Chapter 2

Wine Equalisation Tax

Recent Performance of the Australian Wine Industry

2.1 The Australian Wine Industry has shown tremendous growth over the last decade. It has successfully transformed an agricultural commodity into a quality, value added product. Australia now exports $880 million of wine annually to more than 80 countries and has an international reputation as an exporter of quality premium wine at a competitive price.

2.2 The average annual growth in exports exceeds 25% per annum by volume and even more by value. By the year 2000, the industry expects that wine worth a billion dollars will be exported every year and even today, over 700,000 bottles of Australian wine are opened each day overseas. In 1997-98, the wholesale value of domestic wine sales was over $1.4 billion per annum, adding over $559 million in Wholesale Sales Tax to government revenue.

2.3 Australian wine industry tourism directly contributes $400 million to $500 million to the Australian economy, from an estimated 7 million visits annually and considerably more via its linkages to other sectors of the tourism industry. The grape and wine industries play a vital role in regional economic development and are a major source of regional employment. Including allied industries such as glass and storage manufacture, transportation and financial services, the wine industry is estimated to employ in excess of 60,000 employees.

2.4 The key ingredient to the success has been Australia's natural competitive advantages arising from our soils and climate, together with an adherence to quality and willingness to innovate and adopt the best in technologies. [1]

Trends

2.5 In recent years, per capita consumption of wine in Australia has increased. A long-term gradual decline in consumption of cask and fortified wine has been offset by an increase in bottled wine consumption. In the last decade the share of bottled table wine sales has increased from 27% to over 38%. Bottled red wine sales are currently growing by 9% annually and bottled white by 7%. This increase has meant that the value of the domestic wine market has increased considerably since bottled wine per litre values are higher than cask wine, without any significant increase in volume of wine sold.

Tax Reform Package

2.6 As outlined in the ANTS package, the Government proposed that from 1 July 2000:

Wine, and beverages consisting primarily of wine, will become subject to a Wine Equalisation Tax to replace the difference between the current 41 per cent wholesale sales tax and the proposed Goods and Services Tax. The Wine Equalisation Tax will be levied at such a rate that the price of a four-litre cask of wine need only increase by the estimated general price increase associated with indirect tax reform, ie 1.9 per cent. The concessional taxation treatment of the alcohol content of cask wine will therefore be preserved. [2]

2.1 In addition, the government policy is designed to correct one of the anomalies in the Wholesale Sales Tax system where tax is currently paid on samples, wine used for promotions and tastings. The tax reform package states that:

where goods are given away (for example, tasting samples in a winery) no sale has occurred and no Goods and Services Tax will be payable.

The effect of this policy design is that a representative bottle of wine will increase in price by approximately 3% in meeting the price objective on a four litre cask. It is expected that consumers will be relatively unaffected by the WET.

The Wine Equalisation Tax Bill

2.7 A New Tax System (Wine Equalisation Tax) Bill 1999 (WET Bill) introduces a wine tax on assessable dealings and importations of wine made on or after 1 July 2000. According to the Government the effect of the new wine tax following the introduction of the GST will be a price rise for premium wine remains stable. of 3.1%. [3] The Independent Wineries Association estimates the price increase to be 3.5% [4] and the Victorian Wine Industry Association advised an increase of at least 4%. [5]

2.8 The wine tax applies to wine including fruit and vegetable wine, cider, perry, mead and sake. The concept of wine has not been exhaustively defined in the WET Bill and an essential character test will be used to determine whether a beverage is wine or cider etc for the purposes of the WET Bill. Designer drinks do not meet the essential character test and will not be taxed by the WET.

2.9 Beverages that are specifically excluded from the concept of wine and therefore are not taxable under the WET include:

• Beverages that do not contain more than 1.15% by volume of ethyl alcohol;
• Beer;
• Spirits, liquers or spirituous liquors; or
• Beverages containing beer, spirits, liquer or spirituous liqours.Recommendation
• Beverages containing beer, spirits, liquers or spirituous liquors.

Assessable Dealings

The wine tax will apply to four classes of assessable dealings:

Wholesale sale

2.10 Tax is payable on the last wholesale sale, and on the wholesale selling price, in Australia. If the wine, or some input to the wine, has already been taxed, then a credit for that earlier tax will reduce the tax payable on the later dealing. The only wholesale sale of assessable wine that will not be an assessable dealing will be a sale of Australian wine manufactured by the seller otherwise than in the course of any business, for example, when a person manufactures wine at home as a hobby and may sell some of that wine to a retailer.

Retail sale

2.11 If wine is not sold by wholesale (for example, wine is sold by retail by the manufacturer), then the law seeks to impose tax on the appropriate retail sale or use of the wine. There may be instances where the retail sales of wine that have borne tax, will be taxed again. For example, a retail sale of Australian wine manufactured by the seller in the course of carrying on any business. This ensures that wine is taxed on a full wholesale value.

Application to own use (AOU)

2.12 This term means a use of wine after it has been through the marketing chain. An application to own use will be an assessable dealing if the wine has not been taxed or, having been taxed, the law regards the earlier taxable dealing as not having recouped the full wholesale sale value of the wine.

