Effect on the Australian economy of altering

the effective life of buses for tax purposes

PREPARED FOR
BUS INDUSTRY CONFEDERATION
3 MAY 2004

NETWORK ECONOMICS CONSULTING GROUP PTY LTD

ABN 72 006 819 969

NETWORK ECONOMICS CONSULTING GROUP

Network Economics Consulting Group Pty Ltd 2004

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research,
news reporting, criticism or review. Selected passages, tables or charts may be reproduced
for such purposes provided acknowledgment of the source is included. Permission must be
obtained from Jane Thorn on (02) 9965 4100. Please cite report number 0215:0815.
For information on this report, please contact:
John Zeitsch
Phone (02) 6232 6522
Email [Link]@[Link]

Network Economics Consulting Group offices

CANBERRA

SYDNEY

Level 1, 29 Jardine Street

Kingston ACT 2604
Australia

Level 7, 90 Mount Street

North Sydney NSW 2060
Australia

Phone
Fax

Phone
Fax

(+61 2) 6232 6522

(+61 2) 6232 6188

(+61 2) 9965 4100

(+61 2) 9954 4284

MELBOURNE

Level 50, 120 Collins Street

Melbourne VIC 3000
Australia
Phone
Fax

(+61 3) 9655 1600

(+61 3) 9655 1616

INTERNET

EMAIL

[Link]

contactus@[Link]

Network Economics Consulting Group Pty Ltd is incorporated in Victoria

ABN 72 006 819 969

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

ACN 007 083 570

Page 2 of 27

NETWORK ECONOMICS CONSULTING GROUP

Contents
Executive summary

1 Introduction

2 Effect on bus operating costs of changes in the effective life of a bus

2.1 The economic life of a bus

2.2 Estimating the tax on the bus industry

11

3 Impact on the Australian economy of a tax on the bus industry

15

3.1 Impact on the Australian bus industry

15

3.2 Impact on international tourism to Australia

17

3.3 Impact of the tax on the bus sector on pollution and congestion

20

3.4 Implications of the analysis

22

4 Conclusions and Further Work

23

A Derivation of economic depreciation for a typical bus

24

Boxes, Charts and Tables

Box 1

BIC survey of bus operations in 2002-2003

12

Chart 1

New buses delivered (number)

Chart 2

The cost structure of a typical school bus operation (%)

Chart 3

Average Age of Bus and Coach Fleet

10

Chart 4

Impact on real consumption of increased exports of tourism ($/$

expenditure)

20

Chart 5

Urban transport share of passenger kilometres

21

Table 1

Effective life of selected vehicles for tax purposes

Table 2

Calculated value of depreciation for tax purposes under alternate

assumptions and assuming straight-line depreciation

13

Table 3

Impact on the total cost of bus operations of an artificial extension of

13

Table 4

Average expenditure per night by item for all visitors and main purpose
1999 ($)

18

Table A1 Summary of results from BIC survey

24

Table A2 Alternate depreciation profiles for a typical bus

25

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 3 of 27

NETWORK ECONOMICS CONSULTING GROUP

Executive summary
An ideal tax depreciation schedule for an asset should provide a tax deduction profile over
time that mimics the assets economic depreciation over the life of the asset. Current tax
depreciation schedules for tax purposes allow the purchase price of a bus to be written off
over either five years or six and two third years depending on the type of bus operation
undertaken.
The Australian Taxation Office has proposed that the effective life for tax purposes of a
bus be increased to a uniform 15 years. This proposal is not supported by data on the
work profiles of the Australian bus fleet. A survey of bus operators undertaken by the Bus
Industry Confederation (BIC) clearly indicates that the kilometres travelled by a bus falls
as the age of the bus rises and that the majority of buses are replaced by the time they
reach 11 years of age. Consequently, using the BIC survey data it can be calculated that
about 80 per cent of the lifetime work of a bus is undertaken in the first 7 years of the life
of a typical bus in operation.
Thus the BIC survey data does not support the proposition that an effective life of 15 years
would provide a depreciation schedule for tax purposes that more closely mimics the
economic depreciation of a bus than does the depreciation schedule based on existing
arrangements.
Consequently, the proposal to increase the effective life of a bus for taxation purposes to
15 years would, if implemented, impose a tax on the commercial component of the
Australian bus industry. This tax is likely to be significant as bus operations are a
relatively capital intensive operation. We calculate for example, that on a typical school
bus operation involving a bus with a value of around $370,000, the extension of the
effective life from 5 to 15 years would reduce the net present value of depreciation
deductions by 15 per cent. As depreciation accounts for about 40 per cent of the total cost
of a typical bus operation, the extension of the effective life of a bus to 15 years would
eventually be equivalent to a tax on the industry of 6 per cent.
A tax of this order of magnitude would be particularly damaging to the Australian
economy. It would distort input use in the bus industry and could lead to a fare increase
that would reduce activity in the bus industry with flow on effects to industries that sell
their outputs to the bus industry. Industry experts believe for example, that the general
feel is that School and Route Service bus replacement would go from current 5-7 years to
10-12 years and coaches would go from 3-5 years to 7-10 years. That is, the tax on new

