THE COST OF DOING BUSINESS IN WA [2015]

COMMENT: This fourth report of the Bankwest Curtin Economics Centre, which was complied a year ago, is a valuable tool, in particular for small business, with which to evaluate the WA State Government’s recent Budget. Below are the Executive Summary and Findings from the report, a copy of the complete report can be found on the CoSBA web site. CB.

Executive Key summary findings

This fourth report in the Bankwest Curtin economics Centre’s Focus on Western Australia series addresses an issue of central importance to Western Australia in maintaining its economic growth story – the costs of doing business in the state.

The report examines the principal business cost components facing companies across different industry sectors in WA. information included in the report has been sourced from a range of data bases, including numerous Australian Bureau of statistics products, the Property Council of Australia, fuelWatch, specialised commercial sales price data sourced from Landgate and information from the Department of Regional Developments Regional Price indices.

The report sheds light on the main barriers to business activities and performance cited by companies in different industry sectors – including labour shortages and labour costs, input costs, and burdens of regulation or compliance – and look at those barriers that particularly affect the activities, growth or survival of businesses in the state.

A regional analysis of businesses operating in WA and the differential cost pressures these areas are experiencing is also included in the report.

WA Business Profile

  • WA has almost 219,000 actively trading businesses. This constitutes around 10% of all Australian businesses.
  • Like most states and territories, West Australian businesses are dominated by small business. small businesses account for almost 97% of all actively trading businesses, the majority of which are non-employing (62.0%).
  • One in four Western Australian businesses report annual turnover of less than $50,000. similar proportions report an annual turnover above half a million.
  • WA has the highest proportion of companies with annual turnover exceeding $2 million among all states and territories – 7.7 % of WA businesses reported
  • Construction is one of the most important industries in WA on a combination of number of businesses, number of employees and value – it ranking first in business counts, third in the number of people employed in the sector and second in terms of the economic value it brings to the state.
  • Construction and mining are more prominent in the West, with a greater proportion of active businesses in WA – 18.3% of the total number of businesses – compared to Australia.
  • Businesses operating in the retail trade and accommodation and food services sectors are more likely to be employers than those in other sectors.
  • The number of businesses with less than $50,000 per year in annual turnover has been decreasing since 2007 for both WA and Australia.
  • The number of businesses with a turnover of $200k to $2m increased rapidly for WA and nationally – from 63,981 to 74,889 (a 17% rise) between 2007 and 2014.
  • The number of businesses with annual turnover of $2 million or more has also increased rapidly in WA, from 12,326 to 16,971 entities – an increase of almost 30%.

Business Entries and Exits

  • Patterns of business entries and exits in Western Australia have been similar to national trends over the past decade.
  • The net business entry rate in WA exceeded the national rate prior to the gfC, peaking at 38,013 business entries and 28,482 business exits in 2006-07.
  • Since 2006-07 business entries have fallen considerably – by 30% for WA between 2009-10 and 2012-13 and by 12% for Australia in the same period.
  • This equated to a net fall of almost 11,000 WA businesses between 2009- 10 and 2012-13. This pattern has recently reversed.
  • Business survival rates in WA are similar to those at a national level – 61% of active businesses in June 2010 remained in operation to at least June 2014.

Business Perceptions

  • The most common issues reported by businesses as barriers to performance are a lack of access to additional funds, the cost of inputs, and the lack of labour skills.
  • More than 4 out of 5 businesses in WA report wages as a key cost pressure for their operations.
  • During the heart of the resources boom in 2006-07, more than 1 in 4 businesses reported a lack of skills in any location as a significant barrier – by 2012-13 this had reduced to 15.6%.
  • Barriers to business activity and performance can vary considerably by industry.
  • One in five businesses in the construction sector report outstanding accounts as a significant barrier to business activity and performance.

