Every day we face many consumer, financial,
legal, business and employment choices.
Business Education helps us to make informed
and responsible decisions.
A
Business
and economic
systems
In this part, you will understand:
• business environments
• the nature of systems
and subsystems
• production and markets
• the resolution of business
and economic issues.
1
Business
environments
Whenever you step outside your home, you interact with some type of system
or business organisation. It may be the transport system, a retail business or
a government department. In fact, even within your home, you can have such
interaction through the Internet or on the telephone. In this chapter, you will
learn how business organisations operate within community systems and how
they are regulated.
You will:
•
•
•
•
compare business organisations
analyse their purposes and structures
identify how businesses fit within industry types
identify and investigate the need for systems and businesses to be
regulated
• understand the role of regulatory bodies in Queensland and Australia.
Key terms
asset: item of value that a business owns and that
can be given a monetary value
business: the organised effort of individuals to
produce and sell, for a profit, the products that
satisfy individual needs and wants
consumer: a person who purchases goods and
services to satisfy needs and wants
cooperative: a group of people who join for a
common interest
export: a good or service sold to overseas countries
franchise: the buying of the rights from another
business to distribute its products under its name
franchisee: an individual or organisation that
purchases a franchise
franchisor: an individual or organisation that grants a
franchise
goodwill: the value attached to the reputation of a
particular business
incorporation: the process that companies go
through to become incorporated — that is, to
become a registered company and a separate legal
entity
industry: a business sector involved in similar types
of production
legal entity: a business that has legal recognition and
carries associated rights and responsibilities
limited liability: an obligation by a business owner to
pay off debts only to a limited amount in the case
of business failure — usually the amount invested
need: thing necessary for survival, such as water and
food
non-profit organisation: organisation that operates
in order to provide social, educational, religious and
other services, rather than to earn a profit
partnership: a legal business structure that 2 to
20 people own and operate with the aim of making
a profit
primary industry: any industry that is involved in
growing, producing or extracting natural resources
private company: business owned and operated by
between 2 and 50 private owners. The public
cannot buy shares in a private company.
profit: the money earned by a business that is in
excess of costs — that is, the money left over after
expenses are covered. Mathematically, it is simply
the income from all sources less all costs and
expenses.
public company: business owned and operated by
an unlimited number of people called shareholders.
It has limited liability, and the shares may be
bought and sold on the stock exchange.
quaternary industry: an industry involved in the
transfer and process of information and knowledge
quinary industry: an industry that provides domestic
services, many of which were once carried out by
people within their own homes
raw materials: material as it exists in nature before it
is treated in any way
secondary industry: an industry in which raw
materials are taken from the primary sector and
processed into a finished or semi-finished product
sole trader: a business owned and operated by one
person
stock exchange: the place where shares in public
companies are bought and sold
tertiary industry: an industry that provides a service
for other people
trademark: a brand name or design that is officially
registered
trust: a relationship in which one person (the trustee)
holds property (the trust property) on behalf of
another (the beneficiary)
unlimited liability: describes a situation where a
business owner is personally responsible for all the
debts of his or her business
want: thing that is not essential for survival but that
we would like to have
1.1
Business organisations
operate in order to provide social, educational,
religious and other services rather than to earn a
profit. The Salvation Army and World Vision are
examples. Such ‘businesses’ are called non-profit
organisations.
Today, consumers depend on a wide range of
businesses to provide them with the endless range
of goods and services they require. Without these
businesses, life would be more difficult.
What is a business?
How are businesses organised?
A business is any organisation that produces and
sells, for a profit, the goods and services that
satisfy our needs and wants. Some organisations
A sole trader is a
business that is owned and
operated by one person.
It is the most common type
of business in Australia.
A sole trader business can
operate in almost any
field. Usually, however,
sole traders are stores,
cafés, newsagents and
hairdressers as well as
trades such as plumbers
and electricians.
The sole trader receives
all the profit and suffers
all the losses. He or she
has unlimited liability.
This means he or she can
be forced to sell personal
assets such as the house
or car to pay for business
debts. A sole trader
usually has only one
person’s name in its
business name — for
example, Maria’s Café.
If the business name is
different from the owner’s
name, the sole trader
must register the business
name.
Businesses can be organised in five main ways.
These ways are described below.
A partnership is a business usually owned and
operated by between 2 and 20 people, called
partners. The partners sign an agreement that
records, for example, how profits and losses are
to be shared, the partners’ roles and how to
dissolve the partnership. Together they decide
how best to operate the business. It is common
for people with similar skills — such as doctors,
solicitors and dentists — to form a partnership.
Partnerships tend to have the names of the
partners in the business name — for example,
Harries and Davidson Accountants. Partnerships
have unlimited liability.
6
Part A: Business and economic systems
A private company usually
has between 2 and 50 private
owners called shareholders. These
businesses tend to be small to
medium in size. Often, they are
family-owned. Shares in private
companies are offered only to
those people the business wants
as part-owners. This is why it is
called a ‘private’ company.
A private company must have
the words ‘Proprietary Limited’,
abbreviated to ‘Pty Ltd’, after its
name. The main advantage of
a private company is that
shareholders have limited
liability. This means that if the
business cannot pay its debts, a
shareholder loses only the money
she or he has invested in the
business.
KNOW AND UNDERSTAND
1 What is a business?
2 List three non-profit organisations.
3 Select the most appropriate word from the list
below to complete the sentences that follow.
public
personal
beneficiary
sole trader
private
limited
stock exchange
liability
unlimited
two
twenty
A business entity with one owner is called a
. This person faces
liability,
which means he or she can be forced to sell his or
her
assets to pay for the debts of the
business. Partnerships normally consist of
between
and
partners.
Partnerships have unlimited
. There are
two types of companies, private and
.