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 4 of 27

NETWORK ECONOMICS CONSULTING GROUP

bus capital would cause a substitution of old bus capital for new bus capital. There would
be an economic cost associated with this substitution.
The tax on the industry would come on top of recent requirements for new buses to have
better access for disabled persons and to conform to new emission standards. These
changes are estimated to add up to $105,000 to the cost of a new bus. So a tax on the
industry would place the industry under further pressure at a time when the local bus body
building industry is doing it tough as indicated by the recent decline in demand for buses
(see Chart 1) and the collapse during the last year of bus body building firm Dennings.
Chart 1

New buses delivered (number)

2000

1117
920

Year

2001
2002

831

2003

797
0

200

400

600

800

1000

1200

Data source: BIC estimates

It is unlikely that the bus industry will be able to mitigate all of the tax on new bus capital
by a greater reliance on the existing fleet of buses. Eventually, new buses would be
purchased and there would be pressure for the tax on these purchases to be passed on to
commuters via a rise in fares. This would damage the Australian economy. Our analysis
suggests it would have a significant negative effect on international tourism in Australia
and could increase pollution and congestion problems in Australias capital cities.
The average international tourist visiting Australia likes to travel extensively within
Australia. Of expenditure of about $3,700 dollars per trip, around 45 per cent is spent on
some form of transport. While it is not possible to precisely estimate the proportion of this
expenditure that is spent on bus travel we believe it is of the order of about 2 percentage
points.
Past research has shown that an increase in the cost of a holiday in Australia deters
international tourists from visiting Australia. Using the results of this research along with
the data on the importance of bus travel in international tourist holidays, we have
calculated that the tax on the bus sector will reduce by approximately 1,300 the number of
international tourists visiting Australia each year.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Over ten years we calculate the

Page 5 of 27

NETWORK ECONOMICS CONSULTING GROUP

expenditure lost as a result of these tourists not visiting Australia would reduce economic
welfare in Australia by about $27 million in net present value terms.
The proposed extension of the effective life would also offset some of the effects of the
Governments recent initiatives to reduce emissions generated by the bus industry. The
industry estimates that new emission standards on buses will add approximately $40,000$45,000 to the cost of a new bus.
While these new standards will reduce pollution, extending the effective life of a bus will
contribute directly to increased pollution. This is because it will delay the purchase of new
buses and thereby delay the introduction of buses that comply with new emission
standards. But more importantly, the extension of the effective life of a bus has the real
potential to cause a shift away from bus travel to other forms of transport, particularly
cars, that are more damaging to the environment per passenger kilometre undertaken.
Australia has one of the highest rates of use of motor vehicles per head of population.
Consequently, motor vehicles are estimated to generate about $15 billion in pollution and
congestion costs in Australian cities. The tax on the bus industry would increase these
costs unless State Governments were to increase subsidies to the bus industry. Thus in the
no increase in subsidy case, we calculate that the tax would eventually reduce bus travel
by about 34 million passenger trips per year. Most of these trips would then be undertaken
using a passenger motor vehicle. Consequently, we estimate that the tax on the bus
industry could lead to a $20 million increase per year in pollution and congestion costs in
Australian cities.
Overall, the extension of the effective life of a bus to 15 years is unlikely to provide a
depreciation profile for tax purposes that mimics the economic depreciation of a bus.
Consequently, the proposed extension would effectively impose a tax on the industry that
would have deleterious effects on the industry and the economy at large.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 6 of 27

NETWORK ECONOMICS CONSULTING GROUP

Introduction
Under the Australian taxation arrangements businesses can claim a deduction for eligible
expenditure incurred in gaining or producing assessable income.

Under these

arrangements the effective life of a bus is assessed at either 6 2/3 years or 5 years
depending on the nature of the bus operation undertaken (Table 1).
Table 1

Effective life of selected vehicles for tax purposes

Asset

Life (years)

Date of application

Motor Vehicles, etc

Buses, lorries and trucks:
Generally
Heavy haulage of goods or passengers (long
distance and inter-city)

6 2/3

1 January 2001

1 January 2001

As part of an ongoing review of depreciation rates for business, the Australian Taxation
Office has recommended that the effective life of a bus for tax purposes be increased from
the rates currently prevailing to a uniform value of 15 years. The option is available for
bus operators to make their own determination with respect to the effective life of a
vehicle. However, such determinations would require substantial empirical support should
the particular bus operator be subject to an audit by the Australian Taxation Office.
Where the effective life of a bus is less than 15 years, the introduction of an effective life
of 15 years would effectively impose an input tax on the industry. This would have
several undesirable effects on the Australian economy. These include:

A distortion in input use within the bus industry as bus operators adjust input use in
response to the increased tax on new bus capital;

A contraction in bus operations within Australia as bus operators pass on the added
capital cost in terms of higher fares causing reduced use of buses;

Contraction in other sectors of the Australian economy as a result of the contraction in

the bus industry and fare induced contractions in industries that use bus services; and

Increased congestion and pollution in Australian cities as commuters shift away from
buses and into cars as fares rise to recover the tax imposed on the industry.

