Wine war afoot as tax reforms loom

18 May, 2015 06:25 AM
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Tackling alcohol and tax is not for the fainthearted - it is a complex proposition mired in emotion

AUSTRALIA'S multibillion-dollar alcohol industry is set to turn on itself in a lobbying war that could result in a radical restructure of a sector dogged with tax rorts and inefficiencies.

In the wine sector, dozens of companies are believed to be rorting the system, creating artificial constructs to access a lucrative producer rebate that costs the federal government hundreds of millions of dollars a year.

Alcohol tax is part of the Abbott government's review of the antiquated and complex federal tax system, which is calling for submissions until June 1. What the government ultimately recommends will come down to politics, particularly with a federal election not far off.

Beer, spirits and alcopops are taxed on the basis of their alcohol content and container size, with spirits and alcopops taxed at a higher rate because of the perceived greater risk of abuse.

Wine is the big anomaly. It is taxed on wholesale price rather than volume. This means low-value cask wine attracts little taxation - alcohol tax paid per standard drink on a $13 cask of wine is 5¢ - while more expensive bottled wine attracts higher tax under the Wine Equalisation Tax (WET) system, at 15¢ for a $15 bottle of wine and almost $1 for a $50 bottle of wine.

The stakes are high. If a simpler and fairer structure is adopted, such as a category-based volumetric tax (which is achieved by taxing wine on the basis of its alcohol content) and wine rebates removed, it would change the economics of the entire industry. Cask wine would increase in price, premium wine would fall and spirits and ready-to-drink categories would fall. It would also remove some of the more egregious rorting.

A confidential study suggests a shift to a volumetric tax and the removal of the WET rebate would lift the price of cash wines by $1.40 a litre. It estimates that wines retailing between $6 and $15 would not be substantially impacted and industry revenue for premium wines would increase. Producers of cheaper wine, including cask wine, will argue that a volumetric tax would target the poor and benefit the wealthy and that the WET rebate's removal would have a profound impact on winegrowers in South Australia resulting in the loss of thousands of jobs.

Over the years, there have been a number of attempts to address the huge inefficiencies and heavily rorted wine industry, but politics has got in the way.

This time might be different, as the wine industry has split.

The Australian Financial Review can reveal that the country's biggest wine company, Treasury Wine Estates (TWE) - whose brands include Penfolds, Wolf Blass, Lindemans and Rosemount Estate - and its rival, French drinks giant Pernod Ricard Winemakers - whose brands include Wyndham Estate, Jacob's Creek and Orlando Wines - have unusually joined forces to campaign for radical changes to wine tax.

TWE and Pernod have employed Newgate Communications to lobby for changes to the tax system, including replacing it with a category-based volumetric tax and outright removal of the WET rebate, which was introduced in 2004.

To make it more politically palatable, that rebate could be re-applied as an agricultural subsidy to encourage investment in products such as almonds or cashews. That way, regional Australia would not be negatively impacted.

It is a compelling argument. The ad valorem wholesale sales tax and WET producer rebates have created a distortion in the industry that makes quality wine more expensive and delivers an effective subsidy to uneconomic cheap wine.

The future of Australian wine - and tourism - lies in delivering premium products, meeting evolving consumer preferences and restoring profitability to the industry.

According to the Tax Expenditures Statement 2014, more than $250 million was given back in WET producer rebates in 2011-12, some to New Zealanders who are eligible for the WET rebate through the free trade agreement, some to hobby farmers who already pay a low tax rate. In 2012-13, the rebate grew to $280 million, and Treasury estimates it will balloon to $350 million in 2015-16, with the vast majority of winemakers paying no tax at all. The WET rebate enables producers of wine to claim a maximum of $500,000 per financial year.

It has left the peak lobby group for the wine industry, the Winemakers' Federation of Australia (WFA), hamstrung.

Its 120 members range from cask wine to premium wine producers who can't agree on the method by which wine should be taxed. It means the WFA can only argue for limited changes to the WET rebate, including scrapping the subsidy to New Zealanders and phasing it out for bulk and unbranded wine, which is predominantly private-label or clean-skin wine sold by the supermarket giants.

The WFA's predicament could become even more complicated if industry speculation is right that one of the supermarket groups, concerned by the WFA's agenda on bulk and unbranded wine, is meeting with the WFA to talk about its business.

The WFA has long argued that wine should be treated differently to other categories when it comes to tax because of its export potential, wine tourism, its large contribution to regional employment (20 times more than spirits and four times more than beer) and the fact that it is more capital-intensive than beer.

Whatever the case, most wineries can't make a profit and, at a time when the government is looking to reduce costs and raise tax revenue, the WET tax rebate is a potential target.

The WFA's 2014 vintage report data rated only 7 per cent of Australian grape production profitable, with a further 4 per cent low-profit and 5 per cent break-even. The remaining 84 per cent was loss-making.

While the government has a rural constituency to consider, its mantra that "corporate welfare" is over might make it feel less inclined to protect the wine industry indefinitely, particularly in light of its tough stance on the automotive industry.

The government's tax discussion paper says "the significant variations in concessions, in conjunction with the favourable tax treatment afforded to specific types of alcohol, particularly low-value wine, can influence production and consumption decisions".

The WFA learned on May 5 that the government would not respond to its lobbying on the WET rebate in the 2015 May budget. Assistant Treasurer Josh Frydenberg asked Treasury to prepare a discussion paper to "help inform consideration of the issue as part of the Tax White Paper process". The discussion paper will be ready in July.

Against this backdrop, competition has never been fiercer, consumer tastes are changing and overall alcohol consumption is at its lowest in 50 years, according to the Australian Bureau of Statistics.

Tackling alcohol and tax is not for the fainthearted. It is a complex proposition mired in emotion. Beer and spirits have their own lobbying to do. But for the highly inefficient wine industry, something has to give.

It is why companies like TWE will push hard for change. With private-equity barbarians circling, a volumetric tax and removal of the producer rebate would immediately improve its attractiveness and boost its value.

AFR
Date: Newest first | Oldest first

READER COMMENTS

Colin G
18/05/2015 11:45:24 AM

The answer is very simple- wine should bear the standard gst only if is in a bottle and of normal strength of of say 12% to 14.5% alc. Casks do less harm than we think with only some groups mis-using them. probably no issue to tax soft packs higher. The savings in time, effort and wasted argument disappear entirely if WET is just removed. It works in most other wine producing countries- we are the sad joke with such punitive tax on a healthy, natural and admirable part of life.
Luke S
18/05/2015 12:38:26 PM

I see a volumetric taxation as ideal. As the Foundation of Alcohol Research and Education (FARE) states, “The current alcohol taxation system is illogical, incoherent and does not adequately recognise the extent and costs of alcohol harms to the Australian community.”
John NIven
18/05/2015 5:13:13 PM

Just put it on MEDICARE
Simon Berry
19/05/2015 6:00:13 PM

Who did the figures? $15 bottle of wine has $1.27 in GST and $3.06 of the 29% WET, thats 38c per standard drink if 8 in the bottle, and $10.22 WET in a $50 bottle = $1.27/std drink. Note GST goes on after WET, so if wine price falls, GST revenue falls

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