2.13 There are various types of AOU:

• Consuming wine;
• Giving wine away such as free tasting of wine by a winery. The supply of the wine for tasting will be an AOU by the winery;
• Transferring property in wine under a contract that is not a contract for the sale of wine.

Local entry

2.14 Local entry is a dealing that applies only to imported wine. A local entry of wine at the customs barrier will also be an assessable dealing. Wine which is taxable in this case has a taxable value equal to the GST importation value of the wine.

2.15 Tax is imposed at the rate of 29%, on the taxable value of an assessable dealing. The most common taxable value is the price at which the wine is sold by wholesale. GST will also apply to almost all assessable dealings in wine. The wine tax is calculated on the GST exclusive value of the wine in most cases. In most cases this is the wholesale selling price of wine.

Compliance Costs

2.16 BThe Government's view is that businesses can expect to incur minimal, if any, additional implementation costs for the WET as current WST systems and accounting will accommodate the WET. The WET will not impose separate payment arrangements on taxpayers as the GST payment arrangements will be utilised.

2.17 Businesses will be able to claim a credit for the difference between the WET and the WST for stock on hand on which WST has been paid. The credit will be offset against their GST liability and as many businesses already undertake an annual stocktake, no additional cost will be incurred in determining this credit amount.

Submissions from the Wine Industry

2.18 The Winemakers' Federation of Australia (the Federation) is the Australian wine industry's peak voluntary national body, representing the interests of the nation's small, medium and large winemakers. The Federation's members in total produce around 90% of Australian wine.

2.19 Due to the high level of vertical integration in the Australian wine industry, the Federation represents members on a wide range of issues, from primary production (grapegrowing) to manufacturing (winemaking), distribution and marketing. The issues raised in this paper are based on the comments made by the Federation, and submissions made by the Victorian Wine Industry Association (VWIA), the Grevillea Estate Wines, the Winegrape Growers' Council of Australia Inc. and , Dr John Gladstones on behalf of the Independent Winemakers Association and the National Small Wineries Coalition, following the Government's announcement of its intention to introduce an ad valorem WET at 29% of wholesale price.

Ad-Valorem vs Volumetric tax

2.20 This has been the subject of considerable debate between Treasury and the Federation. Although the policy arguments put forward by the Federation in favour of an ad-valorem tax have been endorsed by government and a policy of ad-valorem wine tax adopted, there is still some division within the industry on this issue.

2.1 Ad valorem is a continuum of the wholesale sales tax system which the industry has lived with on and off in different magnitudes over 50 years. It is applied at the last point of wholesale. The ad valorem system recognises the distinct difference between wine and other alcoholic beverages – beer and spirits are taxed under the volumetric (tax which is based on the alcohol content of the product) regime.

2.21 The position of the wine industry as represented by the Federation is that it:

• supports the introduction of a broad based goods and services tax;
• does not seek a discount from current tax levels to a GST only position in the short term;
• supports an ad-valorem based top up tax; and
• rejects a volumetric tax.

2.22 The Federation commissioned a study by Wittwer and Anderson of the Centre for International Economic Studies (CIES) at the University of Adelaide on the implications of alternative wine tax options in the context of tax reform. Based on the results of this study, the Federation has vigorously maintained that a switch from the current ad-valorem wine tax to a volumetric tax that raises the same government revenue would harm the industry as a whole and especially its non-premium sector. This switch however, would benefit premium wine producers and consumers, but only up to a certain point.

2.23 The Federation also noted and refuted the claim by opponents of the ad-valorem tax, that it creates a disincentive to produce quality wine. The Federation adds that the production of quality wine is primarily influenced by market demand and the only reason an ad valorem tax would adversely affect market demand is if it discouraged consumers from buying quality wine. [6]

2.24 Australia has had an ad valorem tax since 1984 and in that time, premium demand growth has been strong. The Federation argues that this growth would undoubtedly have been faster in the absence of any tax but in the absence of evidence to the contrary, an ad valorem tax has not had a more detrimental impact on sales than a volumetric tax. Any negative impact of the tax would have been outweighed by other factors such as income growth, and changes in consumer taste (moving up to better quality wines). [7]

2.25 The largest ever-sustained growth in premium sales has occurred during a period of ad valorem tax. Despite price increases exceeding inflation (up 12% since 1995), the Federation points out that domestic premium consumption has increased in every year since 1985-86, thereby confirming that price is not dominant when purchasing quality wine. [8]

2.26 The view of the Federation is that a volumetric tax will:

• be highly regressive. For example, the price of a Coolabah cask would rise by around $6.00 while a bottle of Bollinger would drop by around $60.00.
• increase prices for 70% of Australian consumed wine
• diminish employment and investment in Australia's three largest wine grape regions – Riverland, Murray Valley and Riverina
• damage Australia's international competitiveness.
• result in a progressively reducing tax base as producers increase production of premium wines. The number of litres of alcohol consumed as wine has been static since 1984, hence generating static income under a volumetric tax regime.