The effects of higher bus fares on the Australian economy are likely to be significant as
Australia is a large and sparsely populated country. Consequently, travel is an important
component of everyday life in Australia. Any increase in travel costs will have significant

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 7 of 27

NETWORK ECONOMICS CONSULTING GROUP

effects on the economy. For example, it could force potential international tourists to seek
holiday destinations other than Australia.
In addition, Australia has one of the highest rates of car usage in the world. Consequently,
cars account for the bulk of the estimated costs arising from pollution and congestion in
Australian cities. Any policy change that makes buses less attractive to commuters will
force a substitution away from bus travel to travel largely by car. This will impose a cost
on the Australian community via the cost associated with increased levels of congestion
and pollution in Australian cities.
This report provides estimates of these costs. In the following section the tax effect of
changing the effective life of a bus to 15 years is estimated. The effect of such a tax on the
Australian economy is considered in section 3. Section 4 concludes the paper.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 8 of 27

NETWORK ECONOMICS CONSULTING GROUP

Effect on bus operating costs of changes in the effective

life of a bus
Bus operations are relatively capital-intensive (Chart 2).

Consequently, changes to

taxation arrangements which impact on the capital cost of operating buses are likely to
have a significant impact on the cost of operating a bus and hence on fares charged to
passengers and/or significantly alter resource use within the bus industry.
Chart 2

The cost structure of a typical school bus operation (%)

Labour
25%

Capital
56%

Other
operating
costs
11%
Overheads
8%

Data source: NECG calculations

Consequently, a change to taxation arrangements relating to the bus industry should only
be implemented if there are strong economic reasons for such changes. In particular, the
effective life for tax purposes of a bus should not be altered unless;

It can be demonstrated that the proposed effective life for a bus yields a depreciation
schedule for tax purposes that better mimics economic depreciation of a bus than does
existing arrangements; and

The efficiency of resource use within the economy would not be reduced by any
change in effective lives of buses for taxation purposes.

2.1

The economic life of a bus

The economic life of a bus is influenced by a variety of factors including its daily
workload, the work conditions it faces, the regulatory environment it operates in, the
quality of the bus itself and changing technology.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 9 of 27

NETWORK ECONOMICS CONSULTING GROUP

Buses undertaking passenger operations between Australias capital cities, for example,
will have very high daily workloads compared to a small bus that takes patrons home from
a club each night. Similarly, as a bus ages the workload it is required to undertake can fall
significantly.

For example, many of the buses undertaking school runs in outback

Australia are buses that were retired from metropolitan work because their age and or
condition made further metropolitan work uneconomic.
In addition, approximately 60 per cent of the bus and coach fleet in Australia are classified
as small and would typically be used for services such as community transport and for
transporting patrons to and from local clubs etc.1 These buses would undertake relatively
few kilometres of travel per day compared to large commercial buses and consequently
would have longer economic lives. Consequently, many small buses operating in the
community sector would, on average, be older than large commercial buses.
Despite the large number of small buses in the Australian bus fleet, the average age of a
bus has been rising through time and was 10 years in 2002 (Chart 3)2. However, the
average figure disguises significant variation in the age of the fleet. States that are
sparsely populated such as Western Australia and the Northern Territory have relatively
young bus fleets. This reflects the relatively long distances buses in those states are
required to travel per journey. Consequently, buses are replaced more frequently in those
states and the fleet is consequently of a lower age on average.
Chart 3

Average Age of Bus and Coach Fleet

16
14
12
10
8
6
4
2
0
NSW

VIC

QLD

SA

WA

TAS

NT

ACT AUSTRALIA

1997
2001
2002

Data source: Institute of Transport Studies, 2004, 2003 Fact Sheet: Passenger Transport Activity in Australia, Version 27
January, Figure 22.

A small bus is defined by the ABS as a bus with gross vehicle mass of 5 tonnes or less. If gross
vehicle mass is not available, size is determined by seating capacity with a small bus defined as
one with 20 or less seats. If seating capacity is unavailable, a small bus is defined as one with a
tare weight of 3.1 tonnes or less.

The rising age of the fleet suggests that the fleet is not in a steady state and may be still adjusting
to some previous event that led to a large scale renewal of a significant proportion of the fleet.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 10 of 27

NETWORK ECONOMICS CONSULTING GROUP

To obtain further information on the age structure of the bus fleet and information on the
usage of buses through their lives, BIC undertook a survey of bus operators (Box 1). The
results suggest that route buses were on average about 10.7 years of age while charter and
school buses were about 11 years of age on average. The 253 small buses in the survey
were about 8 years of age on average. An overall weighted average age of 8.5 years was
found3.
The survey results also clearly indicate that the kilometres travelled by a bus falls as the
age of the bus rises and that the majority of buses are replaced by the time they are 11
years old. Consequently, using the BIC survey data it can be calculated that about 80 per
cent of the lifetime work of a bus is undertaken in the first 7 years of the life of a typical
bus in operation4.
Consequently, the BIC survey data could not be used to support the proposition that an
effective life of 15 years would provide a depreciation schedule for tax purposes that more
closely mimics the economic depreciation of a bus than does the depreciation schedule
based on existing arrangements (see Appendix A).
This would suggest that increasing the effective age of a bus for tax purposes from 5 years
to 15 years would, on average, effectively impose a tax on the use of capital in the bus
industry.

