Purpose of the Bills
This Bills Digest relates to two Bills comprising:
The purpose of the Excise Bill is to amend the Excise Tariff Act 1921 to increase excise duty rates for domestically produced tobacco products from 1 September 2023.
The purpose of the Customs Bill is to amend the Customs Tariff Act 1995 to increase customs duty rates for imported tobacco products from 1 September 2023.[1]
Background
Overview of tobacco excise
The Australian Government levies an excise duty on domestically produced tobacco products. The excise duty rates, along with tobacco product definitions and descriptions, are set out in the Excise Tariff Act.
The Government also levies an excise-equivalent customs duty on imported tobacco products. The purpose of the customs duty is to ensure that imported tobaccos do not undercut locally produced goods. The excise-equivalent customs duty rates are set out in the Customs Tariff Act.
To conform with the requirements of section 55 of the Constitution, which provides that laws imposing duties of customs shall deal with duties of customs only, and laws imposing duties of excise shall deal with duties of excise only, amendments to two separate Acts are needed.
For simplicity, both taxes are referred to as ‘tobacco excise’ in this Bills Digest. Currently there is no legal tobacco product manufacturing in Australia.[2] In other words, all commercial tobacco products sold in Australia are imported from overseas and subject to excise-equivalent customs duty.[3]
In 2021–22, the Australian Government collected $12.7 billion in tobacco excise from imports.[4] However, the Australian Taxation Office identifies an estimated excise gap of at least $2.3 billion, attributed to the market presence of illicit tobacco products that escaped detection.[5] The gap between the expected excise revenue (based on legal tobacco sales) and the actual revenue collected indicates the extent of tobacco smuggling and illicit domestic production in the sector.
Scope of tobacco excise
Tobacco excise is applied to processed tobacco leaf, mainly for products such as cigarettes, cigars, and loose-leaf tobacco.[6] The tax is levied on based on the quantity of the excisable substance in tobacco products, not its value. The tobacco excise rate is indexed twice a year based on average weekly ordinary-time earnings (AWOTE) and the indexation aims at ensuring ‘that tobacco products do not become more affordable over time’.[7]
Specifically, tobacco excise is charged on a per stick basis for cigarettes with a tobacco content that does not exceed 0.8 grams per cigarette. All other tobacco products, including cigarettes that contain more than 0.8 grams of tobacco, loose tobacco, and cigars, are taxed on a per kilogram basis. Currently, the rates are $1.27816 per stick and $1,893.57 per kilogram (see Figure 1).
Nicotine-containing vaping products aimed at helping users quit tobacco are assigned a ‘Free’ customs duty rate upon import.[8] Starting from 1 March 2024, the import of all vaping products, including vaping devices, accessories, and substances, is prohibited unless the importer holds a licence and permit issued by the Office of Drug Control.[9]
Figure 1: Tobacco excise rates—tobacco, cigars, cigarettes and snuff
Source: Australian Taxation Office (ATO), Excise duty rates for tobacco, ATO website.
Tobacco and vaping control measures announced by the Government on 2 May 2023
On 2 May 2023, Minister for Health Mark Butler announced the Government’s decision to impose higher taxation on tobacco products to deter smoking. Specifically, in addition to ordinary indexation, tobacco excise would be increased by 5% per year for 3 years starting from 1 September 2023 until 1 September 2025.
