BILLS DIGEST NO. 7, 2017–18              8 August 2017

Excise Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017 [and] Customs Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017

Paul Davidson
Economics Section

Matthew Thomas
Social Policy Section

Date introduced:  1 June 2017

House:  House of Representatives

Portfolio: Treasury and Immigration and Border Protection

Commencement: The Bills are scheduled to commence on 31 August 2017.

Links: The links to the Bills, their Explanatory Memoranda and second reading speeches can be found on the homepage for the Excise Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017 and the Customs Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at August 2017.

Purpose of the Bills

The purposes of the Excise Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017 (the Excise Bill) and the Customs Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017 (the Customs Bill) (collectively, the Bills) are to amend the Excise Tariff Act 1921 and the Customs Tariff Act 1995 (the Acts) to increase the excise equivalent customs duty imposed on roll-your-own (RYO) tobacco and other products such as cigars, so as to more accurately standardise the taxation treatment between stick and other RYO tobacco.

Structure of the Bills

The Excise Bill comprises one Schedule and the Customs Bill comprises one Schedule.

Background

Tobacco products are subject to taxation through the application of excise and excise-equivalent customs duties.[1] The method for calculating excise duty differs for stick tobacco (that is, cigarettes) and other tobacco (primarily loose leaf tobacco and cigars).

Currently, the formula for calculating the rate of excise imposed on stick tobacco is based on an assumption of each cigarette containing less than 0.8 grams of actual tobacco. The rate of excise is levied on a per stick basis. This was not always the case.

Prior to 1999, excise on cigarettes in Australia was levied based both on the weight of the cigarettes and fees based on the wholesale value of their sale. Because lighter weight cigarettes attracted less excise and customs duty than did heavier cigarettes, Australian manufacturers had a strong incentive to minimise the weight of their cigarettes.[2]

Tobacco researchers, Michelle Scollo and Margaret Winstanley have observed that following changes to the excise system introduced in 1998:

Australian manufacturers re-engineered most brands to increase their tobacco weights and filter weights, presumably because this increased their consumer attractiveness over the previous designs. The most recent findings show that the majority of Australian brands have remained stable in construction since they were re-engineered after 1998.[3]

Currently, the rate of excise on other tobacco is levied on a kilogram of tobacco content basis, where the tobacco content is taken to be 0.8 grams.

As such, the assumption about the relative tobacco content forms the basis for calculating the rate of excise duty on both stick tobacco and on other tobacco.[4] The rate of excise duty on cigarettes from 1 March 2017 was $0.61726 per stick and the excise duty on other tobacco from 1 March 2017 was $771.60 per kilogram of tobacco content.[5]

Currently, the rate of excise duty on tobacco products is subject to biennial indexation (on 1 March and 1 September each year) in accordance with average weekly ordinary time earnings, plus an additional increase of 12.5 per cent.[6] The 12.5 per cent increases to regular biennial indexation are scheduled to continue until 1 September 2020.

As part of the Budget on 9 May 2017, the Government announced that the taxation of RYO and other tobacco, will be adjusted so that manufactured cigarettes and RYO tobacco cigarettes receive comparable tax treatment. The Government stated that this would be achieved by calculating the per kilogram excise and excise-equivalent customs duty rates on the basis that the average tobacco content of a cigarette is 0.7 grams.[7]

The Bills propose to phase-in a weight conversion factor to the duty rate for other tobacco over four years (from 2017 to 2020) to coincide with the 1 September indexation. The weight conversion factor will gradually reduce the current 0.8 grams of tobacco content to 0.7 grams of tobacco content over four years in four equal 0.025 gram increments.

Committee consideration

Senate Standing Committee for the Selection of Bills

At its meeting on 15 June 2017, the Selection of Bills Committee recommended that the Bills not be referred to Committee for inquiry and report.[8]

Senate Standing Committee for the Scrutiny of Bills

The Scrutiny of Bills Committee made no comments in relation to the Bills.[9]

Financial implications

The Explanatory Memorandum outlines the forecast financial implications of the Bills. It is forecast that excise and excise-equivalent receipts will increase by $360 million, and GST receipts by $35 million, respectively, over the forward estimates.