2.27 A commonly held misconception, according to the Federation, is that a volumetric tax will only affect cask wine. However, around 75 percent of Australian wine are sold as either cask wine or as bottles retailing for less than $8.00. A volumetric tax will shift the incidence to these products, thereby increasing their price to consumers. Less affluent consumers who like to drink wine in moderation and who consume products such as Jacobs Creek, Oxford Landing, Lindemanns Bin 65 will face price increases while Bollinger premium wine drinkers will benefit from lower prices.

Table 1 : Industry Implications of a volumetric tax [9]

2.28 A subsequent paper produced by Wittwer and Anderson, and referred to by Dr John Gladstones [10] in his work for the Independent Winemakers Association, however, shows that a GST plus revenue-neutral volumetric WET would be highly beneficial to premium grape and wine production everywhere, while non-premium grape and wine production in the irrigation areas would be little or no worse off than now. Dr Gladstones claims that the industry overall would gain from a volumetric form of WET, with South Australia gaining the most. [11]

2.29 In comparing the results of the two Wittwer and Anderson papers, Dr Gladstones noted that the second and more accurate report indicates that the relative gains by premium grapes and wine under a volumetric WET more or less balances the relative losses for the non-premium sector. This position does not support the Federation's case. However, the Independent Winemakers Association (IWA) favours it [12] as the Association views it as providing a consistent treatment for wine as for other alcoholic beverages, while preserving its more favourable tax rate that recognises some positive economic, health and social roles of the wine industry.

2.30 IWA further argues for replacement of ad valorem by volumetric taxation of wine especially in the area of exports and imports. Non-premium wine is relatively difficult to export in a world awash with cheap ordinary wines. Many parts of the world enjoy competitive advantages over Australia because of lower cost structures and closer proximity to markets. Australia therefore cannot afford to keep encouraging the production of low quality wine by providing disincentives for quality improvement. [13]

2.31 The Winegrape Growers' Council of Australia [14] completely opposes the volumetric WET for the following reasons :

• It imposes large price increases on the bulk of wine produced and sold in Australia, estimated to be approximately 50% on cask wine. This is also the most price sensitive segment of the market.
• A volumetric tax would distort the whole industry structure and lead to large surpluses of grapes used for the lower priced, high volume end of the market. Such surpluses would compound an already oversupply situation within the industry as a result of overplanting. In times of oversupply, wineries utilise their own grapes first rather than those produced by the independent winegrape growers, thereby causing a disproportionately higher burden on the latter.
• Growers in the Riverina, Riverland and Sunraysia regions will be hardest hit as they produce over 60% of grapes used for wine at the lower (“commercial”) end of the market. The negative impact would be most strongly felt by Sunraysia as it produces the highest quantities of neutral white winegrapes, which are not used for premium wines.
• Much of the economic viability of the infrastructure of the whole wine industry in the Riverina, Riverland and Sunraysia would be destroyed as a result of a negative impact on the wine industry itself in these regions.
• The negative impact of a volumetric tax would result in a downturn in all regional activities, such as direct wine industry support services, tourism, banking, vehicle sales and maintenance, vocational training, health services, etc. Regional Australia is in much need of re-vitalisation. The wine industry has played a major role in this re-vitalisation over the last decade. A volumetric WET will create an economic situation that will destroy the base of the industry with disastrous economic consequences for the winegrape growers and wine processing sectors as well as for export opportunities.
• A volumetric WET would only advantage very few of the premium and super premium wine producers. In fact, the majority of these producers support an ad valorem tax, knowing full well that the introduction of a volumetric tax would also impact adversely on them and have major negative repercussions for the whole industry as the export activity is predicated on the “commercial” sector of the market.

2.32 The National Small Wineries Coalition (NSWC) submit that an ad valorem tax and a GST discriminates against and will be disastrous for small wineries. [15] The NSWC claim that small wineries are a vital part of Australia's small business sector as they are significant employers in rural and regional areas where high unemployment exists. The NSWC states that :

Our growth and future depends on the production of low volumes of high quality or premium wines, at an economic cost.

Rather than penalising the low-volume, high quality wineries, the system should ensure a socially responsible course by placing the tax more directly on the very area where alcoholic addiction occurs – the cheap wine casks. Tax by volume – not value. [16]

In our view therefore, any taxation system sought to be enforced in Australia in respect to high quality, reputation enhancing, export value-adding quality table wines from small wineries, should not be principally based on alcohol content, or retail price (ad valorem) tax, but rather volume-based (volumetric tax) assessment criteria. [17]

2.33 NSWC claims that for any reform of wine taxation to work effectively, the Government needs to look at the two separate and distinct sectors which make up the Australian wine industry. These sectors are:

• The Alcoholic Beverage Industry which specialises in the sale of wine casks and low-priced bottled wine. This sector accounts for 65% of domestic sales and is controlled by twenty companies which produce about 98% of Australian wine; and
• The Fine Wine Industry in which all of Australia's small wineries are involved.