This is because the change effectively reduces the amount of capital bus

operators are assumed to have used below the actual amount consumed in providing bus
services.
We estimate the size of this tax in the following section.

2.2

Estimating the tax on the bus industry

To estimate how the change in the effective life of a bus for tax purposes changes the cost
of a bus operation, the extent of this tax allowable depreciation was calculated assuming
an economic life of 5 years, and effective lives for tax purposes of 5 and 15 years. The
bus was assumed to cost $370,000 and have a salvage value of $90,000.

The weighted average was found by multiplying the age of each bus by the kilometres travelled
and then dividing the sum of these products by the total kilometres travelled.

The typical bus in operation was assumed to be retired at 10 years of age and had a work profile
through its life equal to the average kilometres travelled by buses of particular vintages. Thus
for example, in year 1 the typical bus was assumed to travel the average distanced travelled by
buses of one year of age in the BIC survey. Similarly, in year 2 the kilometres travelled by the
typical bus were assumed to be the average kilometres travelled by all buses of two years of age
in the BIC survey.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 11 of 27

NETWORK ECONOMICS CONSULTING GROUP

Box 1

BIC survey of bus operations in 2002-2003

The way a bus is used over its lifetime reflects the rate of consumption of resources that are
included in the vehicle and, therefore, the diminution in its economic value.
To shed some light on this issue, BIC undertook a survey of a wide range of Australian
buses that were operating in 2002-2003. Operators from five states responded to BICs
request for data and usage information on over 1600 buses was obtained. These include:

1114 route buses;

79 school buses;

256 charter/tour buses; and

235 small buses (<25 passengers).

Route buses
The 1,114 route buses were on average 10.7 years of age and travelled on average 49,869
kilometres in 2002-03. The usage rate of new route buses was about 85,000 kilometres per
year.
School Buses
The 79 school buses were on average 11.9 years old and travelled an average 25,774
kilometres in 2002-03.
Charter/tour Buses
The average age of the 256 charter/tour buses was 11.4 years and the annual kilometres
travelled per vehicle were 38,913. For vehicles aged 1-9 years, annual average kilometres
travelled were 50,294, while the figure for vehicles older than 9 years was 30,061 per year.
Small Buses
The 235 small buses travelled an average of 43,193 kilometres a year. Vehicles aged 1-9
years averaged 49,316 kilometres while vehicles aged 10 years or over travelled 22,664
kilometres per year on average. The average age of small buses was 8.2 years.
Source: BIC

In this example, it can be calculated that the capital cost of using the bus for a year is equal
to $82,863, which when discounted at 10 per cent5 over five years, gives a net present
value of $ 314,1176. This represents the discounted return on capital plus the return of
capital.

From a tax perspective, the net present value of allowable depreciation is

The discount rate can be interpreted as an estimate of the real pre tax weighted average cost of
capital for the bus industry.

This is less than the assumed purchase price of the bus as the bus is scrapped at the end of year 5
for a value of $90,000. Hence, the discounted present value of the $90,000 plus the discounted
present value of the annuity equals $370,000.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 12 of 27

NETWORK ECONOMICS CONSULTING GROUP

$224,635 (Table 2).

Consequently, the proportion of capital costs accounted for by

depreciation over the life of the bus is about 70 per cent, that is $224,635/$314,117=0.71.7
Table 2
Year

Calculated value of depreciation for tax purposes under alternate

assumptions and assuming straight-line depreciation
Opening Value

Depreciation

Written Down Value

Market price

Pre tax benefit

Tax benefit

5 year effective and economic life

1

$370,000

$74,000

$296,000

$74,000

$22,200

$296,000

$74,000

$222,000

$74,000

$22,200

$222,000

$74,000

$148,000

$74,000

$22,200

$148,000

$74,000

$74,000

$74,000

$74,000

$0

$90,000

Net Present value

$74,000

$22,200

-$16,000

-$4,800

$224,635

$67,391

5 year economic life, 15 year life for taxation purposes

1

$370,000

$24,667

$345,333

$24,667

$7,400

$345,333

$24,667

$320,667

$24,667

$7,400

$320,667

$24,667

$296,000

$24,667

$7,400

$296,000

$24,667

$271,333

$24,667

$7,400

$271,333

$24,667

$246,667

$181,333

$54,400

$190,784

$57,235

$90,000

Net Present value

Source: NECG calculations

If the economic life for tax purposes is raised from 5 to 15 years it can be calculated that
the net present value of depreciation for tax purposes would be $190,784 (Table 2). This
is 15 per cent less than net present value of economic depreciation of the bus. The 15 per
cent can be viewed as a tax on the use of capital by the bus industry, as it is a cost incurred
by the industry that is not fully recovered in tax arrangements provided the industry8.
Armed with this information it can be calculated that the tax on the use of capital in the
bus industry will raise the effective cost of operating a bus over its life by 6.0 per cent
(Table 3)
Table 3

Impact on the total cost of bus operations of an artificial extension of

the economic lives of buses from 5 to 15 years (percent)

Share of capital in bus costs (proportion)

(1)

0.56

Share of depreciation in capital costs (%)

(2)

71.51

Increase in cost of depreciation as a result of longer economic life (%)

(3)

15.07

(4)=(1)*(2)*(3)/100

5.99

Effect on bus operating costs (%)

Source: NECG calculations

The analysis was also undertaken with depreciation calculated using a diminishing value
methodology which indicated that the choice of effective life has a greater impact when
diminishing value methodologies are used.

