Federal Government taxation policy is a key factor in shaping Australia’s wine industry. With the Henry review of taxation being progressively leaked, the wine industry is anxious to know its fate. Jeremy Oliver, a leading wine writer and close observer of the industry, believes there is a sensible course for Government and industry to follow.Misinformation, rumour and poor research dominate speculation about possible tax changes facing the Australian wine industry. A straightforward examination of the possible scenarios is overdue.Other than paying the mandatory 10% GST, most Australian wineries do not ultimately pay tax on wine sales. In fact, about 95% of all wine tax is paid by about 40 wineries, leaving around 2400 entirely in the clear. Unsurprisingly, the few that pay the lion’s share feel unfairly disadvantaged. The so-called Wine Equalisation Tax (WET) was an example of making a bad mistake even worse. It was introduced with the GST to ensure the total tax take from wine remained constant throughout the process of tax reform. However, it soon became clear that this 29% tax on wholesale value, which is imposed after the GST, collected $90 million too much. So the wine industry lobbied the Federal Government to give some back Ð and the WET rebate was born. Starting on October 1, 2004, the Government offered a rebate worth a potential $290,000 to the producer for its first $1 million worth of direct sales. In May 2006 this rose to the first $1.74 million of wholesale sales, which pushed the rebate up to $500,000 a year. In other words, the financial fate of hundreds of Australian wineries hangs on a ‰ÛÏlifeline- created by a Treasury mistake. Several nonsensical results arise from this artificial base. Firstly, wineries are able to sell their entire production at cut rates knowing the half million-dollar rebate will follow in full once they achieve $1.74 million wholesale. In other words, producers are motivated to cut their price to retailers to cost Ð or less Ð to score the tax rebate. The result is that medium to large wineries must cut prices simply to compete with competitors surviving only because they are subsidised by taxpayers. They also have to cut prices to match ‘retail exclusive’ brands that have emerged in recent years, most of which owe their existence to rorting of the WET rebate system.In effect, the WET tax rebate distorts the Australian wine market Ð and jeopardises the industry’s future. AUSTRALIA is drowning in surplus wine: the market is oversupplied by at least 100 million cases Ð enough to warrant the removal of up to 40,000 ha of vines, on some estimates. The industry’s three main wine markets Ð Australia, the UK and the US Ð are disaster zones. Our three largest makers Ð Foster’s, Constellation Wines Australia and Pernod Ricard Pacific Ð struggle to break even. Small producers struggle to get into the market at all. Non-contracted grape growers are doomed and those with contracts are worried. In such situations, companies usually merge for survival Ð but this natural selection is not happening with wineries because the WET rebate has prevented dozens of mooted purchases. This reason is that the rebate applies once to a single producer, regardless of how many brands it owns. Big wineries have no incentive to buy smaller ones that are receiving the rebate. So, if Winery A bought Winery B, which had wholesale sales of more than $1.74 million, it would effectively be penalised against its competitors by $500,000 every year. Wineries are not consolidating because of a handbrake on natural business evolution.Three years ago, the Federal Government returned $90 million in WET rebates. In the year ending 2009, the Australian Taxation Office (ATO) collected $907 million in WET and gave back $200 million in rebates, an increase of $110 million. The wine trade has not more than doubled its size in this time but the WET rebate rort has Ð not only by Australian wine retailers and producers but by New Zealanders.Here’s how. A wine producer creates a new brand and registers it as a winery. It then partners with a retailer in an exclusive arrangement, sells more than $1.74 million at wholesale rates, then pings the Australian taxpayer for $500,000! Not surprisingly, the number of NZ wineries has doubled (to about 650) in three years. This is not the only reason Kiwi sauvignon blanc dominates our shelves, but it’s undeniably a factor. And how do we know that Chile and US wineries are not about to start cashing in? The rort is wide open for them. Retailers are not wineries but it seems clear they have taken most of the increase in WET rebates Ð about $50 million a year Ð simply by invoicing their wine-producing partners (Australian or Kiwi) for an allocation of ‰ÛÏmarketing expenses-, which typically accounts for about half the value of the WET rebate. It is easy to argue that the current ad valorum wine tax favours cheap wines and cheap imports, which are stealing market share from local producers. Propping up the industry with a tax rebate not only kills off natural expansion but penalises more expensive bottled wines, the only possible saviour of Australia’s wine export reputation. Let’s explore some of the alternatives. A flat tax for all alcoholic beverages, (reportedly recommended in the Government’s still unreleased Henry review) would be an unmitigated social disaster. It would cause prices of spirits and alcopops to plummet, the price of cask wines to more than double, and increase most bottled wine prices. A bottle of wine that today costs $18 would end up just $5 less than a bottle of spirit that today costs $35, instead of being $17 less as it is now. The inevitable result would be more binge drinking by the young and the vulnerable. That is why the idea is not being taken seriously in Government circles. Another idea is a graded volumetric tax based on alcoholic strength. This would require a series of stepped tax rates: the higher the alcohol, the higher the tax. If imposed, this would make Australia the only country in the world to do it Ð and the tax office the most important influence on our winemaking. An inbuilt flaw is that wine’s alcoholic content varies from season to season. In any given year a winemaker whose shiraz is typically 14% alcohol might end up with a wine at 15% and into the next tax bracket for reasons as varied as seasonal conditions, machinery breaking down, a winemaking