2.34 Given the difference in their cashflows and sales profiles, NSWC recommends that the Committee determine how best any proposed wine tax issues should be resolved by the government. As it currently stands the proposed ad valorem tax arrangements benefit the Alcoholic Beverage Industry, the `big end of town', the large corporate wineries and disadvantages the small regional and rural wineries. [18]

2.35 NSWC pointed out that if this discrimination is to continue, small wineries become further marginalised, with consequent loss of jobs in rural and regional areas, and also hundreds of existing small wineries will be forced out of business.

Wine Tourism and Employment

2.36 NSWC noted the growth in wine tourism that has been rewarding for small wineries and the local, interstate and overseas visitors to Australia's wine producing regions. Many small regional wineries sell their wine by cellar door sales at their own wineries. Tourism bodies have now recognised the value-adding and employment benefits of wine tourism and have now established “wine routes” as an integral component of regional tourism planning.

2.37 Employment is without question an important feature of the wine industry as it employs people from varying levels of educational background, from academics to people who find it difficult to find employment because they do not have an adequate level of literacy skills. NSWC, in their submission, emphasised the important role which small wineries and grape-growers play, in Tasmania, by providing employment opportunities in vineyards and wineries and those in supplier industries and tourist related businesses.

2.38 The Winegrape and Wine Industry Report by the Industry Commission in 1995 highlighted the point that :

The impetus to economic growth provided by the industry also leads to less tangible benefits in the form of greater investor confidence in the region, better management of community boards, local councils etc and a higher quality of life in general. [19]

2.39 The positive business growth areas created by the small wineries in rural and regional areas has helped retain family cohesiveness, as quite highlighted by the Shire Clerk of Augusta-Margaret River, when he stated that:

The job opportunities created by the industry is a godsend to our area. As with most country towns, many young people leave for the city to find work, however, I know of at least five families that have been able to have their children placed in industry work. It is important to those families to retain a close family liaison, and having work for our youth is very important to the area. [20]

The Health Benefits of Wine

2.40 The Federation cited The Preventative Paradox Theory of Ledermann and Kreitman (1986)In 1986, in which Norman Kreitman proposed that although the individual risk of alcohol-related harm is small for moderate consumers, their contribution to “external costs” (defined below) of alcohol consumption is greater than that of heavy consumers because there are more of them [21]. The wine industry maintains that there is a major flaw in the Kreitman analysis as it completely ignores the health benefits associated with alcohol consumption.

“External costs” are those costs that are imposed on the broader community as a result of the production/consumption of particular goods. The loss of life and pain and suffering endured by victims of road accidents caused by drunk drivers are typically regarded as external costs associated with alcohol consumption. [22]

2.41 There is considerable evidence that wine and alcohol consumption in moderation confers positive health benefits. Research on the benefits of alcohol consumption is still evolving. A list of conditions [23] where evidence indicates that there may be a positive link is detailed below:

• Reduction in the level and risk of cardio-vascular disease and in overall mortality
• Reduction in the level and risk of occlusive cerebro-vascular disease
• Alzheimer's disease
• Bone mineral density
• Certain cancers
• Chronic obstructive lung disease
• Diabetes
• Disorders of the immune system
• Gallstones
• Gastrointestinal diseases
• Rheumatoid arthritis
• Age-related visual impairment.

External costs are those costs that are imposed on the broader community as a result of the production/consumption of particular goods. The loss of life and pain and suffering endured by victims of road accidents caused by drunk drivers are typically regarded as external costs associated with alcohol consumption. [24]

2.42 In Australia, death from cardiovascular diseases accounts for approximately 25% of all deaths. The risk factors for coronary disease include diet, exercise, blood pressure and cholesterol concentration. Recent research indicates that the regular and moderate consumption of alcohol may significantly reduce the risk of, and death from, cardiovascular diseases such as coronary heart disease, by 20% to 50%. This protective effect is observed for both men and women, and is irrespective of ethnicity and geography. It is the ethanol component common to all alcoholic beverages, which reduces both blood pressure and cholesterol concentration [25].

2.43 Recent research has also indicated that the relationship between the level of consumption and risk of death from coronary heart disease is J- or U-shaped, such that a reduced risk is observed for moderate consumption, but an increased risk is observed for abstinence and heavy consumption.

2.44 Wine also contains wine-specific compounds, such as phenolics. In other dietary foodstuffs, these phenolics are antioxidative and are associated with a reduced risk of death from coronary heart disease. Some studies suggest, therefore, that wine may confer additional antioxidative protective effects.

2.45 The lifestyle characteristics of wine consumers, which include the amount and pattern of alcohol consumption in addition to diet and exercise, are integral to any protective effects for coronary heart disease. It is only regular and moderate consumption that has a beneficial health effect, where all other amounts and patterns of consumption may be a harmful health effect.

2.46 When taking account of the potential benefits of alcohol consumption, the net external cost of alcohol consumption, as stated by Collins and Lapsley, is potentially significantly overstated. The net cost could be as low as $2 billion. Furthermore, this figure still includes some “internal costs” (defined below), as specified by the Tasman Institute [26].

