A win-win game for Crown

The changes to Crown Ltd's Melbourne casino tax regime could be regarded as a win-win outcome for Crown and the Victorian government. The government gets more tax revenue but Crown, in the middle of a $600 million capital expenditure program, gets tax certainty.

The government would have known for some time that Crown was experiencing capacity issues during its Thursday-to-Sunday peak operating periods. Table limits and the footprint for the licensed casino area within the complex were set more than a decade ago.

The limitations of the gaming capacity and floor space would have been exacerbated by the $340 million construction of Crown's third hotel and convention centre, the refurbishment of the central Crown Towers hotel and the upgrading of the gaming floor.

The government would also be aware that Crown now faces or will soon face competition from giant casino complexes in Macau and Singapore and that the capacity shortage limits its ability to compete. The doubling of the permitted number of poker tables, in particular, will enable Crown to better exploit the massive surge in that game's popularity worldwide.

All that may not have been sufficient to convince the government to approve a substantial increase in capacity – 150 new tables and up to 200 terminals for fully-automated multi-station table games – if it weren't for the global financial crisis and recession's impact on the government's revenue base. The government needs revenue and gambling taxes are a relatively easy way to raise it.

The tax rate on Crown's 2500 electronic gaming machines will be increased by 1.72 per cent each year for the next six years, or from the current level of 21.25 per cent to 32.57 per cent from 2014-15. The government says that would leave Crown with a tax rate ''virtually equal'' to the rate levied on other gaming machine venues.

Apart from the increased gaming capacity, on terms of both tables and licensed floor space, Crown gets two very significant concessions.

One is a commitment that the ''Health Benefit Levy", now at $4333 per electronic gaming machine per year, will be abolished from July 2012. The other is a commitment that there will be no further tax or levy changes before June 2022.

The health benefit levy has been used in the past as an ad hoc revenue-raising measure. It has been described by gambling venue operators as an ''ambush tax'' in the past whose existence created uncertainty for operators and investors.

When the Victorian government increased the levy on the three gaming machine operators in 2005, raising the cost to Tattersall's and Tabcorp by $21.1 million a year and adding $3.75 million a year to Crown's costs, it wiped between $300 million and $500 million from Tabcorp's market capitalisation.

Getting rid of the levy, and removing the potential for unexpected changes in the tax rates, provides certainty to Crown in funding its expansion and removes risk for investors.

From Crown's perspective, assuming it manages the expansion of its gaming capacity effectively, the revenue gains from the extra tables will be offset in the medium term by the rising tax rate. In the longer term, once the ceiling on the tax rate is reached and the new capacity has been fully deployed, it would hope there would be a net benefit and that the new regime would produce gains for both the government and its own shareholders.

Even if there were neither a net benefit nor net revenue loss over time, however, the removal of tax uncertainty would by itself make the trade-off attractive.