experiment or even a mistake. Whatever the cause, the wine would be taxed more, pricing it out of the market. Any variation of technique such as leaving grapes on the vine longer than usual to acquire intensity of flavour could push the wine up to a higher alcoholic strength. To avoid this, grapes would be picked at their usual level of sugar (which equates to the usual level of alcohol after fermentation) to ensure that the maker is not penalised with a higher tax, even if the wine is not as good as it might have been. In this example, the tax office would directly influence the quality of an Australian wine by determining when fruit is harvested. There’s another problem here: the alcoholic strength of a bottled wine can change with time. Alcohol can evaporate from bottles. Fortified wines in wooden casks can lose alcoholic strength each year. Imagine if a wine’s alcoholic strength falls from one tax level to another between making and selling.It is impossible to set the incremental steps of alcoholic strength and tax rate correctly to account for the varying circumstances in wine production.In short, this concept is flawed, if not unworkable, because it would create confusion and complexity, increase the paperwork burden on producers and make a wine’s alcohol band as important as its regionality and variety. Excise is sometimes bandied about as a way to tax the wine industry. Excise was originally imposed to regulate and protect a small number of spirit producers. It was never intended to become a means of collecting taxation from 2400-plus wineries. Experts estimate it would take two years to set up a national wine excise tax, at a cost of tens of millions of dollars. If the Government were to follow a similar system for wine that applies to spirits, the wine industry would drown in a tidal wave of record taking and reporting responsibilities. Wineries would require bonded and non-bonded areas and all stock movements would have to be monitored. The potential for confusion would be huge. Wineries already struggling with quarterly WET and GST returns would be required to report every week on stock movements, plus making monthly reports for wine duty. It would be expensive, time-wasting and unproductive. So, what’s the answer?One thing is certain: whatever new tax system is imposed on the wine industry, it will need to maintain existing revenues to Government. A flat wholesale tax of $1.41 per litre on existing domestic wine sales would achieve that Ð if sales stayed the same. A flat wine tax based on volume would disadvantage wine sold in large format packages such as four-litre casks. A cask now retailing for $12.54 would rise to $17.81. If one assumes a 20% decrease in volume sales of cask wine as a result, wine sales are reduced by 26 million litres, and the Government would get less tax. But by increasing the volume tax to $1.47 per litre, tax revenue is equalised. Problem solved.Such a tax would dramatically change the environment in which wine is grown, made and sold in this country. At the stroke of a pen, all the inconsistencies and outright rorting of the WET system would be removed. Australian taxpayers would no longer be supporting imports that hurt our own industry. Instead of the current artificial incentive to make cheaper wine to sell in casks, Australian winegrowers would be encouraged to make better wine, more profitably, without handouts from the taxpayer. Our industry desperately needs this sort of incentive and reward to restore confidence and profitability.Under this plan, wines currently priced below about $8.50 a bottle would become slightly more expensive, while those priced above that could in fact become cheaper if makers and marketers wanted them to. However, in reality it’s unlikely prices would drop, since it is widely understood that the market interprets any fall in a wine’s retail price as reflecting reduced quality.Instead, wine producers are far more likely to increase the wholesale prices of their wines priced above $8.50 per 750 ml bottle to maintain current retail prices. In doing so, they would actually make more money at wholesale than before, although the smaller producers wouldn’t be getting back their WET rebate. The Government would therefore make more money through an increased value of GST per bottle at wholesale, a bonus to the ATO of around $50 million.A producer currently selling a wine at $35 that chose to maintain that retail price after this suggested change in taxation would receive an extra $4.62 (at wholesale) per bottle. This would go a long way towards offsetting the loss of the WET rebate. Also, the producer would get this extra income at the time of sale, rather than through the existing once-a-year rebate. And if the producer’s wholesale sales exceed $1.74 million, they would still be able to keep all this amount.It’s possible that some producers would not do as well, especially ultra-small ones unable to command high prices for their wines and those whose prices are presently kept artificially low in a bid to win the full WET rebate. But a level playing field would be created for all wine producers, all of whom would pay some tax. It’s worth remembering that the WET rebate only existed to patch up a mistake. No Government of any persuasion has had a policy that small wineries should not pay tax. Government does however retain an option to help small wineries with a form of cellar door tax deduction as a regional tourism rebate.A flat volume tax would for the first time in years give medium-sized to large wine companies the chance to make a reasonable return on investment in quality wine. By increasing the cost of cask wines, it should cut the levels of wine-related alcohol abuse. It would encourage all producers to create a market for quality wine. It would also generate the same tax return per bottle at wholesale for domestic and imported wines. And it would end the WET rorting, saving taxpayers at least $50 million a year.For every bottle of wine that retails for $25 today, about $10 finds its way back to the Government through a raft of taxes. That’s a bigger margin, by far, than the retailer, the wholesaler and especially the producer, whose actual profit is a mere 50 cents for that bottle. So Government presently pockets twenty times more than the producer, yet invests nothing at all. That is not fair, reasonable or sustainable. A flat volume tax is the answer.
