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The 2016 budget has proposed a number of long overdue changes to the taxation of alcohol although many may argue that the changes have not gone far enough.

How do we tax alcohol in Australia?

Australia currently taxes alcohol in two ways. Beer and spirits are taxed on a volumetric basis per litre of alcohol with differing rates depending on alcohol type, concentration, commercial use, and container size. Wine and similar products such as cider, mead and sake are subject to a 29% ad valorem tax on the wholesale price of the product. This is known as the Wine Equalisation Tax (WET).

As discussed by the Treasury in the Re:think Tax Discussion Paper (2015) the differing rates of taxation reflect different policy objectives. These include raising revenue, reducing the social costs of excessive alcohol consumption, and supporting wine producers and independent beer producers. Further, the different rates reflect that demand for different products will be affected differently by price changes.

The below chart from the Re:Think Discussion Paper shows the current differences in price.

Chart1WET

Chart 1: source: Australian Government, ‘Re:think Tax discussion paper’ (March 2015),  pg 160.

What is the WET rebate?

The WET rebate is a tax rebate of up to $500,000 per fiscal year available to wine producers. It equates to an exemption from liability to pay the WET on approximately the first $1.7 million of domestic wholesale wine sales. Groups of associated producers are also limited to a rebate of $500,000 between the groups.

Brewers are entitled to a much lower maximum refund of $30,000 per financial year of 60% of the excise duty paid on beer, where they are considered independent producers. This means that all brewers remain liable to some excise tax on all sales. This brewer refund will be extended to distillers as part of the 2016 Budget proposals.

Policy for wine taxation

The Henry Review which released its final report in 2009 found the WET is not well suited to reducing social harm and that the WET rebate – as it was structured – encouraged small-scale production and allowed economically unviable producers to remain in the industry, suggesting an inefficient use of land, water and capital resources. It was also concluded that the WET rebate was discouraging mergers within the wine industry and increasing the input costs of otherwise successful wineries.

The main policy recommendation of the Henry Review was that all alcoholic beverages should be taxed on a volumetric basis, which, over time, should converge to a single rate, with a low-alcohol threshold introduced for all products. This would replace the WET (and rebate) in future.

Many of the Henry Review findings about the WET rebate were reflected in the recent WET rebate discussion paper (2015) released by the Treasury. This Discussion Paper also highlighted increasing concern about abuse of the WET rebate, and that a number of schemes had arisen in recent years specifically for the purpose of improperly accessing the rebate.

For example, bulk wine purchasing schemes, illustrated in the chart below, have allowed wineries to gain access to wine that is subsidised by multiple rebates. Other schemes include blending of bulk wine arrangements that interpose additional entities into a production line solely so the WET rebate can be claimed multiple times on the same wine, and changes in contractual arrangements to circumvent the WET rebate cap and associated producer rules or artificially inflate the sale price of wine. Of most concern are “virtual” wine producers that claim the WET rebate without having any actual involvement in the winemaking process, for example by purchasing grapes or bulk wine and then contracting out the manufacturing or blending process.

Figure: WET rebate abuse schemes

Chart2WET

Image 1: source: Australian Government, ‘Wine equalisation tax rebate’ (Discussion paper, August 2015), pg 19.

Wine industry policy and wine taxation

The Senate Standing Committee on Rural and Regional Affairs and Transport recently released a report into the Grape and Wine Industry (Senate Report, 2016). This report included extensive discussion, submissions and witness statements about the WET and WET rebate. The Committee recommended that the Government phase out the WET rebate over five years and allocate the savings to a structural adjustment assistance program for the industry including an annual grant to genuine cellar door operators to support their continued operation. More generally, the Committee urged the Government to undertake comprehensive reform of wine taxation so that the Australian industry would remain competitive.

The 2016 Budget partly implements the Senate Committee’s proposals. It proposes a reduction of the WET rebate cap from $500,000 to $350,000 on 1 July 2017 and down to $290,000 on 1 July 2018. In an effort to improve the integrity of the WET rebate the Budget has proposed tightening the associated producer rules and eligibility criteria from 1 July 2019. These criteria will limit access to the WET Rebate to producers of packaged, branded wine that is for sale to domestic consumers, and to those with a significant interest in a winery. They will help address claims in cases such as those illustrated above. The Government has announced it will consult on the details of the tightened eligibility criteria, including the definition of a winery, which it recognises may be difficult.

These changes do not address the broader issue of complexity and the overall policy of the alcohol taxation system, including concerns raised by public health advocates over low tax rates imposed on cheap wine and the negative effects of excessive alcohol consumption (e.g. FARE, 2016).

Is a flat volumetric rate of taxation based on evidence of the net marginal spillover cost of alcohol, as proposed by the Henry Review, the way to go? This might reduce administration and compliance costs, but a recent study has indicated that the percentage of alcohol in a beverage type is not strictly associated with the probabilities of negative behaviours (Yang, Zhao, Srivastava, 2015). Drinkers of regular strength beer and canned premixed spirits are more likely to engage in binge drinking, while drinkers of some higher alcohol drinks, such as bottled wine and fortified wine are less likely. While this evidence suggests that there should be differential rates of taxation depending on the alcohol type, it still supports a volumetric tax on wine instead of ad valorem. This is because the WET results in a much higher tax on bottled wine (as it is generally more expensive) than that imposed on cask wine even though the former is less likely to cause harm (Anderson, 2015).

Critics of volumetric taxation of wine have also highlighted the winemaking industry’s unique socio-economic role in regional Australia, employment footprint, contribution to export earnings, profitability, and access to capital when compared to brewers and distillers in support of differential treatment (WFA, 2016). Wine makers are more susceptible to externalities from changes to climate and disease and grape and wine production is less flexible due to long planting lead times and prolonged fermentation, maturation and storage periods. On the other hand, wine production impacts heavily on the environment, particularly in respect of water use. In contrast to beer and spirit manufacture though, wine production often uses long-life assets, which are more capital intensive and contribute to lower returns on capital. Annual vintages and difficulties with responding to consumer preferences also present challenges (WET rebate discussion paper, 2015).

Another important, commonly overlooked issue is the difficulty of bringing wine production within the existing excise system. Beer and spirit manufacturers are subject to a complex licensing regime that regulates the manufacture, storage and movement of excise products. Finding a taxing point for wine within this system could prove difficult given differences in production methods. Arguably, treating all alcohol products on the same basis may make much of this additional regulation redundant (Henry Review, 2008).

There’s clearly more to fixing wine taxation than a few changes to the WET rebate can accomplish. The changes in the 2016 Budget may address some integrity issues with the WET rebate but they do not tackle the larger problem faced by the lack of coherence in Australia’s alcohol taxation policy.

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