"Internal costs” are those costs which are borne by the producer/consumer of the product in question. In the case of alcohol consumption the effects of a hangover or damage to a drinker's vehicle attributable to his/her actions while driving under the influence of alcohol are generally regarded as primarily private costs. [27]

2.47 No significant studies have been undertaken which adequately measure all the benefits of alcohol consumption. Until all health benefits of alcohol consumption have been determined and evaluated it is inappropriate to base public policy decisions on questionable data.

2.48 On the issue of taxing options, the Independent Winemakers Association (IWA) told the Committee that a price based wine equalisation tax (ad valorem tax) does not address public health or the welfare of minority groups. [28] IWA argued that the Committee should apply the same socially responsible tax logic to cask wine as that which applies to beer, so as to encourage the production of low alcohol, less toxic beverages.

2.49 IWA also noted that cask wine is a prime cause of alcohol abuse, costing taxpayers $4.7 billion annually. Cask wine therefore is seen as an enormous cost to society, as well as the prime cause of human distress, through health problems, serious accidents, family breakdowns, unemployment and alcohol related offences. [29] IWA claims that taxation on alcohol content will reverse this trend.

2.50 Professor Timothy Stockwell of the National Centre for Research into the Prevention of Drug Abuse, also told the Committee that influencing the price of alcoholic beverages comes up regularly as being most effective in preventing adverse health outcomes and road crashes. He also noted the correlation between cask wine consumption and the increase in assaults, violence and hospital admissions. The Committee also heard that if an average drinker substituted a low strength beer for one full strength beer each week, there would be 157 fewer hospital admissions for injuries and 172 fewer night-time assaults [30]. In the case of cask wine, these figures are slightly lower but paint a similar picture.

2.51 Associate Professor Dennis Gray, also from the National Centre for Research into the Prevention of Drug Abuse, highlighted the appalling state of health of Aboriginal people as a result of high alcohol consumption.

Alcohol makes a significant contribution to the ill health of Aboriginal people, and mortality and hospital morbidity rates for Aboriginal people are over twice as high in all categories in those areas to which alcohol contributes. Particularly in remote Australia, cask wine has been identified as a particular problem by Aboriginal groups. [31]

2.52 Professor Gray advised of attempts in Tennant Creek and Derby and Halls Creek in Western Australia to control the availability of cask wine through liquor licensing legislation. He urged the Government to assist Aboriginal people to deal with alcohol related problems through the taxation system. He also mentioned the efforts by the Northern Territory government in introducing a levy on cask wine. This resulted in a significant drop in consumption of cask wine.

Alcohol Abuse versus Alcoholism

2.53 Alcoholics are not usually discerning as to the type of alcoholic beverage they consume. Therefore it can be assumed that increased alcohol prices will merely affect the type and not the volume of consumption by alcoholics. Increased alcohol price will, therefore, not decrease the alcohol consumption of an alcoholic. Furthermore, the costs associated with alcoholism are generally significantly different to those associated with alcohol abuse.

2.54 There are three main classes into which policies directed at alcohol abuse can be categorised – control policies, taxation policies and information programs.

• Control policies involve placing some form of restriction on the manufacture, distribution and/or sale of alcohol beverages. For example, The minimum legal drinking age of 18 is a control policy.
• Taxation Policies are used to increase the price of alcohol relative to other goods and services, thereby reducing consumption. Implicit in the motive for using taxation as a blanket means to curb abuse, is the premise that all alcohol consumed contributes equally towards abuse.
• Information Programs aim to prevent the incident of alcohol abuse, by relying on educational approaches at targeted consumers.

2.55 Whilst control policies and information programs can be targeted towards particular risk categories (eg under 18's), the use of taxation can not. Taxation is a blanket measure applied to all users. Using taxation as a measure to curb alcohol abuse is an extremely blunt instrument in situations where consumption at moderate levels (as defined by the National Health and Medical Research Council, NHMRC) is the norm. Furthermore, it is inequitable, in the sense that a punitive tax is applied to the majority to pay for the excesses of the minority. [32]

2.56 In addressing the effectiveness of using taxation to target alcohol abusers, it is therefore important to understand the incidence of abuse amongst consumers of the respective alcohol products.

Alcohol abuse levels

2.57 Measuring alcohol consumption on a weekly basis, abuse levels as defined by the NHMRC, and as reported by the ABS, were 21 % for males and 14% for females. This means that 21% of males and 14 % of females, based on their weekly alcohol consumption, would be considered at some risk from their regular alcohol intake:

National Health Survey First Results. Australian Bureau of Statistics, December 1996 Cat no 4392.0

2.58 By implication all consumers, despite the fact that only around 20% consumed at significant risk levels, would pay for a punitive tax which is aimed at recovering the full costs of alcohol abuse. These results demonstrate that applying tax increases on alcohol to curb alcohol abuse is an extremely inefficient (and ineffective) means of delivering the desired outcome. 80% of males and 86% of females are expected to pay a punitive tax to pay for “abuse” when their consumption levels fall within accepted moderate levels, and in fact are providing a net beneficial effect [33].

