THE CARBON TAX SPECTRE, CAN THE COSTS BE PASSED ON BY BUILDERS?
By Justin Cotton, Director, Lovegrove & Cotton.
Now that the carbon tax has been approved by parliament, a question many domestic builders have been asking, is whether the cost of the carbon tax to the building company can be passed on down the chain to consumers, ie the owners under building contracts?
This is not a question that lends itself to a rapid and easy answer. The carbon tax is not a direct tax, rather it is indirect, and the domestic building legislation (the Domestic Building Contracts Act 1995) maintains that cost escalation clauses can only be included in contracts in certain defined circumstances.
In any event, a cost escalation clause is only valid if it is in an approved form and before the contract was signed, the Builder gives the Owner a notice in an approved form explaining the effect of the cost escalation clause. The Owner must then, at the time the contract is signed, place their initials or signature in the space provided next to the cost escalation clause. If this does not occur in this way, the cost escalation clause can be regarded as void and of no effect.
What exactly is a “cost escalation clause”? The Act provides that it is a provision in a contract under which the contract price may be increased to reflect increased costs of labour and materials or increased costs caused by delays in carrying out the works.
Significantly though, section 15 of the DBCA says that a cost escalation clause does not include a provision that enables the contract price to increase to reflect unforeseeable cost increases resulting from changes to government taxes or charges.
So it would seem that a Builder mark up on price to reflect the carbon tax, would not qualify as a cost escalation clause that can be included in contracts.
There has been some discussion on whether a clause along the lines of clause 22 in the standard housing HIA contract could cover this scenario, and perhaps allow Builders to increase their price to cover them for the introduction of the carbon tax.
Clause 22.0 reads: “The Owner must pay to the Builder a sum equal to any increase in any tax, duty or charge which takes effect after the date of the Contract and which causes an increase in the cost to the Builder in complying with the Contract. Such sum shall be paid by the Owner to the Builder with the Final Payment.”
The problem in arguing that this covers the carbon tax situation, is that the clause appears to be referring to a direct tax where the sum associated with the tax is obvious or able to be calculated. Further the Housing Industry Association is leaning toward the view that this clause does not refer to indirect taxes.
While a Builder will know that the introduction of a carbon tax will increase the costs of their business in a global sense, it is not possible to pinpoint the exact increase in price caused by it on any given project.
One option would be for Builders to make an educated estimate on the overall cost to the business of the carbon tax, and then to factor it into their margins (ie an increased percentage on the margin) to include on every building contract.
Caution needs to be taken though that increases in costs are not suddenly introduced and labelled as necessary increases brought about by ‘carbon tax’ inflation. There have been many consumer complaints recently about companies suddenly raising prices in an ad hoc fashion and nominating the carbon tax as the cause, and a well know gym chain was recently pinged by a consumer watchdog for this very reason. The gym had advised members to sign up or renew their memberships within a short time frame, or otherwise the costs next year would be severely inflated at a particular percentage due to the carbon tax. There was a finding that this was misleading conduct.
There has been a suggestion that clause 22 in the HIA contract could be amended to allow for a notice to be given to the Owners “in a form approved by the Director” (similar to the cost escalation clause requirements) and then provide a space for the Owner to sign. Having said that, it is uncertain whether that would get us much further, as clause 22 by its very nature would not come within the definition of a cost escalation clause, unless section 15 of the DBCA were to be amended.
There is a counter argument that clause 22 of the HIA contract could apply to the carbon tax scenario. Certainly the carbon tax could be said to be within the definition of “any increase in any tax, duty or charge”. So the conclusion that it could not apply to the carbon tax is not clear cut. Once again though, there is a problem with the fact that the effect of the carbon tax on the price of a particular building contract is not a ‘sum certain’.
There is little doubt there will be more discussion on this as the effect of the tax on all areas of the economy becomes more understood and measurable.