A
company has between 2 and 50
private shareholders. Shares in public companies
are bought and sold on the
. Companies
have
liability. In a trust, the trustee
holds property on behalf of the
.
4 In your notebook, complete this table to show how
each of the businesses below is owned. The first
one has been completed for you.
A public company can have an unlimited number of
shareholders. The general public may buy and sell shares
in these companies. This is done through the stock
exchange. Most public companies are large. Examples
include Westfield, Billabong and Woolworths.
Shareholders in public companies have limited liability.
A public company must have the word ‘Limited’,
abbreviated to ‘Ltd’, after its name.
Sole
trader
Partnership
Private
company
Public
company
Trust
Beck’s
Pty Ltd
Beck’s Pty Ltd
The Jones Family Trust
M&M Communications Tyler & Kelly
Tip Top Pty Ltd
Tai’s Take-away
CGM Ltd
5 In groups of four or five, decide what form of
business ownership is appropriate for:
(a) a small bicycle shop that offers personal and
professional advice by the owner
(b) a national retail chain that would require
$589 million to establish
(c) a suburban hairdresser
(d) a medical clinic.
PROPOSE
6 You are planning to establish the following types of
business. What form of business ownership would
you prefer?
(a) A bicycle shop offering professional and
personal advice
(b) A family cattle stud specialising in breeding
programs
(c) A travel agency that you wish to expand to five
outlets within two years
(d) A national retailer that would require
$467 million to establish
(e) A solicitor’s practice offering a range of legal
services.
A trust is often used to minimise taxation and preserve
family assets. One person (the trustee) holds property
(the trust property) on behalf of another person (the
beneficiary).
7
Business environments
1.2
Analysing business
organisations
• minimum requirement (under the law) of three
directors, two of whom must live in Australia
• requirement to publish an annual report that
clearly states its financial position.
Business organisations are all designed to suit the
particular needs of the people who establish them.
Businesses have different structures and legal
responsibilities and it is important to understand
the differences, for example, between a limited liability company and a private enterprise operation.
It’s no wonder that people spend so much on legal
advice when establishing a business or resolving a
business dispute!
Franchises
In recent times, franchising has also become a very
popular form of business structure. A franchisor is
the individual or organisation that grants the
franchise, and the franchisee is the person who
purchases the franchise. Most franchisees then
operate their business as either a sole trader or in
partnership with another person. The benefit to
the franchisee is that he or she is granted an
instantly recognisable business name and can
immediately start to draw on the goodwill of that
business. The franchisee also receives training in
terms of the technical aspects of operating the business from the franchisor, and assistance with business management principles. In return, the
franchisee provides the start-up fees and labour, and
agrees to uphold the terms and conditions of the
franchise agreement.
Companies
In Australia, all companies undergo a process
known as incorporation. This involves a business
being created as a legal entity in its own right and
treated as a separate entity from its shareholders.
In other words, the company rather than individual
shareholders is liable for the debts created through
its operation.
Private companies
Private companies are not listed on the Australian
Stock Exchange. They have a limited liability
structure, and therefore shareholders cannot be
forced to sell personal assets to pay the company’s
debts. However, there are some exceptions to this
situation. In some instances, the directors of the
company will be asked to give a personal guarantee
when financial institutions are giving loans. In these
cases, the person who offered the personal guarantee
might lose his or her own assets to pay the debts of
the business. If company directors engage in misleading behaviour or recklessly borrow money, they
can be held personally responsible for such acts.
Criminal charges may follow, with lawsuits being
brought under the code of civil law.
Public companies
In contrast, public companies are listed on the
Australian Stock Exchange and their shares are
available for purchase by members of the general
public. These companies tend to be large in size and
can attract investment quickly. The key features of
a public company are as follows:
• unlimited number of shareholders
• no restriction on transfer of shares between
people or the amount of money that can be raised
through offering shares
• prospectus issued when selling shares
Bakers Delight is a franchise operation.
Cooperatives
Another form of company is a cooperative, where
a number of people combine for a particular
purpose. Typical cooperatives involve farmers, community education centres and credit unions.
8
Part A: Business and economic systems
affairs, drawing on their expert knowledge of the
specialist nature of their work. They also reduce
costs by streamlining their operations to ensure
maximum efficiency in the delivery of goods and
services.
One of the most successful cooperatives in
Australia is the Ricegrowers’ Co-operative Limited,
which trades as SunRice. The benefit of a
cooperative is that people who work in the one
industry can join together to manage their own
Case study — David Brown
started to pick up all of the jobs that other
franchisees didn’t want to do around his
territory. David never says no to a customer
request, and this ‘can do’ attitude brings
repeat business and referrals back to him.
The VIP Lawnmowing business continued
to grow and David now has an annual
turnover of between $140 000 and
$180 000. David’s savings habit has not
deteriorated either, and his daily savings
amount has grown to $45 per day. He
initially owned several investment
properties, but has now sold them and is
concentrating on his substantial share
portfolio. David recently purchased a new
BMW for cash as a reward to his wife and
family for sticking with him through the bad
times, and they are now enjoying the benefits of his
savings and work ethic.
As David says, ‘You don’t know how good it feels
when the girls ask for something and you can just pull
the cash out of your pocket’. Some good advice from
David is to ‘. . . find a financial planner and stockbroker
that you can trust. It may cost money, but it is worth it’.
You can’t start from a more difficult
position than where David started.
Ten years ago, he had $20 in the
bank, and was a recovering
alcoholic. David then discovered
Paul Clitheroe’s first book Money
and started saving $2 per day in a
jar as Paul suggested.
He did not get too ambitious, as
he found that if he tried to put
more away, he was taking it back
out before the week was out. In
June 1995, David was able to
purchase a VIP Lawnmowing
Franchise, and continued his
savings habit. He also managed to teach his customers
to save the same way, so they had the money ready to
pay him.