To the extent that existing arrangements provide, for some buses more depreciation than
economic depreciation, this tax will be overestimated.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 13 of 27

NETWORK ECONOMICS CONSULTING GROUP

Thus, when the existing bus fleet is finally replaced the cost of bus operations will be 6.0
per cent higher than they need to be as a result of the tax on buses.
We consider in the following sections the impact this tax would have on certain sections of
the Australian economy.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 14 of 27

NETWORK ECONOMICS CONSULTING GROUP

Impact on the Australian economy of a tax on the bus

industry
In the previous section it was calculated that extending the effective life of a bus for tax
purposes from 5 to 15 years would effectively impose a tax on the bus industry equivalent
to about 6.0 per cent. In this section we evaluate the impact of such a tax on certain
sections of the Australian economy. Specifically we consider:

3.1

the effect of the tax on the Australian bus industry;

the effect of the tax on international tourism in Australia; and

the effect of the tax on the cost of pollution and congestion in Australian cities.

Impact on the Australian bus industry

According to the Institute of Transport Studies9 BIC represents over 3000 businesses that
employ more than 30,000 people. This is made up of bus and coach operators who employ
drivers, administrative staff, workshop mechanics and other staff.
The 30,000 employees also include those engaged in industries directly related to the
provision of bus services. This includes 8 chassis suppliers to bus operators, 11 major
Australian bus body manufacturers and 55 associated businesses, such as seat
manufacturers, air conditioning manufacturers, fabric manufacturers, destination display
signs, etc.
Whilst the BIC does not represent government-owned fleets, the International Public
Transport Association estimates that a further 12,000 people are employed by government
fleets as drivers, administration and workshop workers.
The informal bus industry, made up of community transport programs funded by the
Federal and State Governments, and other bus operators operating outside the
accreditation systems10 also contribute to levels of employment. However, it is difficult to
calculate the employment levels associated with community transport work as its funding
is embedded within the costs of providing home and community care services as a whole.
In addition, bus operations that are operating outside existing regulatory frameworks are
not monitored or recorded.

Institute of Transport Studies 2004, 2003 Fact Sheet: Passenger Transport Activities in
Australia, Report prepared for BIC, Version 27 January.

10

Non-accredited bus operations are largely involved in charter work in the tourism sector.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 15 of 27

NETWORK ECONOMICS CONSULTING GROUP

Thus the minimum level of employment in the bus industry is at least 42,000, consisting of
30,000 employees employed by organisations affiliated with BIC, and 12,000 employees
employed by governments.
It is difficult to calculate what the tax on the industry would mean in terms of lost
employment. This is because the effect of the tax will vary through time. In the short
term, there will be a strong incentive for bus operators to mitigate the impact of the tax
through the substitution of old bus capital for new bus capital. As one operator put it, the
general feel is that School and Route Service bus replacement would go from current 5-7
years to 10-12 years, and coaches would go from 3-5 years to 7-10 years.
This process can only take place for a relatively short period of time, as the quality of the
bus fleet will fall, driving passengers to other modes of transport. Thus, eventually, bus
operators will not be able to mitigate the tax. Eventually, there will be pressure for fares
to rise, to enable operators to obtain a market return on capital invested in the industry.
The rise in fares would contract the industry below what it would otherwise have been,
leading to lost employment in the industry11.
Some idea of the potential pressure that bus operators may eventually come under can be
gained by calculating the drop in passenger numbers that would flow from a tax of 6 per
cent imposed on the bus industry. If all this tax was passed on to passengers and the price
elasticity of demand for bus travel is 0.4, as suggested by econometric work12, then bus
travel could fall by about 2.4 per cent. In 20022003 approximately 1.4 billion13 bus
passenger trips were undertaken, suggesting that the tax on the bus industry would result
in a loss of about 34 million passenger journeys per year.
The effect of the tax on employment in the bus industry would thus vary through time. In
the short run, industries that supply buses to bus operators would be hit hardest as bus
operators substitute old bus capital for new bus capital. Eventually, however, if there is no
change in subsidies provided to the industry, bus operations will also need to shed labour,
as a fare rise induced substitution of other transport for bus travel takes place. This will
make some routes uneconomic to supply, and services to these areas will cease.
Because old buses are good substitutes for new buses, at least for a short period of time,
we would expect that the introduction of a 15-year effective life would see a significant

11

Alternatively, State Governments could provide a subsidy to the bus industry to offset the added
cost of bus operations. Raising the revenue to pay this subsidy would impose an economic cost
on the economy.

12

See, for example, American Public Transit Association 1991, Fare Elasticity and its
Application to Forecasting Transit Demand, August, p xv.