Table 1: excise and excise-equivalent receipts

Receipts ($m)

2017–18

2018–19

2019–20

2020–21

Department of Immigration and Border Protection

30

70

110

150

Explanatory Memorandum, Excise Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017 [and] Customs Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017, p. 3.

Table 2: goods and services tax receipts

Receipts ($m)

2017–18

2018–19

2019–20

2020–21

Australian Taxation Office

5

10

10

10

Explanatory Memorandum, Excise Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017 [and] Customs Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017, p. 3.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed both 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 both Bills are compatible.[10]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights considered that neither of the Bills raised human rights concerns.[11]

Key provisions

Amendments to the Excise Tariff Act

Section 6AA of the Excise Tariff Act 1921 currently provides the method for calculating the duty payable on all domestically produced tobacco products (that is, excise). Section 6AA currently applies that method to both stick cigarettes, as well as ‘other tobacco’, that is cigars and loose leaf tobacco.

The effect of items 1–4 is to create a new methodology for calculating the duty for other tobacco products. Items 1–2 of the Excise Bill provide that proposed section 6AA will now only apply to stick cigarettes, and not to other tobacco products. In calculating the applicable duty on cigarettes, item 3 specifies that the duty rate is to be rounded to five decimal places, which maintains the number of decimal places currently in place for the duty rate on stick form tobacco. The legislative effect of items 1–3 is that the current process for the calculation of excise duty on stick cigarettes will continue in its current form.

Item 4 inserts proposed section 6AAB which provides for a new methodology for calculating the applicable excise duty on other tobacco products. Proposed subsection 6AAB(1) provides that the tobacco duty rate applicable to other tobacco is the rate of duty which has been calculated for cigarettes, divided by the weight conversion factor. The weight conversion factor is defined in proposed subsection 6AAB(2) and reduces the applicable weight from 0.0008 kilograms of tobacco content currently, to 0.0007 kilograms of tobacco content on each 1 September, in four equal 0.000025 kilogram increments, over the next four years. The incremental reduction in the tobacco weight conversion factor is designed to coincide with the incremental increase in tobacco duty rates on 1 September, which is currently in place until 1 September 2020 (see above).

Proposed subsection 6AAB(8) provides that the applicable rate changes apply to tobacco products entered for home consumption on or after the relevant replacement day, which is generally expected to be 1 September each year from 2017 to 2020.

Amendments to the Customs Tariff Act

Section 19AB of the Customs Tariff Act 1995 currently provides the method for calculating the duty payable on all internationally produced tobacco products which are imported into Australia (that is, excise-equivalence[12]). Item 1 proposes to amend subsection 19AB(2) to specify that the duty rate is to be rounded to five decimal places, which maintains the number of decimal places currently in place for the duty rate on other tobacco.

The effect of items 2–4 is to replicate the new methodology for calculating the duty for other tobacco products, thus severing it from the current method which applies to cigarettes, as outlined above in relation to the Excise Tariff Act. Items 2–3 of the Customs Bill provide that proposed new section 19AC will now only apply to cigarettes, and not to other tobacco products.

Item 4 inserts proposed section 19ACA which provides for a new methodology for calculating the applicable excise duty on other tobacco products. The methodology is the same as that provided by item 4 in the Excise Bill to ensure that duty rates between domestically produced other tobacco (excise duty) and internationally produced other tobacco (excise-equivalent duty) are treated analogously. Proposed subsection 19ACA(8) provides that the applicable rate changes apply to tobacco products entered for home consumption on or after the relevant replacement day. The practical effect is to increase the excise equivalent customs duty on RYO tobacco.

Items 5–13 amend Schedule 3 of the Customs Tariff Act so that the new methodology can be applied to each type of other tobacco product.

Items 14–85 make consequential amendments to Schedules in the Customs Tariff Act which relate to various trade agreements. For example, items 14–22 amend Schedule 5 of the Customs Tariff Act which relates to originating goods from the United States. The effect of items 14–22 is to change the applicable duty rate for tobacco that is current calculated on a per kilogram of tobacco content basis to reflect the new methodology proposed in item 4. There are no amendments to the current duty calculation for US originating cigarettes as covered by table items 46, 48, and 51 in Schedule 5 to reflect the fact that the duty for cigarettes remains unchanged.