The Minister argued the tax increase is warranted:
… tax on tobacco will be increased by 5% per year for 3 years starting [1 September 2023], because we know that a higher priced cigarette is a more unattractive cigarette.[10] [emphasis added]
The excise increase forms part of the Government’s response to the National Tobacco Strategy 2023–2030.[11] The National Tobacco Strategy was endorsed by Australian Government and state and territory Health Ministers. It includes targets to reduce daily smoking prevalence in Australia below 10% by 2025 and to 5% or less by 2030.[12]
In addition to the tobacco excise increase, the Minister for Health also announced a raft of measures aimed to deter the recreational use of e-cigarettes or vaping products in Australia, particularly vaping by children.[13] On 21 March 2024, the Government introduced the Therapeutic Goods and Other Legislation Amendment (Vaping Reforms) Bill 2024. The Bill seeks to ban the importation, domestic manufacture, supply, commercial possession and advertisement of vaping products, except in very limited circumstances when the vaping products are approved as therapeutic goods.[14]
It is arguable that the increase in tobacco excise is intended to complement the proposed prohibition on recreational vaping. This approach suggests that as vaping becomes less accessible due to the ban, users might consider switching to smoking tobacco. However, the higher tobacco prices, resulting from the excise increase, are expected to act as a deterrent against such a switch.
Key issues and provisions
Tobacco excise increase
To give effect to the Government’s decision for the higher tobacco excise to be collected from 1 September 2023, the Excise Tariff Proposal (No. 1) 2023 and the Customs Tariff Proposal (No. 2) 2023 were tabled in the House of Representatives on 7 August 2023. These Proposals applied from 1 September 2023 and allowed the Government to collect duty for tobacco goods and products at the higher rates.
Consistent with normal parliamentary practice, the Bills will retrospectively validate the Tariff Proposals to give effect to the tobacco excise increasing by an additional 5% each year from 1 September 2023 to 1 September 2025.[15]
To that end, item 1 of the Excise Bill amends subsections 6AA(5) and (6) of the Excise Tariff Act. Item 1 of the Customs Bill amends subsections 19AB(5) and (6) of the Customs Tariff Act.
Aligning the tax treatment of loose-leaf tobacco products with manufactured cigarettes
As noted, loose-leaf tobacco products that people use to roll their own cigarettes are taxed by weight, while manufactured cigarettes are taxed per stick. Prior to 2017, loose-leaf tobacco products (also known as roll-your-own cigarettes, hand-rolled cigarettes or ‘rollies’) were taxed at a lower rate than manufactured cigarettes. In August 2017, the Parliament passed legislation that harmonised the excise duty rates applying to different tobacco products.[16]
Given the 5% annual tobacco excise increase noted above, and to ensure the tax treatment of manufactured cigarettes and loose-leaf tobacco products are still comparable, the Bills adjust the taxation of loose-leaf tobacco products to match that of the per stick rate.
Specifically, the Bills adjust the weight factor used to calculate tobacco excise duty rates per kilogram. The adjustment is achieved by lowering the ‘equivalisation weight’ by 0.025 gram each year, from 0.7 gram to 0.6 gram by the end of a four-year timeframe.[17]
To that end, item 2 of the Excise Bil amends subsection 6AAB(2) of the Excise Tariff Act. Item 2 of the Customs Bill amends subsection 19ACA(2) of the Customs Tariff Act.
Committee consideration
At the time of writing, the Senate Selection of Bills Committee had deferred consideration of the Bills to its next meeting.
Senate Standing Committee for the Scrutiny of Bills
At the time of writing, the Senate Standing Committee for the Scrutiny of Bills had not considered the Bills.
Policy position of non-government parties/independents
Coalition
It does not appear that the Coalition made any comments specifically about the tobacco excise increase specified in the Excise Tariff Proposal (No. 1) 2023 and the Customs Tariff Proposal (No. 2) 2023.
In response to the measures announced in May 2023, Opposition leader Peter Dutton expressed the Coalition’s readiness to back sensible health-promoting measures, and noted the absence of detailed proposals from the Government. Specifically, Mr Dutton said:
I don’t want to see vaping as a gateway into smoking and I want to see us prioritise the health, particularly of young people, so we will support sensible measures, but we haven’t seen anything yet from the government by way of detail.[18]
Independents
The positions of other parties and Independents could not be identified at the time of writing.
