New Victorian levy to cost Crown Resorts Ltd $57 million per year

Short-term pain for long-term gain.

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A new levy is expected to be agreed between the Victorian state government and Crown Resorts Ltd (ASX: CWN) which will cost the company up to $57 million per year.

The low down

If all goes to plan, the proposal will come into effect this financial year and will impose a $22,715 levy per year, on each of the 2,500 machines in Crown’s Melbourne Casino. The full levy would start in the in 2014-15 financial year, and a smaller $5,500 levy would apply for the 2013-14 financial year ending in June.

If implemented, the cost to Crown will be up to $57 million per year in the 2015 financial year and up to $14 million in 2014. If the full $57 million is payable in 2015 it will represent a decrease of around 7% from expected net profit of $775 million to $718 million based on a recent Morningstar analysis.

Gambling on the government

The new legislation again highlights the risk investing in companies subject to the whims of local and federal government decisions. As was seen in the McMillan Shakespeare Limited (ASX: MMS) debacle during the 2013 election, entire businesses can be brought to their knees when governments are faced with a revenue shortfall.

Long-term gains over short-term pain

Luckily for current and potential investors in Crown, Morningstar analysts believe that the levy may actually turn out to be a positive for the company in the long run. The tax agreement between Crown and the government is just that, an agreement, so both parties must agree to any changes before they are set in stone. While the levy may produce a short-term earnings hit, Crown may be happy to oblige and boost short-term tax revenue in exchange for new licence concessions.

Concessions may include an increase in gaming tables or machines, lower tax rates on VIP revenue, or an extension of its licence for a set period of years. This could have the benefit of improving Crown’s dominant position in the Melbourne market for a comparatively small price over the long run.

Foolish takeaway

Crown is currently engaging in an ambitious expansion plan which will see it open a new luxury resort and gaming complex in Sydney, a new 6-star hotel in Perth, upgrade its Melbourne casino, and build a new casino in Sri Lanka. The new levies in Melbourne are fairly minor in comparison to the opportunities in other cities, but offer Crown the potential to extend its lease in exchange for a relatively minor impairment in earnings.

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