Labour Costs

  • Labour costs shares run at an average of around 28% of total costs for all businesses in Australia, but vary widely across industry – from 14% for mining to 50% in administrative and support services.
  • 9 in 10 businesses report labour costs as the key driver of cost pressures.
  • Wages grew substantially faster in WA compared with Australia over the course of the resources boom, with annual wage inflation of 3% in 2003 rising to 6.3% by 2008.
  • Annual wage inflation is currently running at around 4% for WA, compared with 3.5% nationally.
  • The increase in nominal wages for mining in WA is highest across all industry sectors, increasing by 61.5% between 2003 and 2014.
  • Wages in the utilities sector (electricity, gas, water and waste) have risen 57.7% since 2003, followed by the construction sector (up 56.2%).
  • The utilities sector (electricity, gas, water and waste) paid an average of around $98,643 per worker – a real increase of 8.3% on 2007-08 figures.
  • Real labour costs per worker in WA mining have risen from $145,400 to $161,600 since 2007-08, an increase of 11.1%.
  • WA has seen particularly large increases in real costs per employee since 2007-8 in public administration (up 44.1%, more than double the national sector increase) and construction (up 38.2%, also double the national increase).
  • The ratio of total employee costs to company sales and service income represents the number of cents in employee costs for a dollar of company income.
  • The WA wholesale trade industry has the lowest labour costs per dollar of company income – an average of 6.3 cents per dollar in 2013-14.
  • In mining, labour costs run at around 10.2 cents per dollar of income, driven by a combination of highly productive capital and a strong, well-remunerated skills base.
  • The labour cost per dollar of income earned by businesses is lower in WA compared to Australia in mining (by 16%), manufacturing (by 22%) and agriculture (by 13%), despite there being a higher average wage per employee in these sectors in WA compared to national rates.

Taxation Costs on Companies

  • Australia’s 2.1 million businesses paid around $70.5bn nationally in company tax in 2013-14, equivalent to an average of $33,592 per business.
  • Payroll tax revenues for WA will amount to $3.74bn, equivalent to an average of $17,142 for each registered business in the state.
  • Payroll tax revenues in WA have increased as a proportion of total state tax revenue over the last decade, rising from 26.1% in 2005-06 to some 40.5% on latest projections for 2015-16.
  • As at 1 July 2015, West Australian businesses are currently taxed at a single rate of 5.5% beyond a threshold of $800,000 in total payroll costs net of exemptions.
  • WA ranks highest in payroll tax costs for businesses with payrolls of between $1.75m and $7.5m, and equal highest up to $9.4m.
  • Payroll tax thresholds have not been uprated in line with wage inflation in WA, leading to payroll tax “bracket creep”.
  • This has effectively brought more small businesses into the payroll tax system over time.
  • For the WA payroll tax system to have remained neutral over the last decade would have required the July 2015 threshold to be nearly $1,100,000, 37.5% higher than the current threshold of $800,000.
  • The diminishing payroll tax threshold introduced in the 2015 state budget will increase WA payroll taxes by up to $44,000.
  • A business with a $2m payroll will see payroll tax rise by $7,881, from $66,000 to $73,881.
  • Businesses with a $4m payroll will pay $21,015 more in payroll tax under the new system – $197,015 compared with $176,000.

Capital Composition and Growth

  • Generally, costs associated with capital depreciation and capital formation (interest expenses) are around 20% of total expenditure among businesses.
  • A large degree of variation exists throughout industries, with capital expenditure for the mining, electricity, gas and water and financial and insurance services relatively more dominant than in other industries.
  • Capital expenditure components among Australian businesses has been changing over the last five years, away from plant, machinery and equipment towards dwelling, buildings and other structures.
  • Plant, machinery and equipment constituted around 50% of capital expenditure in 2008-09, this has since fallen to 35% of expenditure.
  • In2013-14, the states most dominant industry – mining had the highest proportion of capital expenditure allocated to dwellings, buildings and other structures – around 70% of all capital spend.
  • Fixed capital formation in the mining sector has increased by almost 700%, between 2005 and 2013.

Barriers to Finance and Working Capital

  • Small to medium enterprises are more like to report lack of access to funds and inadequate working capital (outstanding accounts receivable) as a significant barrier to business activity than large businesses.
  • Between2007-08and2010-11, businesses have increased their reports of lack of access to additional funds and working capital as a significant barrier to business performance and activities.
  • Almost 1 in 4 businesses in the mining and retail sector report lack of access to funds as a significant barrier to business performance.
  • Businesses operating in the wholesale trade sector and manufacturing sector have the highest rates of reports of outstanding accounts receivable limiting cash flow – 22.6%.
  • Around 1 in 5 businesses operating in the construction sector report issues with working capital as a significant barrier.

Utilities

  • Perth total utility prices (including gas, electricity and water) have remained consistently below the national average over the last decade.
  • The price of electricity in Perth has increased almost doubled between 2008 and 2014.
  • Electricity tariffs for medium size businesses increased by 29% between 2011 and 2012.
  • The consumer price of gas in Perth was almost equal to Australia prior to the 2008 gas crisis. since 2008 gas prices have increased considerably and continues to be volatile and above national levels.