David’s basic commonsense also flowed into the
running of his franchise. In the same manner that he
took on board all the suggestions in the Money book,
he also religiously applied all of the principles outlined
in his VIP training manual. By following all of the
suggestions to the letter, his business grew. He also
Source: VIP Lawnmowing
KNOW AND UNDERSTAND
1 Define the following terms:
5 Outline the key advantages and disadvantages in
establishing a business through a franchise
agreement. In your answer, refer to the case study of
David Brown.
6 What are the benefits to farmers of joining a
cooperative?
7 Under what circumstances will the directors of a
company be personally liable for the company’s
debts in the event of a collapse?
8 Go to www.jaconline.com.au/businesseduqld and
click on the Billabong, CSR or SunRice weblinks.
(a) What is the legal nature of the company (e.g.
private, public, cooperative)?
(b) Is the public allowed to purchase shares in the
company?
(c) What are the main areas of operation of the
company?
(a) proprietary company
(b) limited liability
(c) public company.
2 What are the essential differences between a private
and public company?
3 Write the following words in a sentence to show
their meaning:
(a) incorporation
(b) goodwill
(c) franchisee
(d) franchisor
(e) cooperative.
4 Why does the law require at least two directors of
public companies to live in Australia?
9
Business environments
1.3
Businesses within industries
The situation today
Primary industry
Over the last 100 years, the types of goods and
services produced by businesses have changed a
lot. This is evident from the industries in which
businesses operate. The three main industries are
primary, secondary and tertiary.
A primary industry is one that produces raw
materials (such as fresh fruit) from what nature
has provided. All types of farming, mining, fishing,
grazing and forestry are primary industries.
Primary industries provide all our food. As well,
approximately 60 per cent of all our exports are
primary industry products.
Industry sector
Tertiary
Secondary
Primary
Quinary
Quaternary
The industry sectors
The table below
industry sector at
years. Since 1900,
from the primary
industry.
shows the relative size of each
fixed times over the last 100
occupations have shifted away
industry towards the tertiary
A farmer works in a primary industry.
Interpret a table
A table provides a range of data, arranged in columns
(reading down) and rows (reading across). It presents
a great deal of information in a small amount of
space.
Secondary industry
Secondary industries turn raw materials into
finished or semi-finished products. For example,
iron ore, coal and limestone are turned into steel —
a semi-finished product. Steel is then used to
manufacture cars — a finished product.
Proportion of employment by industry in Australia,
1900 to 2000 (%)
Year
Primary
Secondary
Tertiary
1900
34
20
46
1920
27
22
51
1940
21
25
54
1960
12
28
60
1980
8
20
72
2000
5
21
74
Source: Data derived from Year Book Australia 2001
• Note column and
row headings, and
the table heading.
These give
meaning to the
data presented.
• Look for steady
patterns
(increasing or
decreasing data)
and for unusual
results or trends.
• Note any
especially
high or
especially
low figures.
Car workers and steelworkers are secondary industry
employees.
10
Part A: Business and economic systems
Tertiary industry
Tertiary industries provide services for others.
Retailers, dentists, bankers and solicitors all work
in tertiary industries. Over the last 50 years, the
number of people employed in tertiary industries
has grown rapidly. Today, three out of every four
employees work in this sector. The growth has been
so fast that the tertiary industry has been broken
down into the quaternary industry and
quinary industry.
Sales assistants are
tertiary industry
employees.
A teacher is a quaternary industry
employee.
The number of people employed in
information processing industries
is expected to increase in the
future. Expanded Internet and
e-commerce job opportunities
will foster this growth.
Quinary industry
The quinary industry is made up of
domestic services, many of which
were once carried out by people
within their own homes. Hospitality, childcare, domestic cleaning
and home maintenance services
are examples of quinary industry
services. They include both paid
and unpaid workers.
Quaternary industry
The quaternary industry is made up of service industries involved in the transfer and
processing of information and knowledge.
Telecommunication, property, computing and
education are some examples.
A chef is a quinary industry employee.
KNOW AND UNDERSTAND
1 What is meant by the term ‘industry’?
2 List the three main types of industries.
3 In your notebook, construct a table like the one below.
In the correct columns, insert the jobs from the list
that follows. The first one has been done for you.
Primary
Secondary
Tertiary
Quaternary
(b) Which industry experienced the greatest increase
in employment, and which the greatest decline
during the twentieth century?
(c) Which industry was the most stable, with
regard to employment, during the twentieth
century?
5 Collect a series of pictures that show all the different
types of industries involved in making one particular
product.
6 In small groups, brainstorm these questions:
(a) Why has the tertiary sector grown so rapidly over
the past 50 years?
(b) Why are there so many people today employed in
the quinary industry?
Quinary
Orchardist
Lawyer
Chef
Farmer
Dentist
Carpenter
Computer operator
Real estate agent
Tow-truck driver
Factory hand
Cleaner
Teacher
Child carer
Grazier
Welder
Journalist
(a) In which year in the table was the proportion of
people employed in the following industries at its
highest and lowest?
(i) Primary (ii) Secondary (iii) Tertiary
Newsreader
Miner
Secretary
Surgeon
Writer
PROPOSE
4 Look at the table showing the proportion of
employment by industry in Australia, 1900 to 2000,
and answer the following questions.
11
Business environments
1.4
Regulating business and
economic activity
Legal and government regulations
per annum must register for an Australian business number (ABN).
Under the Queensland Business Names Act 1962,
every business name must be registered, except
when the name is that of the owner and then it is
optional. But if something is added to a personal
name, such as ‘Pty Ltd’, ‘Motors’, ‘and Associates’ or
‘and Co.’, then it must be registered. This is to stop
anyone else from trading under a similar name.
