Today the Abbott government announced it has asked Treasury to prepare a discussion paper on the Wine Equalisation Tax (WET) as part of its White Paper tax review.
When it comes to alcohol Australia’s tax rules are some of the most complex in the world, as outlined in the discussion paper on the Australian taxation system recently released by treasurer Joe Hockey.
In this guest post by Paul Evans, chief executive Winemakers’ Federation of Australia, wine is not like other alcohol and shouldn’t be treated as such when it comes to tax. And when it comes to being a wine-producing nation, no country’s taxation, other than New Zealand, hits its winemakers as hard as Australia.
There’s a misperception that wine, beer and spirits are all the same and should receive the same tax treatment.
Such an argument is fundamentally flawed. Wine is different.
The upcoming tax review will give our nation’s winemakers and grape growers an opportunity to show just how much difference there in fact is – our socio-economic footprint and unique product range are the obvious two stand outs. The Australian wine industry has, after all, earned a reputation for being one of nation’s most significant, globally competitive industries. It is unique. It also faces challenges.
The way wine is produced, its path to market and the commercial and structural challenges in front of it, all place our local wine industry in a league of its own and justify why wine has differential tax treatment.
Australia is already one of the highest taxed wine nations in the world today. Other wine nations are taxed much less and some enjoy heavy government subsidies that protect their lucrative local markets.
Analysis commissioned by the Winemakers’ Federation of Australia shows Australia’s 29% WET on premium wines (eg $12 rrp) are one of the most highly taxed. To compare, France has 0.8%, Italy 0%, Spain 0%, Argentina 0%, Chile 15%, South Africa 3.8% and the United States 6.6%.
If we express this as 22 cents per standard drink, it doesn’t get any better. While it’s just under New Zealand which is 26 cents, it’s zero in Argentina, 3 cents in South Africa, 5 cents in the United States, just 1 cent in France and zero in the other Old World wine-exporting countries.
Meanwhile, Australian wine makes a valuable economic contribution, especially to our regions. In dollar figures, wine accounts for around $1.77 billion in 2013-14 and is expected to increase at an annualised rate of 4.3% (vs. annualised GDP growth of 2.5%). Spirits contributed around $130 million with an expected annualised increase of 3.3% (vs. annualised GDP growth of 2.5%) and beer contributed around $1.17 billion with an expected annualised increase of 0.5% (vs. annualised GDP growth of 2.5%).
A big employer
The Australian wine industry also employs large numbers of people – 16,122 jobs in 1,867 businesses. That’s higher than the spirits industry which has some 800 jobs in 55 businesses and beer with 3,918 jobs in 228 businesses.
I should mention wine’s role in tourism too. Tourism Australia reports international wine visitors for the year ending September 2014 accounted for 696,602 visitors, or 11% of total visitors to Australia, and $4.9 billion. Domestic visitors increased 7% on the previous year, spent around 15.7 million visitor nights, or 5.2% of total tourism, and contributed $3.3 billion.
Australian wine producers face unique commercial and structural challenges which again reflect why wine is taxed the way it is.
Wine is more capital intensive in most stages of the supply chain. For example, wine’s fermentation equipment/machinery is used two to six cycles a year compared to beer at around 50 cycles a year in a commercial brewery.
Wine’s maturation can range from 2.6 months to 16 months, whereas storage of beer can be from one to six weeks, and typically one to two weeks for commercial brewing.
Between bottling and selling, wine needs to be stored before it gets ready for sale, from one to three years in a cool storage. To compare, beer is sold after bottling.
Wine’s supply chain is also less flexible than beer since it only has a once-a-year production that needs to be crushed in six to eight weeks, with grapes usually located near wineries but the latter usually some distance away from market.
Profits in the wine industry are 5.3% of total revenue compared to spirits at 11.8% and beer at 16.1% – one of the most profitable manufacturing industries in the world today.
Earnings fluctuate with changing input prices, such as grape supply and other costs. Wine industry purchases account for an estimated 62.8% of revenue, labour costs an estimated 17.2% and depreciation at around 4.5%. When we talk about purchases we need to include all packaging materials as well as wine for blending, fortification or distillation, grape juice and grape spirit and sugar, to name a few.
Strong competition within a highly consolidated retail market also places significant downward pressure on wine margins and profits. We know the retail price increases on wine has lagged CPI for over five years, unlike the above-CPI price rises experienced by other alcohol segments.
As the least consolidated alcohol manufacturing sector, wine cannot leverage economies of scale and command the kind of margin that that other segments can especially those in global supply chains. Take the four largest Australian wine producers – they account for 40.8% of industry revenue compared to the top four spirits producers at 65% and the top two major beer manufacturers at 82.7%.
An export industry
Australia is a net wine exporter, with export revenues at around $2 billion per annum compared to spirits at $168.3 million and beer at $51.2 million. And this can, as we have seen most recently, push wine earmarked for export back onto the domestic market when global economies tighten and competition gets fierce, not just overseas but on the domestic market as well when we have a tide of competing wines on retail shelves alongside our own.
The Australian wine industry also pays levies/charges on wine/grapes which other segments do not. There’s the grape research levy, the wine export charge and the wine grapes levy. These industry levies/charges are important and fund marketing, R&D and plant health programs. As of 2012-13, the total levy receipts from the grape research levy, wine grapes levy and wine export charge amounted to $17.12 million.
Needless to say, profit margins across the Australian wine industry are expected to be approximately 5.4% in 2014-15 – significantly lower than the average profit margin of the beer and the spirit manufacturing industry of 16.0% and 13% respectively.
Over the last three years, the average level of invested capital required to generate a dollar of profit for wine is approximately $11.
Using the IBISWorld score, the wine industry has the highest overall risk among alcohol producers at 6.27 out of 9 which is due to high levels of structural and sensitivity risks. Wine’s risk rating is higher than the average risk score for all Australian industries and the manufacturing sector. Issues at play are structural risk factors including high level of competition, decreasing exports, high level of revenue volatility due to changes in grape supply, prices and even the weather, and that’s not even mentioning the influence of intra-industry competition. Both spirit and beer industries have lower volatility risks by comparison.
So there you have it – the Australian wine industry for all its incredible value laid bare because of global trading terms, production challenges and risk. But what a product it is – worth fighting for and definitely justified in receiving its different tax rate.