Acquisitions and Experience Rating
ACC’s Experience Rating is the penalty / discount scheme driven by workplace claims. Like your car insurance, if you have no claims, you get a discount and of course, if you have claims, you get a loading (penalty). The only difference is, under Experience Rating, the maximum discount is up to 50% and the maximum penalty is up to 100%.
In this blog I avoid the various nuances as to how Experience Rating works. Instead, I focus on what happens when we purchase another business as a going concern.
The Experience Rating Regulations states that when a business is acquired as a going concern, the Experience Rating profile follows the business.
Ok, so what?
The scenario is that you are buying another business and will merge it with your existing one. You are a transport company, currently have 75 staff, a payroll of $5m, and the ACC levy cost is 2.17% of payroll or approx. $122,000. Your current Experience Rating profile has the business on a 30% discount (well done) meaning your actual levies are $85,000.
The business you are buying has 30 staff, same industry, but has a 60% penalty.
When the two companies are combined, a very unpleasant outcome occurs. Although you will not bounce to the 60% loading, you will most likely move to a 30% loading. Financially, this means you are paying an extra $73,000 as a result (you lost the 30% discount plus the new 30% loading) for the next three years - you read this right, 3 years.
"Ok but wait" you say, "we are keeping the other business as a standalone business".
Nice, fair enough. However, the Experience Rating Regulations also requires businesses that have a commonality of Directors and or shareholders, are grouped for Experience Rating purposes. In other words, the claim profile of one business will impact the others in the group.
I have my views on this Business Grouping concept but alas, ACC have done a good job in how this is set up. The commonality is staunchly aligned to the Tax Act and difficult to get out of.
Either way, you run the risk of this acquisition costing you a great deal more.
The solution? Cover ACC levies and Experience Rating as part of your due diligence process. You can get this data from the other company either by way of reports or better still, because you want to be able to verify the accuracy, through getting access via the MyACC portal.
If nothing else, you can use this as a negotiation tool. You don't buy a car without looking under the hood, don't buy a business without doing the same.