If the business name is a crucial part of the
business’s operation, then it should also be registered as a trademark with the federal agency
responsible for intellectual property (IP Australia),
which administers the Trade Marks Act 1995
(Cwlth).
Business owners may sometimes feel they are
overregulated. Licences, permits, approvals and
authorities must all be taken into account. All business owners have a legal obligation to observe laws
and regulations when commencing and operating a
business. This can be frustrating at times, particularly when more than one level of government is
involved. The consequences, however, of failing to
comply with regulations could be serious.
Business owners should consult a solicitor,
accountant or the Queensland Department of State
Development and Innovation to clarify the laws
governing their business operations.
All three levels of government (federal, state and
local) have regulations that business owners must
follow. The regulations are needed primarily to promote fairness, protect consumers and encourage
efficiency. The following legal requirements — business and business name registration, company
registration and local government regulations — are
examples of some of the main regulations.
Company registration
(incorporation)
When companies go through the process of
incorporation, they:
1. lodge an application with the Australian Securities and Investments Commission (ASIC) and
receive a Certificate of Incorporation
2. complete two compulsory sets of documents: the
memorandum of association and the articles of
association
Business and business name
registration
Since the introduction of a goods and services tax
in Australia, businesses earning more than $50000
Ownership
• Business name registration
• Product labelling
• Patents and trademark
• Legal structure
Consumer protection
• Fair trading
• Advertising
• Trade hours
• Weights and measures
• Guarantees and warranties
Health regulations
• Food and safety program
• Food safety code
• Pollution controls
• Sewerage and water
Zoning
• Building permits
• Fire safety
• Parking and access
• Development application
Employees
• Awards
• Contracts
• Superannuation
• Occupational health and safety
• Equal employment opportunity
• Unfair dismissal
Taxation
Some major legal and government
regulations on small business
Licences
• Liquor
• Commercial vehicle
• Chemical storage
• Trade specific (e.g. plumber, electrician)
• Environmental
• Playing of music
Some of the major legal and government regulations on business
12
Part A: Business and economic systems
• Pay as you go (PAYG) tax
• Company tax
• Payroll tax
• Goods and services tax (GST)
• Fringe benefits tax (FBT)
Company structure
• Memorandum of association
• Articles of association
• Directors’ role
3. receive a unique nine-digit Australian company
number (ACN) that becomes part of the company name and must be displayed on all official
correspondence
4. pay the required fee to ASIC.
Once these steps are complete, the company is ready
to begin trading.
KNOW AND UNDERSTAND
1 Which government department provides advice
2
Local government regulations
Many business owners overlook the importance of
local government regulations. Any business using
premises or land must first seek local government
approval. Commencing trading before approval is
obtained could result in the closure of the business.
Time, money and energy could have been wasted.
Local governments have control over the following
business activities:
• land zoning and the purpose for which a building
or land can be used
• new development applications and alterations to
existing premises
• fire regulations, especially the provision of
adequate fire prevention facilities
• parking regulations governing the number of
parking spaces that need to be provided
• health regulations
• business signs — the size, shape and location.
Two of the most important business activities are
zoning and health regulations.
3
4
5
6
regarding the licences that a business needs to
operate lawfully?
What are the main objectives of imposing
government regulations?
What is an ABN?
When should a business name be registered as a
trademark?
List three business activities over which local
government has control.
What is the purpose of zoning?
PROPOSE
7 Using a telephone directory, find:
8
Zoning regulations
Local government controls zoning regulations. It
ensures activities that do not belong together, such
as those associated with factories and residential
areas, are kept separate. This function assists the
local community in terms of planning.
When commencing a business, owners must
enquire with the local council to determine which
zoning regulations will affect their business now
and in the future.
9
10
Health regulations
Local government also imposes health regulations
under the Food Act 1981 (Qld). Each local council
supplies businesses (primarily those dealing with
food, such as cafés, restaurants, butcher shops and
bakeries) with the regulations and standards they
have to meet in order to obtain a licence to operate.
Some regulations relate to:
• temperature for food storage
• kitchen layout
• employee clothing requirements
• correct food handling.
A health inspector will assess a premises regularly and often without warning to ensure the small
business owner maintains standards. If problems
occur, then the business is given a period of time to
rectify the situation or it will be closed down.
11
12
(a) five examples of sole traders or partnerships
that would not have to register their name
(b) five examples of businesses that would have
to register their name.
In groups of three or four, suggest appropriate
names for the following businesses. Indicate
which ones would have to register their business
names.
(a) A café owned by Kira Tobani
(b) A newsagency owned by Garry Barnsley
(c) A mobile telephone franchise owned by Huy
and Sou Tai
(d) A corner store owned by Mardu Ararney
(e) A secretarial service owned by Anna
Wolfenden.
Imagine you are about to open a pizza restaurant.
Investigate what federal, state or local regulations
you would have to satisfy.
In pairs, research the types of licence the
following businesses would need to operate. You
may wish to use a word-processing application to
prepare your report.
(a) Café owner
(b) Publican
(c) Video arcade owner
(d) Pest controller
(e) Solicitor
Go to www.jaconline.com.au/businesseduqld and
click on the SmartLicence weblink.
(a) Select two businesses and identify the
licences that apply to these businesses.
(b) Identify the relevant government
department(s) that issue the licences.
(c) Briefly outline the business activities to which
the licences relate.
Arrange for the local health inspector to visit the
class. Ask him or her to discuss:
(a) his or her role
(b) health regulations for a small food-based
business
(c) penalties for non-compliance.
