Notes to Submission to the Productivity Commission Inquiry into the ...

From an analytical economics perspective, the only meaningful benchmark is economicprofit, and the only issue relevant to whether a cost impost is likely to cause hardship iswhether the firm nets or does not net an economic profit. The percentage of economicprofit would be irrelevant, since the existence of economic profit would be enough tosuggest capacity to afford a cost impost. In practice, however, economic cost is difficultto estimate since by definition, economic cost seeks to estimate ‘next best alternatives’,which necessarily involve speculation, and makes the estimate an art rather than science.Practical standard accounting benchmarks such as turnover, accounting profits, cash flowetc… are less speculative estimates, but using these benchmarks raises other problem.Firstly, benchmarks for thresholds which show hardship will vary across industries andorganisational types. Thus, in low margin industries 1% of turnover may be anunjustifiably high cost while in high margin industries, 1% may not be considered high.This implies that it would be inappropriate to use a single benchmark across allindustries. More critically, the purpose of profit/loss and balance sheet statements areonly indicative estimates of financial position and hardship, implying that no singleaccounting ratio would suffice as an indicator of hardship, and that the interpretation ofthese estimates also involve art rather than science. Finally, accounting ratios arebackward looking, whereas economic hardship is more a matter of future opportunitiesthan of past performance.The above suggests that any single standardardised threshold measure involves anelement of arbitrary “art”, and that it is therefore impossible to create a single benchmarkwhich a court could follow and which would eliminate the uncertainties faced bycomplainants and respondents.It does not follow that a range of benchmarks and criteria for the court to take intoaccount in a flexible manner would not reduce uncertainty. It is more than likely that thisis the approach that has been taken by the Federal Court on a case by case basis. Theproblem then is one of transparency and accountability, where the current inadequateguidelines and legislative direction creates excess uncertainty.Viewpoint 3: Cost Passed Backward to the Property OwnerEconomic analysis suggests that Jaxxjazz is unlikely to bear that portion of the capitalcost that accrues outside the period of its tenancy. The ramp would presumably havevalue to a future tenant, so Jaxxjazz would be able to “sell” the ramp to ZLK Life, whichin turn could pass the cost of the ramp on to next tenant in the form of a higher rent. Withthe $10,000 cost capitalised at $1,000 p.a., it would not be unreasonable to suggest thatJaxxJazz would bear $2,000 over the two years remaining of the lease and while ZLKLife would bear $8,000 over the balance of the ramp’s useful life.This case is relevant if the court recognises that costs can be passed on by the respondentclaiming unjustifiable hardship. By recognising that the costs can be passed on to theZLK Life, there is a greater likelihood that the court will find for Sandra rather thanJaxxJazz unless the court also accounts for the cost to be born by ZLK Life.32