Position of major interest groups
Arguments in favour of tobacco tax increases
Several health organisations and experts have welcomed the Government’s proposed tobacco and vaping control reforms.[19] For example, the Australian Medical Association said:
The AMA also welcomed the increase on the tobacco tax, funding for lung cancer screening, a public campaign to raise awareness of vaping and smoking harms, quit programs, training and education, and more funding for the critical Tackling Indigenous Smoking program.[20] [emphasis added]
The National Tobacco Strategy 2023–2030 argues that ‘reducing the affordability of tobacco products through tobacco tax increases is the single most effective measure that governments can adopt to reduce smoking’.[21]
The World Health Organization (WHO) considers that raising tobacco taxes to more than 75% of the retail price for tobacco products is amongst the most effective and cost-effective tobacco control interventions.[22] According to 2022 data from the WHO, tobacco taxes (excise and GST) make up approximately 76.98% of the retail price of tobacco products in Australia.[23] Specifically, excise comprises 67.88% while GST comprises 9.09% of tobacco price.[24]
Arguments against tobacco tax increases
Tobacco excise increases could foster the black market
Researchers James Martin and David Bright from Deakin University have raised concerns that increasing the tobacco excise could inadvertently boost the black market and the production of illicit tobacco:
Australian smokers are taxed at one of the highest rates among comparable nations, with taxes set to further increase at rate of 5% per year. …
While arguably well-intentioned, the increasing taxes and restrictions on cigarettes and vaping products have resulted in an unintended and dangerous outcome – the rise of a lucrative and expanding black market for these products.[25]
Their rationale is that higher taxation of (legal) tobacco products would make tobacco smuggling and illicit production more lucrative:
The black market for illicit tobacco and vaping products has been driven by economic forces on both the supply and demand side. …
This demand is only likely to increase as cigarette prices increase further and prescription vapes become even less appealing with the introduction of new flavour restrictions.
On the supply side, economic models suggest traffickers of illicit products are attracted to opportunities that present the lowest risks and highest rewards. …
The Australian public and policymakers, as well as other countries considering emulating our policies, need to be mindful of these risks and the implacable economic forces that are driving the black market.[26]
Tobacco excise increases could disproportionately affect lower income earners
Professor Paul Ward from Flinders University says the tobacco excise increase will disproportionately affect lower-income earners, and he questions the effectiveness of taxation in deterring smokers:
There is this idea that people are making a choice to smoke and that if we nudge them by increasing taxes, they will make a choice not to smoke… We just know that that’s not the case.[27]
Tobacco excise increases are generally understood to be regressive; that is, they impact disproportionately on poorer people who are more likely to be smokers and less able to afford price increases.[28]
Sky News columnist Caleb Bond claims tobacco taxation is ‘a tax on the poor’ and the Government’s primary motivation in raising tobacco taxation is to boost revenue rather than to address public health concerns:
The federal government keeps taking smokers for a ride as it jacks up the tobacco excise under the guise of discouraging an evil…
The Australian Taxation Office estimates that the total tobacco market shrank by 34 per cent between 2015-16 and 2020-21.
But, in that same period, the duty collected on tobacco increased 43.7 per cent from $9.93 billion to $14.26 billion.
Who is the real addict here?
And it’s a tax on the poor.
The smoking rate among the most disadvantaged Australians is 16.5 per cent compared to 5.3 per cent among the most advantaged.[29]
Financial implications
According to the Explanatory Memorandum, the Bills are estimated to increase budget receipts by $3.3 billion over the 5 years from 2022–23, including $290.0 million in GST receipts to be paid to the states and territories.[30]
Minister for Health Mark Butler said some of the revenue generated from tobacco excise will be reinvested in Australia’s healthcare system.[31]
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bills are compatible.[32]
Parliamentary Joint Committee on Human Rights
At the time of writing, the Parliamentary Joint Committee on Human Rights had not considered the Bills.
Commencement and retrospective application
The Excise Bill and the Customs Bill commence on 1 September 2023. This means the amendments retrospectively take effect on and from 1 September 2023, which is the day that the Customs and Excise Tariff Proposals facilitated the collection of duties at the higher rate.[33] Please see this Parliamentary Library publication for more information about tariff changing processes in Australia.