Differentiating Wine from Other Alcohol Products

2.59 Data generated by the ABS, AGB McNair and the News Limited Survey indicate a significant difference between the consumption behaviour of the different alcohol groups. This difference is evident across age categories, in relation to food consumption and most importantly, when measuring abuse levels. The evidence points to a lower incidence of wine abuse compared to that of beer and spirits.

Alcohol Consumption with Food

2.60 With respect to consumption patterns, bottled and cask wine is primarily consumed with or during food consumption – 77% and 50%, while beer and spirits are primarily consumed without food (88% and 93%).

Alcohol Consumption by Age

2.61 The health costs associated with alcohol consumption are highest amongst higher intake groups. Alcohol related health costs are magnified where intake is sporadic but excessive, for example when there is `binge drinking'. Whilst `binge drinking' is not confined to one particular group in the population, the incidence of `binge drinking' is believed to be highest in the under-25 age category or youth market:

News Limited Readership Survey

2.62 Both the AGB McNair research and the News Limited Readership Survey point to a much higher incidence of beer and spirit consumption in the under 25 age group, and particularly in the under 18 age group. Wine is not the preferred beverage of youths. In the 14 – 17 age group less than 5% of the population consume wine.

2.63 In the 18 to 24 age category, 44% of the population consumed beer and 34% consumed spirits. 16% consumed bottle wine and 9% consumed cask wine.

2.64 This data demonstrate the magnitude of the difference in youth consumption of beer and spirits compared with wine. The data gives insight into the preferred alcohol beverage of youths and gives significant insight into the likely preferred alcoholic beverage of youth binge drinkers.

2.65 The Australian wine industry does not deny that alcohol-related problems constitute a serious public health problem. However, the statistics presented above unquestionably distinguish wine consumers from consumers of other alcoholic beverages which, by implication, indicates that wine is not a primary substance of abuse. [34]

2.66 With the unquestionable benefits of wine consumption, the Federation claims that wine cannot be attributed an equal share of the alcohol-related problems in Australia. It also recommends that increased taxation on wine will not serve to discourage consumption. Furthermore, to warrant an increase in the taxation impost on the wine industry there would need to be clear and unambiguous evidence of the external costs of wine consumption. There is no such evidence [35].

Arguments in favour of WET

2.67 The Federation supports a policy position of implementing a Wine Equalisation Tax (WET) to replace the difference between the current 41 percent Wholesales Sales Tax and the proposed GST, which amounts toresulting in a revenue neutral position. Therefore, the major influence of taxation reform on the Australian wine industry will be the rate of the WET applied to wine.

2.68 The Federation estimates that the level of the WET required to raise the same amount of revenue, as under the Wholesale Sales tax regime is a maximum of 24.5%. This level will be critical for the continued viability and competitiveness of the industry and as long as the rate of the WET is such that there is no increase in the tax burden on the industry, the industry can and will accept this position.

2.69 According to research undertaken by Wittwer and Anderson (1998) a Goods and Services Tax will maximise national economic welfare. Their modelling suggests with a GST rate of 10 percent and if the current tax on wine is replaced by a Wine Equalisation Tax, national economic welfare will be raised by more than $100 million per year.

2.70 Whilst supporting the design of the proposed WET, the Federation has rejected the proposed 29% rate and the proposed inclusion of wine used for samples and other promotional activities. This is estimated to cost 500 jobs. [36]

2.1 The Australian wine industry agrees with the Business Taxation Review that the current tax system is complex and “ad hoc” due to:

• the absence of transparent objectives and principles underpinning design of the business tax system leading to ad hoc policy;
• an unsatisfactory process for implementing tax policy design within that system; and

an inefficient and distortionary existing indirect tax system in Australia that is clearly antiquated and inequitable.

2.71 The Federation told the Committee that the Australian wine industry has been subject to higher levels of taxation than most other Australian industries, and to an array of taxation measures leading to high levels of investment uncertainty particularly for smaller producers and/or new entrants to the industry. Under the current tax regime, there are two reasons why wine has been subject to above-average taxation.

• First and foremost to raise government revenue, based on the assumption that alcohol consumption levels are less responsive to price changes than most other products. (The 10-14 per cent Business Franchise Fees formally imposed by the State Governments on wine sales is a good example of this.) Consistent with this assumption is that the demand for wine is relatively unresponsive to price rises. However, the majority of cask wine is price elastic. Therefore, tax increases will impact disproportionately on the industry with the cask wine sector receiving the greatest impact.
• Secondly the high taxation levels are to discourage excessive consumption of wine on the grounds that alcohol abuse can lead to high social costs. This argument is complicated in the case of wine consumption, where there is an increasing body of evidence that suggests moderate consumption is beneficial to an individual's health and can therefore reduce the cost of health care.