Key issues

Explaining the impact of the Bills

Currently, the methodology for calculating the rate of duty is effectively harmonised at 0.0008 kilograms of tobacco content. Hence, the rate of excise duty on cigarettes from 1 March 2017 was $0.61726 per stick and the excise duty on other tobacco from 1 March 2017 was $771.60 per kilogram of tobacco content.[13] For other tobacco products calculated on an equal per stick basis that equates to $0.61728 per stick, which is identical to the fifth decimal place.

The current harmonisation is based on the fact that the excise rates for both cigarettes and other tobacco products are the same. The excise rate that currently applies to cigarettes relates to 0.0008 kilograms of tobacco content, and is effectively the same rate which applies to other tobacco. According to the Explanatory Memorandum, ‘the average tobacco content of cigarettes is now lower than 0.8 grams’,[14] hence the four-year transition in item 4 in each Bill which eventually results in the rate of excise for other tobacco products being set at 0.0007 kilograms of tobacco content. As a result, whereas tobacco duty rates are currently set at the maximum tobacco content for both stick and other tobacco, other tobacco will become subject to the average tobacco content, whilst stick tobacco will remain at the maximum.

The stylised example in the Explanatory Memorandum provides that the excise rate for stick tobacco increases from $0.61726 per stick to $0.69511 per stick on 1 September 2017. Given the staged implementation of the weight conversion factor from 0.0008 kilograms of tobacco content to 0.0007 kilograms of tobacco content, the applicable weight conversion factor is 0.000775 kilograms of tobacco content from 1 September 2017. Hence, in order to calculate the applicable duty on other tobacco products, the stick form rate is divided by the weight conversion factor, which results in a rate of $896.92 per kilogram of tobacco content. If the 0.0008 kilogram of tobacco content had remained in place, the duty rate would have been $868.89 per kilogram of tobacco content.

By extrapolating the stylised example in the Explanatory Memorandum over the four year transition period the full effect of the Bills can be demonstrated. The excise on stick tobacco would be $0.99567 per stick from 1 September 2020. The duty rate for other tobacco (now under the 0.0007 kilograms of tobacco content weight conversion factor) would then be $1,422.39 per kilogram of tobacco content. If the current 0.0008 kilogram of tobacco weight factor were used then the excise rate would be around $177 per kilogram of tobacco content less than the rate proposed in the Bills. Alternatively, the new rate imposed by the Bills would be equivalent to a per stick rate of duty of $1.13791 for other tobacco products.

Do the Bills ‘harmonise’ duty rates?

Because the method for calculating excise on both cigarettes and other tobacco products is currently set on the maximum tobacco content (that is, 0.0008 kilograms of tobacco content), the current duty rates are harmonised. The effect of the Bills is to retain the method for calculating the duty for cigarettes, but to change the method for calculating the duty for other tobacco.

The Explanatory Memorandum notes that:

… from 1 September 2020 roll your own tobacco and other tobacco products have duty imposed at the same rate per kilogram as cigarettes containing the average tobacco content rate per stick.

The rate per kilogram of duty for other tobacco is adjusted progressively each year so that it is equivalent to the in stick form rate for cigarettes containing 0.7 grams of tobacco from 1 September 2020.[15]

The effect of the amendments is therefore to provide for a method of calculation for other tobacco products which explicitly recognises the actual tobacco content contained in a cigarette. Currently there is no such rate explicitly provided, and in that regard, the Bills can be considered to harmonise the duty rates for all tobacco products. However in practice, the effect of the Bills is to decouple the assumption currently used in the calculation of tobacco rates. The full effect of the decoupling is realised after four years where the tobacco content assumption for cigarettes is higher than the now lower assumption of tobacco content in other tobacco products. The effect of this change is to tax other tobacco products relatively higher than cigarettes. Why this is the case is not explained in the Explanatory Memorandum. It is possible that other tobacco products should be taxed relatively more than cigarettes because of some additional externality which is unique to other tobacco products.

Possible explanation for the changed duty methodology based on health grounds

The Government has at no point suggested that it is ‘harmonising’ the rates of excise applying to different tobacco products for health reasons. However, a case might reasonably be made for the measure on these grounds, providing that the externalities on other tobacco products are greater than they are on cigarettes.

