Is Australian Premium Wine Being Taxed Beyond Return?

The Wine Equalisation Tax (WET) continues to burden Australia’s wine industry. Why? Because the tax is charged on the wholesale value, meaning the cheaper the wine, the less tax is paid. Meanwhile, beer and spirits are taxed based on the excise system, with rates of taxation varying by the type and the alcoholic strength of the product. According to the Australian Institute, cheap wine attracts only $3 in tax per litre of alcohol content, whereas bottled beer pays 10 times as much at $35, while spirits are taxed at $80 per litre. Is Australian premium wine being taxed beyond return?

Falling behind overseas competition

Australia’s wine industry is at a disadvantage internationally; it is among the most heavily taxed-wine producing nations in the world. It differs to the policies of old-world wine countries (such as Italy and France) and emerging competitors who impose little wine tax.

For example, an Australian bottle of wine which sells at $12 retail is taxed at 29% ad valorem tax plus GST and is taxed at 22 cents per standard drink; compared to zero in Argentina, 3 cents in South Africa, 5 cents in the US, only 1 cent in France.

From this you can see the WET is tainting the reputation of Australian wines because it discourages winemakers from investing in the quality of their wine, promoting the bulk production of cheap wine; and as a result, Australia is losing the appeal of ‘premium winemakers’ and is falling behind the international competition.

Additionally, the substantial tax rates that Australian businesses have to pay on home soil, means it is harder for winemakers to build and sustain a strong brand at home. A strong brand on home soil is important to establish in order to be recognised and to confidently launch into the global marketplace.

Over the years, one of Australia’s claims to fame is being premium wine producers – however, the bulk production of cheap wines has changed this perception. Wine drinkers in traditional and old-world wine countries know view Australian wine as ‘cheap’ and this has affected Australian exports. For example, there has been a significant drop in the US market of Australian wines, where it once was a $1 billion dollar market it is now around $440 million.

However not everything is gloom and doom, with the recent introduction of the China-Australia Free Trade Agreement (chAFTA) on 20 December 2015, the Chinese wine market is now Australia’s third largest market with a 66% rise in exports last year. Australian suppliers exceeded demand and with the growing Chinese middle class combined with their thirst for red wine and their preference for premium wines; this could be a turning point for Australia’s wine industry.

Misuse of the WET rebate imposes more damage

The original introduction of the WET rebate in 2004 was supposed to support small rural wineries in Australia and regional employment by allowing smaller producers to claim a maximum of $500,000 a year in WET tax rebates.

Arguably, the WET rebate continues to distort the wine industry by allowing inefficient winemakers to stay in business and is subject to being exploited by wholesalers, distributors and virtual winemakers.

Rebate rorting is said to be carried out by companies with complex business arrangements (often used by large wine distributors and wholesalers), to buy subsidised wine from grape growers allowing companies such as Coles and Woolworths to sell wines at shockingly low prices. Further, large companies with complex business structures have also been accused of making multiple WET rebate claims. For example, between 2007 and 2012, claims for the WET rebate increased by 21%, despite domestic sales declining in value and production remaining flat.

This exploitation is impoverishing Australian wine grape growers, and diminishing their ability to add value to their brands because it has allowed uncommercial grapes to be turned into bulk wine and sold as cheap skins and home brands.

Additionally, the WET rebate was extended to New Zealand producers in 2005 as part of free trade agreements; however, this has only caused unfair competition. Over 200 New Zealand wine producers are currently claiming $25 million in rebates under the broader WET scheme. There has been a push from the Winemakers Federation of Australia to prevent New Zealand producers using the scheme, however; this has been rejected because to remove New Zealand from the rebate scheme the government would have had to abolish it entirely.

Cheap wines are a health hazard

The health services have raised concerns of the wine tax, were ‘cheap cask wine at retail is cheaper than bottled water’. Alcohol-related abuse is a significant cost to hospitals, health services and other government expenses such as police. The removal of the WET rebate would increase the production of premium wine, meaning wine would become less affordable and accessible for abuse.

Federal Budget 2016-2017 – Wine Producers’ Rebate Reigned In

The Turnbull Government has recognised that the WET rebate has only contributed to excessive wine grape production, and as a result, the value of Australian wines has plummeted.

The government has proposed to tighten the WET producers’ rebate and the eligibility rules.

From 1 July 2019, in order to be eligible for the rebate a wine producer must own an interest in a winery or have a long term lease and sell packaged, branded wine domestically.

To offset the loss of the rebates, from the 1 July 2016 the government will provide $50 million over four years to the Australian Grape and Wine Authority (AGWA) to promote Australian wine overseas and wine tourism within Australia.

The wine producer’s rebate is currently capped at $500K per annum. From 1 July 2017, the rebate cap will be reduced to $350k and back to $290k from 1 July 2018.

There have also been concerns of the WET rebate being axed altogether. If such an event arose, boutique winemakers would have to raise their wine prices even higher which only makes it more difficult for them to win over consumers. Furthermore, if the WET rebate were to be axed, concerns have been expressed that almost half of Australian wineries wouldn’t be able to continue operating because the rebate has been built into business models and it is now heavily relied upon.

If the new government changes apply to you, please don’t hesitate to contact Butlers Business and Law, and we can help you.