Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E5. Alcohol taxation

E5–2 Current taxes on beer, wine and spirits are incoherent

Many Australians enjoy drinking alcohol — around five in six adults drink alcohol each year, though not all drink on a regular basis. In 2007–08, Australians consumed around $12.6 billion worth of alcohol products (ABS 2009b), containing 170 million litres of alcohol (ABS 2009c). Of this, alcohol in beer accounted for 46 per cent of consumption, followed by wine (31 per cent), spirits (12 per cent) and ready-to-drink beverages (11 per cent) (ABS 2009c).

Cnossen (2009) estimated that the costs relevant for calculating alcohol tax rates amounted to around $46 per litre of alcohol when averaged across all alcohol consumed.19 However, effective rates of tax per litre payable on beer and less-expensive wine are significantly lower than this. Premium wines and spirits-based products are taxed more heavily than this benchmark rate.

The current system does not reflect the risks of consuming different products. Chart E5–2 illustrates the variation in taxation for different products, at different levels of alcohol content. Some products are not taxed at all. The wine producer rebate means that wine produced by a small winery pays no net tax. Similarly, inbound duty-free concessions allow adults to bring 2.25 litres of alcoholic beverage into Australia duty free.

Taken together, current alcohol taxes reflect contradictory policies. They encourage people to drink cheap wine over expensive wine, wine from small rather than large producers, beer in pubs rather than at home, and brandy rather than spirits, and to purchase alcohol at airport duty-free stores (see Box E5–3). As a consequence, consumers tend to be worse off to the extent that these types of decisions to purchase and consume, which may have no spillover cost implications, are partly determined by tax.

Chart E5–2: Current effective (specific) alcohol tax by beverage

Chart E5–2: Current effective (specific) alcohol tax by beverage

Note: WET calculated using half-retail method.

Source: Adapted from Ryan (2009), Treasury Estimates.

Current wine tax arrangements distort production

Wine is taxed on its wholesale value through the wine equalisation tax (WET). This tax was introduced, in conjunction with the GST, to maintain a tax treatment for wine roughly consistent with the previous wholesale sales tax regime.

Because wine is taxed on a value basis, wines with the same alcohol content are subject to different levels of taxation. The cheaper the wine, the less it is taxed. As such, current tax arrangements are inconsistent with targeting spillover costs.

Box E5–3: Wine, beer and spirits in the Northern Territory

In Alice Springs, a 2-litre wine cask costs $10.99, which includes roughly $1.59 of wine equalisation tax. An equivalent volume of alcohol in full-strength beer would attract $7.48 in excise, and in spirits $16.45.

Source: Alice Springs supermarket, as at 17–18 August 2009. WET calculated at 29% using half-retail price method, assumes 240 ml of pure alcohol from 12% a.b.v. wine. Equivalent excise rates calculated at 5% alcohol by volume for beer, at $41.06 per litre of alcohol (including 1.15% low alcohol threshold); 40% alcohol by volume for spirits at $68.54 per litre of alcohol.

Moreover, the WET affects the type of products being sold into domestic and export markets. A value-based tax favours cheaper wines that tend to have lower profit margins and are often made by large producers.

The wine producer rebate introduced on 1 October 2004 sought to address this bias in favour of larger producers by shielding the first $1.7 million (approximately) of domestic wholesale wine sales per producer (or group) from WET. The rebate is up to $500,000 per year.

The rebate has created risks for tax avoidance, through 'double dipping' and attempts by small producers to transfer the value of the rebate to larger operators in the supply chain.

The rebate also creates biases between smaller and larger producers. Small producers effectively pay no net WET, but the rebate reduces only a proportion of the WET paid by larger producers. Consequently, an expensive wine made by large producers is subject to higher tax per standard drink than a similar wine made by a small producer. While this provides assistance to small producers, it is inconsistent with targeting spillover costs.

The assistance provided by the WET rebate is poorly targeted. It benefits wine produced outside rural and regional Australia, including wine produced overseas. For example, from 1 July 2005 the rebate was extended to New Zealand wine producers, at an expected annual cost of $9 million for 2008–09 (Australian Government 2005, p. 37). Spending targeted at rural assistance is likely to deliver significantly better value for money to the community.

The wine producer rebate fosters small-scale production and supports some small, otherwise uneconomic wineries. The industry currently reports a widespread grape oversupply and that around half of all wine producers are currently unprofitable. This suggests that resources such as land, water and capital are not being used efficiently. Moreover, the rebate may be acting to prevent an appropriate market response to these circumstances by discouraging mergers within the industry. By supporting uneconomic wineries, the current arrangements are likely to increase the costs of inputs to other wineries that would otherwise be more successful.

Findings

Alcohol is widely enjoyed in Australian society, but some alcohol consumption imposes significant spillover costs. Current tax and subsidy arrangements for alcohol are complex, and distort production and consumption decisions with no coherent policy justification. In particular, the wine equalisation tax, currently designed as a value-based revenue-raising tax, is not well suited to reducing social harm.

Effective rates of tax per litre of alcohol on beer and cheap wine are significantly lower than estimates of average spillover costs, while effective tax rates on premium wines and spirits are significantly higher than these estimates.


19 These calculations are based on data from 1998–99, and represent a lower-bound estimate of average external costs per adult.