13
Business environments
1.5
It’s the law —
Commonwealth legislation
The Trade Practices Act 1974 (Cwlth) is one of the
most important pieces of legislation in Australia. It
has two main purposes:
1. To protect consumers against undesirable
practices, such as misrepresenting the contents
of products or their place of production
2. To regulate certain trade practices that restrict
competition. The government also wants to
ensure a number of businesses are operating at
any one time in the same market, to avoid the
problem of too much power with one group.
The Act applies to businesses in Australia, including
the commercial activities of government. It is
administered by the Australian Competition and
Consumer Commission (ACCC), which is an independent statutory authority. The ACCC operates
nationally for the enforcement and administration
of competition and consumer protection laws.
In 2000, McDonald’s Australia Limited was prohibited
from re-advertising its ‘grilled chicken burger’ as being
‘grilled’ after court-enforceable undertakings to the
ACCC. The ACCC successfully argued that the
extensive advertising of the burger as ‘grilled’
constituted misleading or deceptive conduct, in
breach of s.52 of the Trade Practices Act, and a false
representation, with respect to the qualities and
history of the burger, in breach of s.53(a).
The chicken burger was initially cooked in an oven,
branded and seared, and then cooked between two
hot plates. The ACCC argued that McDonald’s claims
did not match reality.
Restrictions on the seller
The following are prohibited by the Trade Practices
Act:
1. Misleading or deceptive advertising. Advertisements must not use words that are deceptive or
claim that a product has some specific quality
when it does not. Such actions convey a false
impression of the exact nature of the product
(see the bizFact at right). Additionally, price
reductions or specials must be genuine.
2. Prohibition of unconscionable conduct that occurs
where one party to a transaction is at a disadvantage and the other party takes advantage of this
3.
4.
5.
6.
for its own gain. The disadvantage may be for a
number of reasons, such as age, sickness, illiteracy or poverty.
False representations regarding goods or services. A false representation is a statement of
fact that is untrue.
Offering gifts and prizes in connection with the
supply of goods and services and then not providing them
Conduct that may mislead the public
Bait and switch advertising. This involves advertising a few products at significantly reduced
and, therefore, enticing prices to attract customers. When the advertised products quickly
Deceptive advertising
14
Part A: Business and economic systems
Bait and switch advertising is often misleading and deceptive.
run out, customers are directed (or switched) to
higher priced items.
7. Referral selling. This occurs when a business
offers a customer a special deal or special price
if the customer refers other potential customers
to the seller.
8. Implied conditions or terms, which are the
unspoken and unwritten terms of a contract.
These conditions are assumed to exist regardless of whether they were especially mentioned
or written into a contract. The two most important implied terms relating to customer purchases refer to the merchantable quality and
fitness of purpose of the product.
• Merchantable quality means the product is of
a standard a reasonable person would expect
for the price. It applies to most consumer contracts. If a consumer purchased a sandwich,
for example, that turned out to be stale, or
contained impurities, the sandwich would not
be considered of merchantable quality.
• Fitness of purpose means the product is
suitable for the purpose for which it is being
sold — that is, the product will perform as the
instructions or advertisements imply. A pair of
running shorts being sold as football shorts,
for example, would be a breach of a condition
to supply goods for the purpose for which the
seller knew they were intended — running.
The law prohibits a retailer from claiming a
product has a particular characteristic that it does
not have. It is illegal, for example, to state that a
washing machine is automatic, or that a motor
vehicle has a certain fuel consumption performance, when it does not. Merchandise quality and
fitness of purpose are also important when it comes
to representing the history or previous use of a
product. To say, for example, that a motor vehicle
has never been used as a taxi or that it has only
been used for short trips when this is not the case
would be misleading.
In the case of Doherty v. Traveland Pty Ltd (1982), a
travel agent continued to display brochures
advertising a holiday for 13 days when it had been
reduced to 11 days. The travel agency was penalised
$2200 for ‘misleading the public’.
In the case of Makita (Australia) v. Black and Decker
(Australasia) Pty Ltd (1990), Black and Decker began a
series of advertisements comparing its drill with
those of Makita. The court found that the comparison
of the two drills was not accurate and, therefore, the
advertisement was ‘misleading and deceptive’. Black
and Decker was not allowed to use the advertisement
and had to correct its advertising.
15
Business environments
It is misleading to suggest that a product has certain characteristics when it does not.
Breaches of any of these responsibilities can
result in penalties of up to $1.1 million for companies and $220 000 for individuals. This cost does
not include legal fees and the cost of adverse publicity (see the case study at right).
In the case Cool and Sons Pty Ltd v. O’Brien Glass
Industries Ltd (1981), O’Brien Glass was found to
breach s.47 (exclusive dealing) of the Trade Practices
Act by offering discounts to its customers if the
customer purchased most of their windscreens from
O’Brien Glass. In this way, the supplier (O’Brien
Glass) restricted the freedom of its customers.
Restrictive trade practices
Businesses are prohibited from engaging in any
practice that restricts trade. Restrictive trade practices include the following:
1. Exclusionary provisions (s.45) — the Act prevents individuals or groups setting up arrangements that restrict business or competition.
Examples are market-sharing agreements
whereby businesses agree to divide the customers or allocate customers by the area.
2. Price fixing (s.45A) — the Act prevents businesses from agreeing to fix, control or maintain
the price for goods or services.
Federal Court declares Radio Rentals
advertising to be misleading
Advertisements themed on ‘Rent two, get one rent
free’ have been declared to be misleading and
deceptive by the Federal Court. Justice French made
orders by consent against Thorn Australia Pty Ltd
(trading as Radio Rentals in all states and territories
other than South Australia). Justice French found that
Radio Rentals engaged in misleading and deceptive
conduct in its ‘Rent two, get one rent free’ advertising
campaign that appeared throughout Australia in
late 2002.