In addition, for the same reason that wine is attractive for revenue raising means that taxation to reduce consumption is unlikely to impact on the small number of individuals who abuse wine consumption. [37]

2.1 On the broad macro-economic front, the Federation recognises a number of positive factors affecting the outlook for the Australian wine industry under taxation reform including:

• higher disposable income levels (associated with the income tax cuts) to increase both savings and consumption;
• increased savings to benefit capital intensive industries, the wine industry being one, by increasing availability of resources for investment; and
• increased consumption expenditure will potentially increase wine sales, particularly bottled wine as bottled wine sales are strongly correlated to movements in household disposable income). [38]

Argument against the WET

2.72 Competition is fierce in the international wine market. California, Chile and South Africa are making inroads in the traditional markets dominated by France, Italy and Spain. If Australia is to maintain its growth into the millennium, it requires a stable business environment that does not place the Australian producers at a competitive disadvantage on our export markets. A tax based on clear unambiguous policy is the cornerstone for such a business environment.

2.73 Some sectors of the industry, especially the smaller wineries that are currently marginal under the existing tax regime, expressed a preference for a GST only. This issue is particularly critical to these operators as the tax burden on the Australian wine industry is estimated to increase substantially according to the Treasury documentation under the reform package. Tax on a four-litre cask is estimated to increase by around 15 per cent; tax on a medium priced bottle by around 22 per cent; and tax on a premium bottle of wine by around 17 per cent. [39]

2.74 The Victorian Wine Industry Association, in particular, is advocating a “GST only” taxation policy for Australian wine on the basis of four key factors [40]:

• The Government's proposed GST/WET policy will significantly increase the tax burden on Australian wine from around $500 million to $700 million. This is expected to result in a 1.9% increase to a 4 litre wine cask and up to 7% on premium table wines. This will adversely affect industry viability and directly undermine the industry's domestic market revenue which aid regional development.
• Under the GST/WET proposal the tax rate on our product will rise and disadvantage small winegrape growers in the market place. An example [41] is:
• Currently
• Wholesale price $6.50
• Wholesale Sales Tax @26% (41% less State 15% rebate) $1.69
• Retail margin $5.81
• Final Sales Price $14.00
• Proposed
• Wholesale price $6.50
• WET @29% (41 % less State 15% rebate) $1.89
• Retail margin $5.81
• Retail Price pre GST $14.20
• GST10% of retail $1.40
• Final Sales Price $15.60
• Total tax is now $3.29 vs $1.69 on cellar door sales. A move from 26% to 49.3% on production costs.
• Australia's 900 small winemakers will suffer as their products are premium priced, and are already facing unavoidably high costs on a large number of indispensable imported winery inputs (including cork, oak and winemaking equipment) flowing from the low Australian dollar. The economies of scale which larger winery enterprises benefit from and the ability to readily match increased input costs through the generation of additional wine export income made possible by the relatively low Australian dollar, are benefits which are not available to small winemakers. [42]
• Australian premium wines already attract the highest levels of domestic wine tax in the world. Australian producers therefore are at a competitive disadvantage to their major international competitors in France, Italy, California and Chile. The GST/WET tax regime will further diminish Australian winemakers' competitive base. [43] Victoria's predominantly small winemakers, for instance, do not believe that they can simply absorb or pass on to consumers another increase in wine taxation, without a detrimental effect on their sales revenue. Taxation relief is required if the majority of Australian winemakers are to continue to invest in the industry and to feed the growth in wine exports.
• The Government's plan will erode the wine industry's ability to fund export development from domestic market revenue. The industry's vision of developing into a $4.5 billion industry worth generating $2.5 billion of Australian wine exports (per year) by 2025 will be undermined, as will the significant dividends to the Australian economy provided by regional development through the wine industry [44].

The 2025 Vision has been widely acknowledged by Government and industry as a well research, measured and achievable blueprint for the future growth of the Australian wine industry. It has subsequently led to State Strategic Plans being developed in Western Australia, South Australia and Victoria, all of which endorse the settings of the industry established in the 2025 Strategy document. [45]

Anomalies arising from the WET Bill

2.75 In a supplementary submission the Distilled Spirits Industry Council of Australia Incorporated (DSICA) noted that the WET Bill in its proposed form, gives rise to a number of anomalies. These anomalies are:

• the undermining of the designer drinks policy foreshadowed in ANTS for all alcoholic beverages (other than wine and beer) of less than 10% alcohol content as a result of :
  • an unintended loophole for cider derivatives and cider-based designer drinks;
  • a possible precedent for lobbying by brewers for further exceptions to the designer drinks policy;
• the unintended application of the WET to cider derivatives or cider-based new age drinks that were not intended to be taxed under the WET system; and
• the unintended application of the WET to wine-based creams which imitate spirits and liqueurs.

