The government’s tax review will determine whether rebates given to the wine industry should be allowed to continue. Photo: Jessica ShapiroWine Equalisation Tax rebate: a rort?
The wine industry is at war with itself. In one corner are the mass producers of lower end table wines that led a cheap Australian charge on the world stage.
In the other, are the top end producers seeking to carve out a premium niche with the attendant price.
Passions run hot on both side sides as there are big dollars at stake and it will fall to the federal government to referee the stoush.
Bruce Tyrrell, a well-known Hunter Valley figure who is a fourth generation member of one Australia’s first families of wine, sums up the federal government’s choice on the wine tax debate pithily: “it would be a very brave government that would say, ‘I am going make cask wine more expensive and Grange cheaper’.”
He may well be right, but his views represent just one side of a debate that’s divided the industry.
The central issue is tax, although it collides with numerous others including the role of government support for an export industry worth $1.8 billion and employing more than 16,000 people across more than 2000 businesses as well as the basic economics of a massive supply glut that has put strain on all players. A divided industry
FARE believes any revenue gained by taxing wine based on volume should go back into drug and alcohol education programs.
The key, and hotly contested, question is whether wine should be taxed at a flat rate based on volume, rather than as a portion of its wholesale price?
This question pits lower-cost wine producers – who prefer paying a lower rate – against the premium-brand producers – who want the mass producers taxed harder.
In a market where 65 per cent of the wine bought in bottles retailed for less than $8, this is a fundamental question.
To demonstrate the depth of the split consider that Accolade Wines – which markets itself as the “world’s leading provider of new-world premium, commercial and value wines” (brands include Hardys and Jack Rabbit)and Wine Grape Growers Australia, which represent more than half of the nation’s 6200 grape growers, want the status quo. They’ve also got Cider Australia (which says that cider, as a fruit wine, should be taxed in the same manner as grape wine) in their corner.
They face off against the country’s biggest wine company Treasury Wine Estates (TWE). Its big brands include Penfolds, Wolf Blass, Rosemount Estate and Lindemans.
TWE is joined by the other big premium brand winemaker, Pernod Ricard Winemakers, which heads the Jacob’s Creek, Wyndham Estate, and Orlando Wines brands.
Another advocate for change to wine taxing arrangements is the Foundation for Alcohol Research and Education (FARE), although its position somewhat differs from the wine companies. FARE believes any revenue gained by taxing wine based on volume, and ending industry rebates, should go back into drug and alcohol education programs. The wine companies say it should go to helping the struggling industry compete in the export market. Cheap wine gets taxed less
Currently, cheap wine gets taxed less than more expensive wine.
This Wine Equalisation Tax (WET) is a tax based on the value of wine and other fruit-based alcohol products, and applied regardless of the amount of alcohol in the product.
All other alcohol products like beer and spirits are taxed on a volumetric basis, with the amount of tax paid determined by the volume of alcohol within the product and the category of alcohol (for example full-strength packaged beer is taxed differently to spirits).
The tax paid per standard drink on a $13 cask of wine is 5¢. Compare that to bottled wine, which is taxed at 15¢ for a $15 bottle of wine, and almost $1 for a $50 bottle of wine.
Pernod Ricard says that for wines retailing at $12, Australia’s rate is more than 40 times higher than France, seven times higher than South Africa and almost five times higher than the United States.
It argues that a change, that would see margins squeezed for some players, would help solve the glut.
“It will have a real impact on forcing uneconomic producers to change their business model or leave the industry,” its submission to the tax white paper says.
Its submission suggests transitional support, and restructuring assistance, to help to winemakers and growers that want out.
Pernod Ricard estimates that at the proposed volume-based rate of $2.20 per litre of wine, the price of cask wine would rise on average by $1.70 a litre.
Such a rate would “not substantially” impact the price of wines sold between $6 and $15 a bottle, but it would stimulate production of premium wines retailing for $15 a bottle or more. Communities would be ‘decimated’
Managing director of Casella Family Brands (behind the Yellow Tail brand), John Casella. Photo: James Brickwood
Overall this would be “revenue neutral” for the government, it says, and will improve the image of Australian wines “damaged by an influx of cheap wine”.