The ACCC instituted proceedings against Thorn
Australia in May 2003. In October and November
2002, Radio Rentals ran a campaign that included
extensive television and radio advertising, a distribution of almost two million catalogues to households
throughout Australia, Internet advertising and a variety
of in-store promotions. The television commercials
claimed that consumers could rent any two Radio
Rentals products and get a third one rent free.
Radio Rentals, however, failed to sufficiently
disclose important terms and conditions attached to
the contracts. These included:
• the price and offer being based on an 18-month
consumer rental agreement on selected stock
• the offer being available only while the consumer
continued to rent the other two items
• the free rental for the third item being for the item
with the lowest monthly rental.
16
Part A: Business and economic systems
Enrolling in a course? Do your homework first
Fair Trading Minister Margaret Keech today warned school
leavers seeking work to be wary of employment and training
advertisements that sound ‘too good to be true’.
‘The Office of Fair Trading (OFT) has received 111 complaints relating to training courses in the last 12 months,’ Mrs
Keech said.
‘Dubious advertisements for training courses often lure
people with claims of the potential to make big bucks.
‘Recent advertisements in a local newspaper claimed that
participants can make up to $179 per hour on completion of
a proofreading course, but there was no guarantee of
employment.
‘These types of advertisements can be misleading and
tempt jobseekers who are desperate for work,’ Mrs Keech
said. Consumers are also warned to check the credentials of
training organisations before signing up. ‘You don’t want to
invest in a course run by a shonky company — it’s important
to ensure the trainers are registered before committing any of
your money,’ she said.
Mrs Keech offered the following advice for those contemplating privately run training courses. Be wary of courses
that involve the payment of large upfront fees. Check with
your local TAFE to see if there is a similar course on offer;
and if so, compare the two courses to work out which is best
for you.
Confirm the validity of any employment guarantees — in
some cases these promises only amount to being supplied
with a list of contact numbers for people in the industry. Ask
to be put in touch with former students who’ve completed the
course so you can ask them if they found it worthwhile.
Under the Fair Trading Act, companies taking advantage
of the unemployed by making false and misleading claims
face fines of up to $202 500. Individuals face fines of up to
$40 500. You can check if a training provider is registered by
contacting the Department of Employment and Training’s
registration service toll free (Qld only) on 1800 600 039.
KNOW AND UNDERSTAND
1 What are the two aims of the Trade Practices Act?
2 To whom does the Trade Practices Act apply?
3 Provide a brief description of:
(a) A small business advertises a particular brand of
television and states that it is at a cheaper price
than that offered by a competitor. This statement
is false.
(b) A small business advertises jumpers and claims
that they are made in Australia when in fact they
are made in Hong Kong.
(c) A small business advertises that a special deal is
only for one week when in fact it plans to extend
it for two months.
(d) A small business offers its customers a 10 per
cent discount if they provide the names and
addresses of five potential customers for the
business.
9 Read the bizFact about McDonald’s ‘grilled chicken
burger’ on page 14. How did the ACCC determine
that McDonald’s had conveyed a false impression
about the nature of its grilled chicken burgers? Do
you agree with the ACCC’s decision?
10 Go to www.jaconline.com.au/businesseduqld and
click on the ACCC weblink to answer the following
questions:
(a) Outline the role of the ACCC.
(b) Why is its role important in terms of business?
11 ‘Government regulations are required to create a
fair and competitive marketplace.’ Discuss.
Source: Queensland Office of Fair Trading, December 2004
(a) bait and switch advertising
(b) misleading advertising
(c) price discrimination.
4 Prepare a summary of the aims of the Trade
Practices Act using the following table. The first
entry has been completed for you.
The aims of the Trade Practices Act
Responsibilities of business
created by the Act
No misleading and
deceptive conduct
Restrictive trade practices
regulated by the Act
Exclusive dealing whereby
a supplier imposes a
restriction on whom they
deal with
5 Read the article on training courses. How can job
seekers check that advertised courses are
legitimate?
6 What happens to traders who mislead consumers
using tactics described in the case study?
MANAGE
12 Nyree is the owner of a small business that sells
PROPOSE
7 Discuss why the ACCC rigidly enforces misleading
computers. She wants to place an advertisement in
the local newspaper to publicise a new range of
laptop computers. In relation to the Trade Practices
Act, what matters should she consider when
advertising?
advertising breaches of the Trade Practices Act.
8 In each of the following examples, state whether
there has been a breach of the Trade Practices Act.
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Business environments
1.6
It’s the law —
Queensland legislation
Consumer protection
To complement the federal Trade Practices Act, the
Queensland Government has its own fair trading
legislation. The Fair Trading Act 1989 (Qld) aims to
provide consumers not protected by the Trade Practices Act with the same protection. The Act prohibits
a wide range of deceptive and misleading practices.
To comply with the law and fulfil their responsibilities, all business owners should be aware of the
Fair Trading Act and how it impacts on the way in
which they conduct their business.
The Fair Trading Act prohibits a supplier from:
• making statements or representations that are
misleading or deceptive. A person making the
representation has to prove that it was reasonable for the statement to be made.
• using unconscionable conduct to provide personal, domestic or household goods or services. To
decide if a supplier has used unconscionable
conduct consider:
– the relative strengths of the bargaining positions of the supplier and the customer
If you operate a business in Queensland, you need to be aware of your rights and responsibilities.
18
Part A: Business and economic systems
•
•
•
•
– whether the customer was required to comply
with conditions that were not reasonably necessary
– whether the customer was able to understand
any documents relating to the supply or possible supply of the goods or services
– whether any undue influence or pressure was
exerted on, or any unfair tactics were used
against, the customer (or person acting on
behalf of the customer)
– a comparison of the cost and method by which
the customer might have gained the goods or
services with another supplier.
using bait advertising
engaging in pyramid selling, loan fund schemes
and mock auctions
ignoring restrictions on door-to-door sales, including
hours, harassment and cooling-off periods
not honouring warranties.