13

Institute of Transport Studies 2004, op. cit., p.2.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 16 of 27

NETWORK ECONOMICS CONSULTING GROUP

drop in new bus orders. Such an occurrence would be particularly stressful for the bus
body building industry. As one of the largest body builders indicated;
It is no secret that most, if not all, body builders are doing it tough. A quick look at
deliveries over the last few years shows the market for new buses is reducing,
despite DDA compliance laws.
New Buses Delivered:
2000
2001
2002
2003

1,117
920
831
797

We have this year seen the collapse of Dennings, with probably more to come. The
2 largest builders, Custom Coaches and Volgren have both suffered from reduced
sales (not reduced market share). Since 2000, Customs deliveries have reduced
from 393 buses to 264 in 2003. During the same period Volgren have reduced from
276 to 234.
Quantification of the short term and long term employment impacts would require detailed
modelling of the sector. This has not been possible in the time available. However our
analysis suggests that the extension of the effective life of buses will impact most heavily
on the bus body building industry, and the extent of these effects would depend on how
many bus builders cease operations. In the longer term, we would expect a contraction in
employment opportunities in bus operations as well.
The loss of activity within the bus industry would also have flow on effects to other
sectors of the economy.
As indicated above, we believe that in the longer term a change in the effective life of a
bus could lead to fare rises. In the following section we examine possible impacts on the
Australian economy assuming that the tax on the use of capital in the bus industry is
passed on to passengers. The impact on the tourism sector in Australia is used as an
illustrative example.

3.2

Impact on international tourism to Australia

The average international tourist visiting Australia likes to travel. Of expenditure per trip
of $3,700 dollars for tourists visiting Australia for a holiday, around 45 per cent is spent on
some form of transport.
It is difficult to estimate the proportion of this expenditure that is directly related to bus
travel, as bus travel is not separately recorded in the survey of visitors. However, we can

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 17 of 27

NETWORK ECONOMICS CONSULTING GROUP

approximate this expenditure by the proportion of expenditure classified as Other

transport fares as most other forms of transport are separately recorded14.
On this basis bus transport accounts for approximately two per cent of expenditure by
international tourists visiting Australia for a holiday. A rise in the cost of this transport by
6 per cent would increase the cost of a holiday for an international tourist by about 0.1 per
cent.
Table 4

Average expenditure per night by item for all visitors and main purpose
1999 ($)

Item
Holiday
Package Tour
70
Pre-Paid international Airfares
36
Organised Tours
8
International Airfares bought in Australia
1
Domestic Airfares
1

Purpose
VFR
6
47
3
1
1

Total
Business
25
149
2
2
3

Other
9
17
1
2
1

34
37
4
1
1

Other transport fares

Self Drive, rent-a-car, campervan

4
4

2
1

8
5

2
1

3
2

Petrol & oil for self drive cars

Shopping-for use in Australia

Shopping-for items to take home

20

13

26

13

Total Shopping

23

17

30

17

Food, drink and Accommodation

36

20

96

26

32

Horse racing and gambling

Entertainment

Motor vehicles

Education fees

23

Phone, internet, fax, post

Other

Total expenditure per night

196

109

345

103

152

Average stay (nights)

19

26

12

64

26

3,737

2,795

4,168

6,592

3,974

Total expenditure ($/stay)

Source: IVS, 1999.

14

Train travel is also not separately recorded so other fares includes both train and bus travel.
However, a significant proportion of Packaged Tours and Organised Tours would involve
bus travel. Thus overall using other transport fares to approximate tourists use of buses is
likely to be conservative.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 18 of 27

NETWORK ECONOMICS CONSULTING GROUP

In a study of the effects of promotion of Australia on arrivals, Crouch et al15 found that
while promotion of Australia in overseas markets encouraged tourism, an increase in the
cost of the stay in Australia reduced tourism. In fact, for every 1 per cent increase in the
price of a visit to Australia relative to the price of a holiday in the country of origin,
arrivals in Australia were estimated to fall by between 0.92 per cent for United States
tourists down to 0.37 per cent for United Kingdom tourists. No significant effect could be
found in the German and Japanese markets.
Assuming an elasticity of arrivals with respect to the cost of a stay in Australia of 0.616,
the 0.1 per cent rise in the cost of tourism in Australia would reduce the number of
international tourists visiting Australia by 0.07 per cent or approximately 1,200 tourists per
year.
Based on the expenditure figures previously reported (Table 4), these tourists would each
have spent approximately $3,700 per visit, or about $5 million in total. To estimate the
additional welfare this expenditure would have generated for Australia, we used the results
of simulations with the MONASH model of the Australian economy. The simulations
involved a given increase in tourism expenditure, and the results are reported as deviations
from the base case results from the model17.
In the simulation, the economy-wide stock of capital achieved in the base case is required
to be maintained in the long run in the simulations. The investment required to achieve
this is factored into the model results. Consequently, the change in real consumption
observed in the simulation results can be viewed as an increase in welfare, as it represents
the amount consumers would need to be paid to make them indifferent between a world
without increased tourism, and an economy with increased tourism.
To evaluate the impact of the increased tourism on real consumption, an $A100 million
increase in exports of tourism was simulated, and the results are summarised in Chart 4.
The figures also demonstrate that the initial impact of the increase in tourism is
significantly higher than the long run impact. This reflects the modelling assumptions of a
slack labour market. Thus, in the short run, the expansion in tourism leads to an expansion
in employment. However, once employment rises to the level observed in the base case, it
is held at base case levels. Consequently, over the longer term, the increased demand for

15

Crouch, G. I., L. Schultz and P. Valerio 1992, Marketing international tourism to Australia, A
regression analysis, Tourism Management, June, pp. 196-208.