Industry veteran Brian Croser is deputy chairman of Wine Australia, the government body responsible for helping grow the Australian wine market. But he spoke to Fairfax Media in a personal capacity, as the man behind the family wine companies, Petaluma and Tapanappa located in South Australia’s Piccadilly Valley. He says wine has always, and should always, get preferential tax treatment and he hates the idea of volumetric tax.
“A volume-based tax would decimate those communities in the Riverland and MIA,” he says, referring to the Murrumbidgee Irrigation Area in NSW.
Managing director of Casella Family Brands (behind the Yellow Tail brand), John Casella, also believes the issue has been exaggerated.
He says TWE and Pernod Ricard’s argument is that “wine needs to be expensive or no-one will buy it”.
“I mean please, what nonsense,” Casella says.
“If we want people to stop buying Corollas and instead buy Lexus, do we change the laws or do we change the way we market Corollas better? If industry wants people to drink better wine, it should promote it. I cannot believe the time that’s been wasted on this whole tax debate when we should be focusing on selling ourselves and our products to our customers and consumers overseas.”
But the chief winemaker for Jacob’s Creek, Ben Bryant, says the tax system is hurting its ability to do so. “You have a tax structure that favours cheap wine… Unless you complement marketing with a fair tax system, you are not going to address these structural issues.” The end of an industry?
South Australian Liberal Senator Sean Edwards. Photo: Daniel Munoz
Accolade’s submission by its chief executive John Ratcliffe suggests that an increase on the tax on wine “risks devastating the wine industry”.
He says four out of five bottles and casks of wine will increase in price if the federal government imposes a volumetric tax on the industry. “We would expect demand for [affordable] wines to fall dramatically given likely price rises – with significant negative economic impacts in regional Australia, particularly the River Murray related wine producing regions of South Australia, Victoria and New South Wales,” Ratcliffe says.
“The scale of the impacts in those regions would be similar in economic and social outcomes to the restructure of the car industry, with the additional drawback that regional residents have fewer employment options, forcing many to choose between unemployment and leaving the region to find employment, further damaging the already straining fabric of rural communities.”
The greatest impact of increasing the price of cheaper wine will be on pensioners and other battlers who would be forced to give up one of “life’s little luxuries”.
The Winemakers’ Federation of Australia – the national industry body for Australia’s winemakers – has chosen to stay silent (given its members are from both sides of the debate). Its chief executive Paul Evans told Fairfax Media it was a very “divisive” issue.
Wine Grape Growers Australia says that lifting the price of one type of alcohol is more likely to lead to a switch to the next available substitute rather than a reduction in consumption.
The major drivers of cheap wine isn’t tax, its submission says, but rather, retailer market power and promotions. It says the government needs to deal with such issues separately.
“A volumetric tax on wine would be regressive and discriminate against older and generally poorer consumers who would be most affected by the price increase, whereas consumers of luxury wines, generally wealthier, would make gains through price reductions,” it says.
Tyrrell says: “I see no reason why pensioners, who may have a glass of wine a day …should be hit.”
South Australian Liberal Senator Sean Edwards – himself a winemaker in the Clare Valley – says changing the way wine gets taxed is a “big benefit to multinationals and beer distributors” but not to “wine makers and Australian grape growers”.
He says those advocating for change to the way wine gets taxed “are just wage earners”.
“They don’t have family businesses which are generations old,” he says. “I hear the word rationalisation in this conversation all the time – but what does that mean in practice? It means receivers and managers get appointed … it means there is going to be a loss of assets for the industry. … How long before we have no vineyards left because of this rationalisation that the industry is talking about?” The social consequences
In 2013-14, the Government raised $5.1 billion in alcohol tax revenue. Photo: Michele Mossop
The Australia Institute modelling shows that if wine were taxed in the same way as beer, an extra $1.4 billion in tax revenue could be raised each year.
The potential gain is measured both in terms of extra tax revenue, as well as social benefits that can be realised by reducing alcohol-related harm.
The 2010 Henry tax review – which had recommended a volumetric tax rate be applied to alcoholic beverages including wine – argued that it would raise the price of cheap wine, and thereby reduce the costs associated with alcohol abuse.