International and domestic evidence suggests that where the price of manufactured cigarettes is high relative to the price of roll-your-own (RYO) cigarettes, this is associated with the increased use of RYO cigarettes over other cigarettes.[16]

There is evidence to suggest that in recent years the use of RYO cigarettes has increased in Australia following a number of substantial tobacco excise increases.[17] While the excise increases apply to all tobacco products, because RYO cigarettes are priced lower than manufactured cigarettes, smokers may be substituting RYO cigarettes for manufactured cigarettes as they have become a more appealing economic alternative.

The National Drug Strategy Household Survey, conducted by the Australian Institute of Health and Welfare (AIHW), is the most comprehensive source of data on the use of licit and illicit drugs in Australia. The results of this survey are released on a three-yearly basis, with key findings from the 2016 survey having just been released.[18] These findings indicate that while the smoking of manufactured cigarettes by adult smokers has been gradually declining since 2007, there has been a steady increase in the smoking of RYO cigarettes—from 26 per cent of smokers in 2007 to 33 per cent in 2013 and 36 per cent in 2016.[19] The increase has been most pronounced among younger adult smokers, with a significant increase in the proportion of smokers in their 30s smoking RYO cigarettes between 2013 and 2016—from 29 per cent to 37 per cent. In 2016, young adult smokers were the age group most likely to smoke RYO cigarettes.

It may be the case, then, that the cheaper retail price of RYO cigarettes relative to manufactured cigarettes has led smokers to shift from manufactured cigarettes to RYO cigarettes. There is also a risk that young people, who are typically on limited budgets, may be smoking RYO cigarettes as a means of limiting their expenses.[20]

The impact of the Bills may therefore be to force people who would otherwise smoke RYO cigarettes to substitute them for manufactured cigarettes, since the effect of the Bills is to increase the excise duty on RYO cigarettes, relative to the duty on manufactured cigarettes. The potential health consequences of this substitution are considered below.

Recent evidence of potential unintended health consequences

In terms of the relative health impacts of manufactured and RYO cigarettes, until recently there has been no clear evidence to suggest that one product carried any substantive health benefits over the other.[21]

Filter ventilation in cigarettes was introduced to Australia in the early 1970s.[22] Initially this innovation was equated with making cigarette smoking safer, chiefly by reducing the amount of tar inhaled by smokers. However, subsequent comparisons between manufactured and RYO cigarettes found that, ‘overall, neither has the incidence of lung cancer varied with tobacco product used, nor have other health benefits become apparent’.[23]

Filter ventilation in manufactured cigarettes may increase draw resistance and thereby provide a barrier to smoker’s attempts to get more tar and nicotine per puff. However, a majority of addicted smokers have a target nicotine intake from each cigarette and will unconsciously change their smoking behaviours—such as puff size and frequency, but also the degree to which they block the filter vents with their fingers or mouth—in order to ensure that they gain this desired amount.[24]

Until recently, the evidence indicated that these changes in smoking behaviour—referred to as compensatory smoking—meant that smokers of conventional, manufactured cigarettes had at least an equivalent risk of developing disease as did smokers of RYO cigarettes.[25]

However, research findings published earlier this year suggest that filter ventilation may in fact have made manufactured cigarettes more harmful than they would otherwise have been, and, by implication, more harmful than RYO cigarettes.[26]

Based on a review of internal tobacco company documents and quality published scientific research, researchers have found that filter ventilation may have contributed to an increase in lung adenocarcinomas among smokers. This increase is partly attributed to the effects of compensatory smoking, with smokers taking deeper puffs and smoking more cigarettes per day, but also to the cigarette burning less rapidly, resulting in an increased number of puffs per cigarette and toxic constituents having longer to develop.[27]

Given these findings, it would be difficult to support the policy on the grounds that RYO tobacco imposes greater externalities than manufactured cigarettes.

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[1].              Duties of excise are levied on domestically produced goods, whereas internationally produced goods which are imported to Australia are subject to excise-equivalent customs duties. To aid understanding of the Bills, only ‘excise’ is referred to, but the Bills apply equally to imported tobacco products, which are subject to excise-equivalent customs duties. Excise equivalent goods are imported alcohol, tobacco and fuel that, if produced or manufactured in Australia, would be subject to excise duty. Thus when these types of goods are imported, a rate of duty is levied on them that is equivalent to the excise liability that would apply if the goods had been manufactured in Australia.