Consumer rights
Some businesses try to persuade customers that
they do not have rights. Businesses that display ‘no
KNOW AND UNDERSTAND
1 What is the purpose of the Fair Trading Act?
2 What is the relationship between the federal Trade
Practices Act and the state Fair Trading Act?
3 How does the Office of Fair Trading try to protect
consumers?
PROPOSE
4 In each of the following examples, state whether
there has been a breach of the Fair Trading Act.
(a) A small business advertises a motor vehicle as
having low mileage when in fact it has travelled
200000 kilometres.
(b) A small business owner displays a sign that reads
‘Choose carefully. No refunds given’.
(c) A small business owner removes any unfair
terms from the business’s contracts.
5 Go to www.jaconline.com.au/businesseduqld and
click on the Queensland Office of Fair Trading
weblink. What catergories are used to provide advice
to consumers?
EVALUATE
6 Should there be greater self-regulation by industry
associations and/or use of a code of ethics?
7 In determining unconscionable conduct, a number of
factors are considered. Discuss as a group whether
you believe the following statements to be true or
false. What other factors would need to be taken into
account? Often there is no obvious correct answer
because the circumstances of each transaction need
to be examined carefully.
refund’ signs are breaking the law. The wording
should read: ‘Please select carefully because no
refund will be given if you change your mind’. A
business must offer a refund if a product:
• is faulty
• is not as described
• does not do the job it was supposed to do
• does not match a sample product.
In Queensland, customers should try to resolve
issues with the supplier first; but if this is unsuccessful, customers can contact the Office of Fair
Trading (OFT). The OFT will consider complaints
likely to affect the interests of consumers, investigate the complaints and take action.
The OFT also has a role in educating consumers
about their rights to prevent dangerous or unfair
situations occurring. It will investigate reported
fraudulent practices, such as businesses pretending
to be aligned to similar businesses to gain customers. Customers can access the OFT’s website to
learn how to become a ‘smart shopper’ by choosing
safe products.
(a) Young people have less knowledge of products
than older people.
(b) Men know more about electrical appliances than
women.
(c) Most customers buying fashion items are more
concerned about looks than safety, such as the
highly flammable nature of materials used.
(d) The literacy levels of people today have declined,
so documentation given to customers should be
in very simple language.
8 Consider the following scenario and discuss the legal
aspects.
A wedding gown sale is held in a factory. It is a
big event. However, there are no dressing rooms,
so the customers cannot check that the products
fit. The sign says ‘no refunds’. The seller argues
he has advertised the conditions of the sale and
has reasonable grounds for this type of coercion.
9 With the increasing volume of information being sent
to consumers, is there a need for the law to protect,
and perhaps favour, the consumer? Use the following
example of a situation investigated by the Office of
Fair Trading to write a response to the question.
A recent case involved scammers demanding
immediate payment of an ‘unpaid fee for live
phone sex’ from people who had not used the
service. The scammers threatened legal action if
payment (usually about $35) was not received.
They relied on the fact that people felt pressured
to pay because of the embarrassing nature and
relatively small amount of the invoice.
19
Business environments
1.7
It’s the law — local government
Many small business owners overlook the importance of local government regulations. Local councils have control over a wide range of small
business activities, including land zoning, development applications, fire regulations and signage.
However, one important role of local government is
the enforcement of laws affecting food handling to
protect consumers.
Food safety
The making and selling of food carries with it
specific responsibilities. Food must be:
• safe to eat
• free from contamination
• unadulterated.
Food poisoning is not only a serious health
problem — it can close down a business!
Good food safety practices are an
essential ingredient in operating a
food business.
20
Part A: Business and economic systems
The Brisbane City Council has a ‘food industry’
webpage that provides business owners with all the
information they need. (Go to www.jaconline.com.au/
businesseduqld and click on the Food Industry
weblink.) The table below is a summary of the
information available.
To ensure the highest standards are attained,
under the Food Act 1981 (Qld), any small business
that prepares, serves, manufactures or sells food
must be registered with the relevant local council
health department. The local council will charge a fee
for registration, which has to be renewed each year.
Food industry guidelines available from the Brisbane City Council
Category
Information available
Food licensing
The Council is responsible for the licensing and registration of most food businesses as part of the
Food Hygiene Regulation 1989. The Council is also responsible for ensuring that local food
businesses meet Australian food safety laws. Information is available on compulsory licences as
well as the best practice licence, which recognises high achievements in food standards.
Food safety
To help small businesses achieve safe food handling practices, the Council offers food safety fact
sheets on cleaning, cross-contamination, food labelling, food poisoning, food quality monitoring,
personal hygiene, pest management, taste testing, temperature control and waste management.
Food safety program
The Council’s food safety program is designed for small businesses to identify food risks and
provide ways of preventing them. Businesses can register with the Council and download a food
safety report that includes the business details, food items and food processes that are used in the
business, potential hazards as a result of the food processes used and suggested actions to avoid
these hazards. Once a food safety program has been created online, it can be printed out and
implemented in the business.
Eco-efficiency
The Council provides a self-assessment guide to help small food businesses become more
eco-efficient — that is, to minimise the amount of water and energy used and the amount of waste
produced.
Note: Above information correct at time of printing
KNOW AND UNDERSTAND
1 What are some of the ways that local government
can affect small businesses?
2 Identify three responsibilities associated with
selling food.
3 A friend has decided to open a café. She asks you
for advice concerning the legal requirements of
operating a food business. What advice would you
give her?