The Foundation for Alcohol Research and Education (FARE) submission says that the “current alcohol taxation system is illogical, incoherent and does not adequately recognise the extent of harms that result from the consumption of alcohol in Australia”.
It says the WET has contributed to wine being the cheapest form of alcohol available for sale, with some wine in Australia being sold for as little as 24 cents per standard drink and the majority of bottled wine (about 65 per cent) being sold for under $8.00.
“There is strong evidence to demonstrate that the lower the price of alcohol, the higher the levels of consumption,” its submission says. “The WET must move to a volumetric tax rate as a matter of urgency.”
In 2013-14, the Government raised $5.1 billion in alcohol tax revenue (via the tax on beer, spirits and other excisable beverages).
This is despite the economic impact of alcohol on the Australian community costing $14.3 billion, according to the FARE submission, which cites Marsden Jacobs Associates (MJA) research. That research found the total costs of alcohol harm in Australia would be easily in excess of $15 billion per year.
FARE says the alcohol industry has been quick to innovate and “take advantage of the perverse incentives offered by the current taxation arrangements”.
It says spirit-like products such as TriVoski or Divas Vodkat are examples of products that are produced to imitate Vodka, but are actually ‘wine-based.’
“Because these products are taxed under the WET and not at the higher spirits rate, they are able to be taxed as wine and sold at cheap prices,” FARE says. For example, a 750ml bottle of TriVoski containing 13 standard drinks can be purchased for $9.95, equating to 77 cents per standard drink. The cost to the consumer
‘Australians will be economically better off’, says FARE’s Michael Thorn.
FARE chief executive, Michael Thorn, says the WET is corporate welfare at its worst.
“It simply beggars belief that ordinary Australians continue to foot the bill for the significant health and social costs of alcohol, while the majority of wine producers are profiting from favourable tax arrangements that encourage production of cheap alcohol that we know is targeted at, and consumed by problem drinkers,” he says.
Thorn says the price increase for pensioners will be so minuscule that it will not make a difference.
“The vast majority of Australians will be economically better off by taxing wine in a similar way to the way we tax draught beer,” he says.
FARE cites research by Allen Consulting that shows that if the WET is removed and replaced with a volumetric tax rate of $13.03 per litre of alcohol, it would result in an increase in the price of cask wine of 24.7 per cent and a decrease in the price of premium wine of 3.9 per cent.
The research estimates the change would decrease consumption of cask wine by 26.2 per cent or 6.98 million litres of pure alcohol.
However, there would be a 5.1 per cent increase in premium wine consumption, equivalent to 2.2 million litres of pure alcohol, and a substitution towards premium wine from other alcohol types by 1.8 per cent or 0.23 million litres of alcohol.
Total alcohol consumption would drop though, by 2.6 per cent or 4.9 million litres of pure alcohol.
Accolade and Wine Grape Growers Australia says while overall consumption may fall, price rises of one product will not stop binge drinking. Both submissions rightfully argue that those determined to drink will simply move to another product.
Accolade says that education and targeted programs about responsible drinking would be a better response. Tough choices
Bruce Tyrrell sees ‘no reason why pensioners, who may have a glass of wine a day …should be hit.’ Photo: Emma-Jane Pitsch
With wine consumption in Australia already at a 50-year lows, the impact of such drastic change to a tax system that the industry has so long relied on, will be devastating for some players.
As various submissions to the tax white paper noted, wine grape prices have halved over the past 15 years. And the size of the industry has shrunk in value by almost 25 per cent between 2003 and 2012.
In 2014, 84 per cent of Australian wine grapes were produced at a loss. Exports, while improving in some core markets such as China, overall remain subdued.
That leaves a conundrum for the government. Do they kill part of the industry to benefit another? Do they do more damage than good by meddling with the tax system?
Pernod Ricard says “tough choices need to be made if Australia’s wine industry is to achieve its full potential”.
But Tyrrell says if the government changes the system that generations of winemakers have relied it, it will not only destroy them, but local tourism.
“There are 3 million tourists driven to the Hunter Valley every year,” he says. “The small wine makers are an incredibly important part of that. It’s very easy to be pragmatic sitting in an office in Melbourne, but look at the country towns that are growing- they all have a tourism aspect to them. We’ve got to be careful we don’t take that away.”
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