[2].              ‘12.1: tobacco in Australian cigarettes’ in M Scollo and M Winstanley (eds), Tobacco in Australia: facts and issues, Cancer Council Victoria, 2016.

[3].              Ibid.

[4].              Explanatory Memorandum, Excise Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017 [and] Customs Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017, p. 5.

[5].              Notice of Substituted Rates of Excise Duty: Notice No. 2 (2017).

[6].              For more information on the indexation process, see: P Davidson, Customs Tariff Amendment (Tobacco) Bill 2016 [and] Excise Tariff Amendment (Tobacco) Bill 2016, Bills digest, 10, 2016–17, Parliamentary Library, Canberra, 2016. For a brief description and analysis of the tobacco excise increases, see M Thomas, ‘Tobacco excise increase’, Budget review 2016–17, Research paper series, 2015–16, Parliamentary Library, Canberra, 2016.

[7].              Australian Government, ‘Part 1: revenue measures’, Budget measures: budget paper no. 2: 2017–18, p. 12.

[8].              Senate Standing Committee for Selection of Bills, Report, 6, 2017, The Senate, Canberra, 15 June 2017.

[9].              Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 6, 2017, The Senate, Canberra, 14 June 2017, pp. 21, 25.

[10].              The Statement of Compatibility with Human Rights can be found at pages 13–14 of the Explanatory Memorandum to the Bill.

[11].              Parliamentary Joint Committee on Human Rights, Report, 5, 2017, The Senate, Canberra, 14 June 2017.

[12].              Excise equivalent goods are imported alcohol, tobacco and fuel that, if produced or manufactured in Australia, would be subject to excise duty. Thus when these types of goods are imported, a rate of duty is levied on them that is equivalent to the excise liability that would apply if the goods had been manufactured in Australia.

[13].              Notice of Substituted Rates of Excise Duty: Notice No. 2 (2017).

[14].              Explanatory Memorandum, Excise Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017 [and] Customs Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017, p. 5.

[15].              Ibid., p. 6.

[16].              See ‘13.1 Price elasticity of demand for tobacco products’ in M Scollo and M Winstanley (eds), Tobacco in Australia: facts and issues, Cancer Council Victoria, 2016 and D Curti, C Shang, W Ridgeway, F Chaloupka and G Fong, ‘The use of legal, illegal and roll-your-own cigarettes to increasing tobacco excise taxes and comprehensive tobacco control policies: findings from the ITC Uruguay survey’, Tobacco control, 24 (S3), 2015, pp. 17–24.

[17].              See ‘2.5 Industry sales figures as estimates for consumption’ in Scollo and Winstanley, op. cit. For a brief description and analysis of the tobacco excise increases, see M Thomas, ‘Tobacco excise increase’, Budget review 2016–17, Research paper series, 2015–16, Parliamentary Library, Canberra, 2016.

[18].              Australian Institute of Health and Welfare (AIHW), ‘Tobacco smoking’, AIHW website.

[19].              Ibid.

[20].              See Quit Victoria, Roll-your-own tax a welcome step to curb appeal to young people, media release, 10 May 2017.

[21].              B Bellew, E Greenhalgh and M Winstanley, ‘3.27: health effects of smoking tobacco in other forms’ in Scollo and Winstanley, op. cit.

[22].              See ‘12.4: general engineering features of Australian cigarettes and their relation to compensatory smoking’ in Scollo and Winstanley, op. cit.

[23].              Bellew, Greenhalgh and Winstanley, op. cit.

[24].              ‘12.4: general engineering features of Australian cigarettes and their relation to compensatory smoking’ in M Scollo and M Winstanley, op. cit.

[25].              Bellew, Greenhalgh and Winstanley, op. cit.

[26].              M Song, N Benowitz, M Berman, T Brasky, K Cummings, D Hatzukami, C Marian, R O’Connor, V Rees, C Woroszylo and P Shields, ‘Cigarette filter ventilation and its relationship to increasing rates of lung adenocarcinoma’, Journal of the National Cancer Institute, 109(12), 1 December 2017.

[27].              Ibid.