16

This is the simple average of the elasticities found to be significantly different from zero in the
Crouch, et. al. study.

17

Dixon, P. B., and M. T. Rimmer 2003, Three tourism simulations with the MONASH model,
Paper prepared for NECG, February.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 19 of 27

NETWORK ECONOMICS CONSULTING GROUP

Chart 4

1.6

Impact on real consumption of increased exports of tourism

($/$ expenditure)

1.48

1.4
1.09

1.2

1.04

0.98

0.86

0.80

0.8
0.6
0.4
0.2
0
Year 1

Year 2

Year 3

Year 4

Year 5

Average

Data source: Dixon and Rimmer (2003).

labour is expressed in terms of increased real wages. The rise in real wages contracts
other sectors, allowing the expansion in tourism to take place. However, the contraction in
other sectors, particularly export-orientated sectors, leads to an increase in the terms of
trade. Consequently, in the longer term, the benefits from an expansion in tourism are
driven more by terms of trade effects than increases in employment.
Using these results it can be calculated that the reduction in tourism that would flow from
higher bus fares would reduce welfare in Australia in the first 10 years after the changes
were made, by about $27 million in net present value terms.

3.3

Impact of the tax on the bus sector on pollution and congestion

The Institute of Transport Studies has argued that, the economic, social and
environmental impacts of our dependency on cars strongly compel action for increasing
the use of public transport18. The proposed changes to the effective life of buses have the
potential to achieve the opposite result.
The Institute of Transport Studies detailed the following estimates of noise, pollution and
congestion costs associated with road travel in Australia:

congestion cost of $12.8 billion per annum, rising to $29.7 billion by 2015 if
improvements are not made;

18

Institute of Transport Studies 2004, op. cit., section titled Economic sustainability and the Cost
of Cars.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 20 of 27

NETWORK ECONOMICS CONSULTING GROUP

air pollution from cars in 2001 of $1.35 billion, or 31% of the cost of air pollution from
road transport; and

noise pollution from cars of approximately $850 million per year19.

These costs would rise if car travel were to increase. Recent econometric work suggests a
demand elasticity for bus travel of 0.4. This elasticity implies a reduction in bus travel of
2.4 per cent, assuming fares were to rise by 6 per cent to recover the implicit tax imposed
on the bus industry by the artificial extension of the economic life of buses from 5 to 15
years.
As bus travel accounts for approximately 5 per cent of passenger kilometres of travel in
the metropolitan area, the reduction in bus travel of 2.4 per cent represents approximately
0.1 per cent of the metropolitan passenger transport task.
If this task were to be diverted to car and train travel, according to the metropolitan
transport shares indicated in Chart 5, it can be calculated that the social and
environmental impacts generated by cars would rise by about $20 million per year.
While this is a relatively small number, it is still a loss to Australia that results from an
incorrect policy towards the Australian bus industry.

In addition, the policy will

undermine the Governments recent initiatives to improve emission standards in the bus
industry. New Emission Standards will add around $40-45,000 to the cost of a bus, and
see reduced passenger capacity that will reduce productivity.
Chart 5

Urban transport share of passenger kilometres

Bus
5%

Car
90%

Train
5%

Data source: Institute of Transport Studies, op. cit., Figure 4.

19

Ibid., section titled Economic sustainability and the Cost of Cars.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 21 of 27

NETWORK ECONOMICS CONSULTING GROUP

Of course, these costs would be avoided if State governments were to offset the higher bus
costs through a subsidy to bus travel. However, tax revenues would need to be increased
to pay this subsidy. There would be an economic cost associated with the higher State Tax
revenue.

3.4

Implications of the analysis

The proposal to extend the economic life of a bus to 15 years would significantly reduce
the economic efficiency of the Australian economy. It would impose a tax on the bus
industry that would have significant adverse effects on the cost structure of the Australian
bus industry, and would have negative effects on other sectors of the Australian economy,
particularly the tourism sector.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 22 of 27

NETWORK ECONOMICS CONSULTING GROUP

Conclusions and Further Work

Available data does not support the proposition that an effective life of 15 years would
provide a depreciation schedule for tax purposes that more closely mimics the economic
depreciation of a bus than does the depreciation schedule based on existing arrangements.
Accordingly, extending the economic life to 15 years would effectively impose a tax on
the bus industry of about 6 per cent. Such a tax would reduce economic welfare in
Australia. It would reduce the level of international tourism to Australia and the lost
tourism expenditure would reduce welfare in Australia by $27 million in the first ten years
after the change was made. In addition, the tax would cause a shift away from buses
towards a greater use of cars in metropolitan areas. This would impose additional costs on
the Australian economy via increased pollution and congestion in Australian cities.
Further work could be undertaken to consolidate the research findings contained in this
report. Up-to-date estimates of the cost structure of different bus types could be derived to
obtain more accurate estimates of the tax on the industry. Finally, an analysis could be
undertaken to establish if the estimated effects of the tax on the bus industry are
particularly sensitive to the assumptions made .
Pending further work, the findings of this study indicate that the proposed change in the
effective life of a bus to 15 years would be an inappropriate policy change, as it would
effectively impose a tax on the industry that would have deleterious effects on the industry
and the economy at large.