Occupancy and Housing

  • Commercial rents for office and retail spaces, workshops and other places of business operations can be a substantial cost component for many businesses, particularly those operating in the retail industry.
  • Average weekly rental returns for Perth CBD office space has almost doubled in the four years to 2012, increasing from$250 to $470 per square metre.
  • Perth CBD office space rents were the highest among the five capitals in 2011 and 2012.
  • Housing can be an important factor when attracting skilled workers to an area. it can also play a role in remuneration packages, inflating wages and increasing business costs.
  • Housing prices have increased in WA at a rate consistently above the national average for an extended period from 2003-04.
  • The rate of change in established house prices in Perth was especially high over the boom period with annual percentage changes well in excess of 20 % not uncommon.

Transport

  • Over the five year period from 2009, the number of Passenger vehicles and Light Commercial vehicles registered with diesel fuel increased by 103.6% and 65.4% respectively.
  • Unleaded and diesel fuel prices have followed a similar pattern over time, increasing prior to the gfC before falling rapidly and increasing since.
  • WA has the third highest diesel fuel price across all states and territories.
  • NT and Tasmania have the highest price per litre of diesel and unleaded fuel.

Red Tape and Regulations

  • Government regulation and compliance was more likely to be cited as a barrier to performance as the economy grew rapidly. since the global financial crisis this has decreased among all firms at similar rates, with other barriers more likely to become problematic.
  • In 2009-10, 18% of innovation-active businesses reported government regulation and compliance as a barrier to performance, whereas only 11% of non-innovation active businesses reported this issue.
  • Small to medium enterprises are more likely to report regulation and compliance as a significant barrier to performance than big businesses.
  • 17.9% of businesses operating in the mining sector reported government regulation being a significant barrier to business performance in 2012-13.

WA Regions – business profile

  • The profile of WA businesses at a state level can mask important regional patterns.
  • The dominance of the Perth metropolitan area is clear, with three- quarters of all Western Australian businesses located in this region – 162,495 entities.
  • Mining dominant areas, including goldfields-esperance, the Pilbara, Kimberley and gascoyne have higher proportions of businesses employing more than 200 employees.
  • The Gascoyne region has the lowest number of actively trading businesses – just under 1,000 entities.
  • The Goldfields-Esperance region has the highest proportion of employing businesses – at 46%
  • The Goldfields-Esperance, Kimberley and Pilbara regions all have greater proportions of businesses with annual turnover of $2 million or more – 11% compared with the state average of 7%.
  • The 2011 -12 to 2012-13 period • stands out for Western Australian regions, with almost all experiencing a reduction in the number of actively trading businesses over the period.

Remote areas including the Kimberley, Pilbara and gascoyne have experienced higher transport costs compared to Perth.

WA Regions – costs

  • The expansive and remote geography of the state can make business operations more challenging than might otherwise be the case in areas throughout WA.
  • Wages in the Pilbara have grown the fastest, increasing by 60 % in the ten years to 2013-14, from an average annual wage of $58,000 to $93,000.
  • Annual wages for Perth and Peel have tracked closely together over the last ten years, with wages also increasing by 60 % in the last decade, from around $40,000 to $64,000.
  • The Goldfields-Esperance region has seen substantial wage growth across the period, with employees averaging the second highest wages in the state – around $69,000 each year.
  • The Pilbara and Perth have recorded the highest sale price per square metre for retail space in the last two periods, averaging $6,340 and $5,920 per square metre, respectively.
  • Increases in the price of commercial space in all property classifications is evident across all WA regions.
  • Generally housing prices have remained lower than Perth throughout all years and most WA regions. notable exceptions are the usual suspects – the Pilbara, Kimberley and more recently the gascoyne regions.
  • In 2011, housing costs in the Kimberley were double that of Perth, but have since dropped back to around 40 % higher than the state capital.
  • Electricity tariffs in WA’s regional areas have largely remained similar when compared to metropolitan WA. Recently, regional areas have experienced higher electricity prices (tariffs) than those in metro areas.
  • Transport prices in the Pilbara have remained persistently higher than Perth – at around 12 %.
  • All WA regions record higher average fuel prices per litre compared to Perth over the last fifteen years.
  • The cost of a litre of diesel in the Kimberley is 17 cents higher than in Pert