Going Down Under? The uncertain future of Australian Corporate Bookmakers

“Always back the horse named self-interest, son, it will be the only one trying” Jack Lang (Australian politician)

Australia has a bittersweet relationship with gambling. Few countries would be enormously proud of having the highest (recorded) gambling spend per capita globally; but at least that has meant a number of large, successful gambling companies. Historically, Australia has attempted to balance commercial success, harm prevention and public good with a judicial combination of state monopolies (betting, lottery), community links (pokies), and ‘rural support’ (horseracing product fees). Responding to governing a vast country in a pre-internet age, positive gambling regulation is devolved to states (licensing and regulating what is allowed), though the birth of the internet required (some) negative legislation (defining what is not allowed) at the Federal level.

Australia’s two largest gambling operators, Tabcorp (mostly pool betting) and Tatts Group (mostly lottery), generate revenue of AUS$2.2bn (£1.3bn) and AUS$2.9bn (£1.6bn) respectively. Perhaps more telling, in terms of how Australia operates at state level, is the tax and levy yields: Tabcorp pays 55% of its revenue in gambling specific taxes and product fees; Tatts Group pays 54%. That is a combined total of AUS$2.8bn (£1.6bn) – AUS$120 (£70) per Australian per year in taxes and levies, just from those two companies. This figure is identical to the UK total of £70 per head in gambling duties and lottery good causes (excluding arcades in pubs), with a 35% proportion of taxes, levies and good causes to revenue. Put another way, two Australian gambling companies (albeit by far the biggest) collect as much tax per capita as the entire UK gambling market.

However, this UK figure includes the National Lottery and Large Society Lotteries, which is a fair comparison with Tabcorp’s and Tatts’ state monopoly businesses. If we strip out these sources from the UK totals, then the commercial gambling tax and levy yield falls to c. £1.7bn or 19% of commercial revenue (£27 per head): a far lower proportion and figure, which allows significant commercial competition among a broad group of mid-sized companies, rather than two (market-size relative) behemoths.

The comparison to the UK, which has had a lottery monopoly sitting alongside nationally regulated commercial gambling for only a generation, is instructive. In the UK, we don’t consider a much lower commercial tax percentage yield than the lottery yield as incongruous or worthy of public debate. This is perhaps because all taxes end up at the same place: HM Treasury. The Horserace Levy is different, but since it comprises less than 5% of overall yields, it is a relatively specialist problem. In the highly centralised government of the UK, taxes are decided by overall (if often disjointed) policy, and then help to fund general expenditure without any hypothecation. This level of centralisation creates only two stakeholder groups: the government and the operators (even the regulator is kept out of tax affairs), which means the value transfer is clear, if not always harmonious.

This is not the case in Australia. The Federal government’s only interest in gambling is GST (ie, UK VAT), which is charged at 10% on most forms of gambling (including Corporate Bookmakers): the states and product groups get the rest. Some states have different priorities than others: Victoria is probably the most fiscally driven, capturing 90% of licensed lottery expenditure in taxes and good causes (you read that right), and leading the way in turnover-based product fees. Even in the more widely distributed pokie market, tax rates start at 35% and ‘community charges’ to operating partners (social clubs) take the overall ‘non-commercial’ takeout much higher. In a landbased environment the spend occurs where the supply is, and so states can reliably tax and regulate gambling to the extent that they wish to.

This is obviously not the case online, where Australia has developed an uneasy ‘Point of Supply’ regime largely centred on Northern Territory (NT). This “onshore Gibraltar” originated as a telephone betting hub and until the mid-2000s and was largely a ‘Wild West’ catering to sharp punters and whales. However, the growing ubiquity of the internet (especially mobile) has made the offer increasingly mass-market. This process has been significantly accelerated by the (actual) ‘corporatisation’ of the leading Corporate Bookmakers: a roster of the biggest providers is a roster of the big names in the UK betting market. This has turned a c. AUS$500m revenue niche, which was little more than an annoyance to the big monopolies, into a c. AUS$2bn market today, growing at c. 15-20% pa. In other words, the overall online market in Australia is rapidly set to overtake Tabcorp’s revenue and will soon be as big as Tatts: channel shift is happening in a major way (and that excludes illegal online gaming).

Horseracing remains the key online betting product in Australia, and the horseracing groups, which have product fees (set by racing) instead of a levy, were quick to insulate themselves from channel shift as much as possible. GST and product fees now account for c. 25-35% of Corporate Bookmakers’ net revenue and they are going up further (eg, PPB saw a YoY increase H115-H116 of 1.4ppts). In terms of overall capacity to pay in a commercial market, it should be noted that this figure is already c. 10ppts ahead of the UK commercial gambling tax yield average (ie, a profit margin ahead).

However, there are three big problems with the Australian Corporate Bookmaker position from a policy / politics perspective:

  1. GST is a general tax and the c. AUS$200m raised from CBs is a drop in the ocean to the Federal government (GST is also typically seen as a tax on the consumer not the operator)
  2. Product fees are hypothecated directly to sports and are therefore not seen by the states
  3. NT has historically seen the benefits of employment outweighing tax, therefore capping duties at AUS$580,000 per operator (eg, equating to 1% of PPB’s revenue)

Therefore, the states are seeing gambling spend from their citizens migrating from a tax footprint of 35-90% to a tax footprint of 0 (in their terms). Equally, NT is feeling increasing pressure to raise taxes from somewhere, as well as to be seen to be an effective regulator (eg, the current in-play farce). Regardless of the sector economics, it is entirely logical, indeed inevitable, that the states see themselves protected against channel shift by having a direct stake in the taxation of remote gambling. NT is considering a 10% ‘Point of Supply’ tax; South Australia has legislated a 15% Point of Consumption tax, and other states are “following the opportunity closely”. Concurrently, sports, led by horseracing, are still seeking to squeeze the golden goose further – especially since Tab pays (and is able to pay) considerably more to racing in revenue terms than CBs, and so the benchmark is high.

If we total up the current tax possibilities facing Corporate Bookmakers, we are potentially looking at: c. 20% product fees (variable on revenue as some are turnover based), 10% GST, 15% state POC tax, and 10% NT POS tax. That is a tax and levy take of 55%. Herein lies the problem: that figure looks completely reasonable when compared to the taxes paid by the monopolies (indeed, it is the same in literal tax terms and actually discounts ‘community’ fees); but it looks completely out of kilter when compared to the level of taxes that can be reasonably borne by competitive commercial enterprises. Indeed, the only operating remote jurisdiction with similarly high taxes is France – hardly an example of a functioning market. Broadly speaking, 25% tax and levy is the tipping point for effective competitive commercial supply – Australian Corporate Bookmakers are already at that tipping point.

Australia must therefore decide what it wants out of its rapidly changing gambling industry: a tax efficient oligopoly – which must therefore extend online in an omnichannel world; a means of funding (some) sports – which will crowd out other fiscal needs if a competitive commercial model is desired, or; a vibrantly competitive commercial sector – which has little room for further taxes and so the sports must share with the states, meaning all parties must accept lower tax yields in percentage terms in return for more businesses.

Immutable economic logic dictates that Australia cannot, as it is (probably accidentally) attempting to have, all three. The problem is, by (perfectly reasonably) avoiding (state) taxes for so long, while (less reasonably) aggressively advertising and exploiting legal loopholes in the face of mounting criticism, the Corporate Bookmakers might be making the Australian legislators’ decision as to which option is preferable a very easy one…