2.76 DSICA makes the following recommendations on the treatment of wine in relation to the WET Bill:

• volumetric wine tax: DSICA strongly recommends the imposition of a volumetric tax on wine;
• tighter cider definition: that amendments be made to the definition of cider to ensure that only traditional cider is covered by the WET. The definition of cider must be tightened along the lines of the UK excise system to ensure that cider derivatives and cider-based designer drinks will be subject to excise under the designer drinks policy, and will not be covered by the WET;
• exclusion of imitation spirits: that the WET Bill be amended so that the Government's decision to include 70% wine-based products in the WET does not extend to wine-based products that seek to imitate spirits or liqueurs. [46]

An Alternative Wine Taxation Policy

2.77 The VWIA proposal of a 10% GST only taxation policy represents a modest reduction of the equivalent of 4% in Wholesale Sales tax – or a return to the level of wine taxation applied by the Keating Government in the first of its 3 tier tax increases on wine, implemented in 1994. This would bring Australia broadly in line with our major European competitors.

2.78 The VWIA submits that it is appropriate that the Federal Government pass on the benefits of a new flat taxation system on all goods and services to categories of products such as wine which are currently highly taxed.

2.79 The VWIA submits that the Federal Government not use the current total taxation load (parity) figure of 41% equivalent Wholesale Sales Tax as the basis on which total GST and Wet tax load on wine is equated, because it includes the additional 15% WST Surcharge being levied on behalf of the States. The Government's proposed WET/GST will increase the total wine tax rate to a 46% This level will be critical for the continued viability and competitiveness of the industry and as long as the rate of the WET is such that there is no increase in the tax burden on the industry, the industry can and will accept this position equivalent rate of Wholesale Sales Tax; compared to the current 41%.

2.80 Instead the true Federal Tax level of 26% WST should be the current starting point for consideration of the rate of wine taxation. The 15% WST State Rebate must be excluded, as this is a tax raised in lieu of State Franchise Fees. As the State taxation rebate must be negotiated with each State Government individually, and is not guaranteed by the Federal Government, it should not be grossed up as part of the Federal Government's taxation base on wine. To do so would be to establish a significant potential windfall gain for the Federal Government to the detriment of the wine industry, should the States not choose to pass on the rebate to wineries from GST receipts.

2.81 IWA's volumetric proposal comprises four elements:

• A direct WET on deemed alcohol content. Based on the ad valorem WET at 29% of wholesale price and a 10% GST, IWA believes that it can estimate the equivalent volumetric rate needed as dollars per deemed litre of alcohol. IWA's calculations are detailed in their submission. [47] Based on these calculations, IWA proposes a GST rate of $11.00/lal, projected to raise $705 million.
• Deeming of alcohol contents. The suggested approach here is to tax unfortified wines simply on wine volume, or alternatively on alcohol, where all wines are deemed to have the same alcohol content.
• Low alcohol incentive. IWA suggests exempting the first 2.0% in wines with less than 6.5% alcohol.
• Phase-in over five years. Volumetric taxation allows a simple approach through deeming of alcohol content. IWA proposed that in year 1 all unfortified wine in containers of over 1.5 litres be deemed to contain 6% alcohol, rising by 1% each year to reach the full 10% in year 5. [48]

Footnotes

[1] Submission No.938.

[2] ANTS, p.87.

[3] ANTS, p.88.

[4] Submission No. 386B.

[5] Submission No. 1437.

[6] Submission No.938C.

[7] Submission No.938C.

[8] Submission No.938C.

[9] Submission 938.

[10] “Wine Taxation in Australia:1”, Review of CIES studies by Wittwer and Anderson.

[11] “Wine Taxation in Australia:1”, Review of CIES studies by Wittwer and Anderson.

[12] “Wine Taxation in Australia: 2”, A Proposal by the Independent Winemakers Association for Volumetric Taxation Based on Alcohol Content.

[13] “Wine Taxation in Australia :2”, A Proposal by the Independent Winemakers Association for Volumetric taxation Based on Alcohol Content

[14] Regarding The Future System for Taxation of Australian Wine, April 1999.

[15] Submission No.1322.

[16] Submission No.1322.

[17] Submission No.1322.

[18] Submission No.1322.

[19] Submission No.1322.

[20] Submission No.1322.

[21] Submission No.938.

[22] Submission No.938.

[23] Submission No.938.

[24] Submission No.938.

[25] Submission No.938.

[26] Submission No.938.

[27] Submission No.938.

[28] Evidence TAX 1304.

[29] Evidence TAX 1305.

[30] Evidence TAX 1311.

[31] Evidence TAX 1312.

[32] Submission 938

[33] Submission 938.

[34] Submission 938.

[35] Submission No.938.

[36] Submission 938C.

[37] Submission No. 938.

[38] Submission No. 938.

[39] ANTS, p88. How is this calculated?

[40] Submission No.1437.

[41] Submission No.1441.

[42] Submission No.1437.

[43] Submission No.1437.

[44] Submission No.1437.

[45] Submission No.1437.

[46] Supplementary submission No. 643A.

[47] Wine Taxation in Australia: 2. A Proposal by the Independent Winemakers Association for Volumetric Taxation Based on Alcohol Content

[48] Wine Taxation in Australia: 2. A Proposal by the Independent Winemakers Association for Volumetric Taxation Based on Alcohol Content