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 23 of 27

NETWORK ECONOMICS CONSULTING GROUP

Derivation of economic depreciation for a typical bus

The results from the BIC survey were used to derive an estimate of the economic
depreciation of a typical bus. The analysis commenced with the specification of the
expected economic life of a typical bus. The BIC data indicates that the number of buses
in an age category rises gradually until the age category 7 years. Thereafter bus numbers
decline in most years until year 11 when numbers dramatically drop. Thus in year 11 the
number of buses is around a third of numbers in year 7 (Table A1).
Using this age profile we conservatively assume that the typical bus is replaced at the end
of its tenth year.
Table A1 Summary of results from BIC survey
Number of buses

Average kilometres
Travelled per bus per
year

Age in years

Kilometres travelled

4,828,961

67

72,074

5,525,013

81

68,210

4,443,278

62

71,666

4,398,164

71

61,946

5,742,295

81

70,893

6,026,124

97

62,125

9,546,629

159

60,042

4,127,244

94

43,907

6,243,920

134

46,596

10

5,191,577

114

45,540

11

2,113,397

47

44,966

12

1,661,013

57

29,141

13

1,653,485

53

31,198

14

3,369,703

88

38,292

15

2,661,178

75

35,482

16

2,562,631

93

27,555

17

2,082,382

69

30,179

18

1,384,776

71

19,504

19

708,020

36

19,667

20

942,315

42

22,436

21

481,952

21

22,950

22

754,313

22

34,287

23

679,894

24

28,329

Source: BIC

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 24 of 27

NETWORK ECONOMICS CONSULTING GROUP

The workload the typical bus undertakes over its life is not uniform. Kilometres travelled
are around 70,000 per annum for the first 5 years of a buss life, thereafter annual
kilometres is on average about 15,000 less than in the first 5 years of a buss life
(Table A2).
We assumed that the typical bus would have a work profile per year over its life equal to
the average kilometres travelled by buses of different vintages in the BIC survey. Thus,
for example, in year 1, the typical bus was assumed to travel the average distanced
travelled by buses of one year of age in the BIC survey, that is 72,074 kilometres.
Similarly, in year 2 the kilometres travelled by the typical bus were assumed to be the
average kilometres travelled by all buses of two years of age in the BIC survey, and so on
for each year.
It was then assumed that the economic depreciation would decline linearly with the
kilometres of work undertaken. This gave the economic depreciation profile given in
Table A2. This depreciation profile can be compared to the profile associated with the 15
year effective life proposed by the ATO, and alternate profiles associated with the current
effective life of 6 years for some buses, and alternate profiles associated with an 8 and 10
year economic life.
Table A2 Alternate depreciation profiles for a typical bus
Age in
years

Assumed
cumulative Cumulative share Economic
distance
of lifetime travel depreciation
travelled

15 year
life

6 year
life

8 Year
life

10 Year
life

72,074

0.12

0.12

0.07

0.17

0.13

0.10

140,284

0.23

0.11

0.07

0.17

0.13

0.10

211,950

0.35

0.12

0.07

0.17

0.13

0.10

273,896

0.45

0.10

0.07

0.17

0.13

0.10

344,788

0.57

0.12

0.07

0.17

0.13

0.10

406,913

0.67

0.10

0.07

0.17

0.13

0.10

466,955

0.77

0.10

0.07

0.13

0.10

510,862

0.85

0.07

0.07

0.13

0.10

557,458

0.92

0.08

0.07

0.10

10

602,998

1.00

0.08

0.40

0.10

Total depreciation

NPV

$0.64

$0.54

$0.73

$0.67

$0.61

Difference

$0.00

$0.10

-$0.09

-$0.03

$0.03

Tax/subsidy

0.00%

-15.88% 13.47%

4.24%

-3.95%

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 25 of 27

NETWORK ECONOMICS CONSULTING GROUP

To enable the depreciation profiles to be compared, we calculate the net present value of
the depreciation profiles, and compare these to the net present value of economic
depreciation of the typical bus. These calculations indicate that the proposal to extend the
effective life of a bus to 15 years would impose a large tax on the bus industry, as
indicated by the fact that the net present value of allowable depreciation is 15 per cent
below the net present value of economic depreciation (Table A2). Interestingly, setting an
effective life of 10 years would also involve a tax on the typical bus operation, as it would
not capture the fact that buses are used more intensively in the first five years of their
lives.
Overall, existing depreciation arrangements for some buses that allow for an economic life
of 6 years more closely mimics the profile of economic depreciation than does a
depreciation profile based on an effective life of 15 years. This can be seen by comparing
the net present value of the different depreciation profiles to the net present value of
economic depreciation (Table A2).

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 26 of 27

NETWORK ECONOMICS CONSULTING GROUP

EFFECT ON THE AUSTRALIAN ECONOMY OF ALTERING

THE EFFECTIVE LIFE OF BUSES FOR TAX PURPOSES

Page 27 of 27