MANAGE
4 Arrange for an environmental health officer from
your local council to address your class about his or
her role in enforcing the relevant Food Act. Prepare
a list of interview questions and send them to the
officer before the visit. After the visit, compile a
report and arrange for a copy to be sent to the
officer.
5 Arrange to interview a representative from your
school’s tuckshop. Prepare a report on:
(a) safe food handling procedures
(b) food regulations with which they must comply.
6 Research the Internet site of your local council to
determine what other local laws have been
implemented that apply to small businesses.
21
Business environments
Check & challenge
Business organisations
1 How is a business different from a non-profit
organisation? Make notes.
2 True or false?
(a) A sole trader means there is only one business of this type.
(b) Unlimited liability of proprietary companies
means the shareholders’ personal assets are
protected when claims are made on the
business assets.
(c) A partnership can have any number of
members.
(d) ‘Pty Ltd’ stands for property limited.
(e) It is possible to determine whether a company is private or public by examining the
legal name of the company.
(f) The stock exchange is a place where shares
in a public company are bought and sold.
(g) One reason for people forming a trust is to
minimise taxation. This is illegal.
(h) People who choose to buy a franchise have
the benefit of established goodwill.
(i) Goodwill means that people work in the
organisation for no payment.
3 Write a paragraph to describe how you received
goods or services from the primary, secondary,
tertiary, quaternary or quinary industries in
the past month.
• Business name
• Trademark
• Articles of association
• ABN
• ACN
• Alteration to premises
• Fire prevention facilities
5 Mary purchased a pair of sunglasses and received
a receipt together with a certificate providing
details of the warranty. The warranty stated that
the sunglasses had a 12-month guarantee for
defective parts. Helen bought a similar pair of
sunglasses. After one week, Mary’s glasses bent
out of shape, and Helen decided she no longer
liked her pair. They returned to the store and
asked for a refund. The store agreed to send
Mary’s glasses back to the manufacturer and
organise a replacement pair. However, the store
refused to give Helen a refund or another pair of
glasses, because she had no grounds for returning
the goods. They were of merchantable quality.
Distinguish between a ‘warranty’ and a
‘refund’. Why do you think disagreements over
warranties and refunds are a common source of
consumer complaints?
Legal and government regulations
4 Allocate each of the following examples of busi-
ness regulations to a category in the table below.
• Building permits
• Weights and measures
• Unfair dismissal
• Product labelling
• Playing of music
• Payroll taxation
• Memorandum of association
• Sewerage and water
Ownership
Consumer
protection
Employees
Health
regulations
Taxation
Zoning
22
Part A: Business and economic systems
Licences
Company
structure
Investigate local industries
PRODUCT RECALL
6 Find businesses that are examples of a primary,
secondary, tertiary, quaternary and quinary
industry in your local community (that is, your
suburb, town or shire). Choose two of your
examples and provide a fact file on each of these
businesses by either visiting and interviewing a
representative or collecting information from
the businesses’ websites or other public documents they produce. Include information about
the regulations that govern your chosen businesses. Present your findings as a PowerPoint
display or as a report. Alternatively, investigate
a franchise business in your local area in a
similar way.
Charlie’s Chips
The following Charlie’s Chips products with a
best before date of 10 JUN
Charlie’s Chips 50g
Charlie’s Chips 100g
Consumers are advised that the above product is
being recalled because of a possibility some packs
contain fragments of plastic.
As a precaution we are recalling all supplies of this
product with the above identification. Any person
with the specific products should not consume them.
Please return them to
The Charlie’s Chips Company,
PO Box 242, Coorparoo, Qld 4151,
for a full purchase price refund.
Product recall
7 Research and prepare either a two-page written
report or three-minute oral report on product
recall.
(a) What is meant by the term ‘product recall’?
(b) Under what circumstances should a
product be recalled?
(c) What is the procedure for a product recall?
You may wish to use either a word-processing
package or multimedia package to present your
report.
We ask anyone with family and friends who may
have purchased this product to contact them in case
they may not be aware of our advertisement.
Enquiries can be directed to 1800 444 657 between
9.00 am and 9.00 pm.
We sincerely apologise for any inconvenience
caused by this recall.
8 Governments have passed laws to regulate the
manufacture of products to make manufacturers
conform to certain minimum standards so that
products are safe for consumers to use. If products that have been sold to the community are
later found to be somehow faulty and therefore
potentially dangerous, manufacturers are
required to recall their products. Manufacturers
are required to advertise to make the public
aware of the problem. Look through the daily
newspaper for a week to find product recall
notices. They are generally clearly labelled. It
should be easy to find product recalls of:
• food items
• babies’ toys
• children’s clothing
• cars
• electrical appliances.
The Charlie’s Chips Company Ltd
ABN 65 057 940 679
An example of a product recall notice
Unfair business practices
9 In groups of three or four, research the fines for
breaching local, state or federal laws or regulations applied to trading.
(a) Is the fining of business owners who breach
the Fair Trading Act adequate?
(b) What are some alternative punishments?
Select a spokesperson to present your responses
to the rest of the class.
10 (a) What is meant by the term ‘code of
practice’?
(b) Discuss whether it is an effective method
for ensuring better trading practices.
(c) What may happen if a code is broken?
11 Design a poster to draw attention to unfair
business practices. Include the phrases
‘misleading advertising’, ‘bait and switch
advertising’, ‘merchantable quality’, ‘fitness of
purpose’ and ‘pyramid selling’. Find or create
cartoons to illustrate the message.
Cut out at least one product recall notice and
answer the following questions:
(a) What is the product?
(b) Who is the manufacturer or importer?
(c) What explanation is given for the product
recall?
(d) Apart from manufacturers being required by
statute to follow recall procedures, manufacturers are very concerned to safeguard
the consumer. Why do you believe this is so?
23
Business environments