interactive and skills-based (dependent on amended legislation). For others it will be investing in different entertainment offers and/or non-traditional entertainment facilities and diversification, and for others it may be as simple (short-term) as changing their menu to offer specific cuisines.

“There is no doubt the community clubs’ sector in Queensland is facing more pressure than it ever has in history with only one new greenfield club opening in 20 years and more established clubs closing,” Flockhart said.

“By understanding the forces which impact our market and patrons, we must develop and implement strategies to keep us relevant to ensure the continued support and patronage of our members and visitors and the communities they support.

“With the challenges, always come opportunities. With the information from this report, it assists with a proactive positioning and approach to ensure community clubs continue to be a mainstay of our communities long into the future.

“What we need is a commitment and willingness to have the discussions and challenge the status quo, while pushing ourselves into new frontiers. This is possibly the most exciting time in the history of clubs in Queensland.” 

Note: The Sustainability of Queensland Clubs report is due for imminent release to Clubs Queensland members.