Much of the recent argument for the fair treatment by the Australian taxation commissioner of small breweries and their beer, such as in ARCBA’s May 2013 ‘White Paper’, hinges on a thing called the Wine Equalisation Tax, and the fact that much of it, once paid, is given back. Look it up and you’ll find that this tax, called WET for short, is ‘a value-based tax which is applied to wine consumed in Australia’. It applies to ‘assessable dealings with wine (unless an exemption applies) which include wholesale sales, untaxed retail sales and applications to own use.’ But what does that mean? Why does the WET exist? Why is much of it given back after it has been collected? And what does it have to do with beer?
Like the small brewery excise rebate scheme, the wine equalisation tax was a consequence of the introduction of the goods and services tax (GST) in 2000. Immediately prior to the GST, wine was subject to a wholesale sales tax of 41 per cent. The wholesale sales tax on wine was ‘replaced’ by the GST, but, the 10 per cent GST being much less than the WST, the new WET, at 29 per cent, was introduced to make up the difference; to ensure that the retail price of wine, and most importantly taxation receipts, did not fall. Hence ‘equalisation’.
One important thing that initially was overlooked in the transition from WST to GST + WET was the 15 per cent rebate that small winemakers already received under the existing tax system for wine sold through the cellar door, and by mail order, and wine used for promotions and tastings. This oversight was corrected, after much debate and complaint, and with the support of the Democrats; when the A New Tax System (Wine Equalisation Tax) Act 1999 was passed, it provided for a rebate of WET for the first $300,000 of cellar door sales and those other items already mentioned.
Four years later, in an uncharacteristic act of generosity towards an alcoholic beverage industry, the federal government replaced the cellar door rebate with a general rebate of the 29 per cent WET on ALL domestic sales by Australian wine producers, up to an annual limit of $290,000 each, corresponding to a value of wine sales of $1 million. This limit has since grown incrementally to $500,000, corresponding to annual sales of more than $1.7 million. As treasurer Peter Costello explained when he introduced the measure in 2004, it was designed to support small producers with domestic sales.
The wine producer rebate effectively exempted nine out of ten Australian producers from the WET, returning them to the tax-free status that ALL Australian wine producers had once enjoyed. The rebate cost the government dearly; for example, about $230 million in 2009–10, compared to total revenue from WET that year of $720 million. In other words, taking into account the amount rebated, the average WET paid by wine producers in 2009–10 was only about 22 per cent, rather than the nominal rate of 29 per cent. This might not sound like a large difference, but the point is that the vast majority of producers fall under the threshold so effectively pay no WET.
Until 1984, wine had been mostly exempt from the excise duties that for around a century had consistently applied to beer in Australia. In that year, noticing the marked shift away from the consumption of heavily taxed beer, and towards un-taxed wine, new treasurer Paul Keating announced that a sales tax of 10 per cent would be applied to wine and cider from August 1984.
Keating’s August 1986 budget raised the rate to 20 per cent, then in 1993, by which time the treasurer had become the prime-minister, it was raised again, to 31 per cent. Howls of protest against the latter increase, from the industry and from the opposition parties, led to an agreement being framed in October 1993 under which the new rate was quickly reduced to 22 per cent, and an inquiry into the wine industry was conducted. The terms of reference of the inquiry included the development potential of the industry, and the most appropriate form and level of wine taxation. Meanwhile, the WST was raised to 24 per cent in 1994 and 26 per cent in 1995.
The final increase, to 41 per cent, occurred in 1997 as a result of the landmark High Court case that declared state government franchise fees (sales taxes) to be unconstitutional. The loss of state revenue thus threatened was avoided by an arrangement whereby the Commonwealth collected the tax, amounting to 15 per cent, and handed it back to the states. This new arrangement did not increase the overall rate of taxation, it just changed the manner of collection of a part of it. It was the exemption from this state tax for cellar door sales and some other things that formed the basis of the initial WET rebate in 2000.
To say that wine had been mostly exempt from taxation until 1984 invites the question of when and how it had not been. Tax was first imposed on Australian wine in 1930 as part of a general sales tax of 2.5 per cent introduced that year. Noticing that beer was among the various items exempted from the sales tax, the wine makers pressed the government to be given similar tax-exempt status. Perhaps they did not understand that beer was exempted only because it was already subject to the excise, which wine was not. Nevertheless, Canberra was easily persuaded, and in 1931 ‘Australian wine’ was added to the schedule of exempt items.
It was several decades before another tax was imposed on Australian wine. The federal budget in 1970 contained a proposal to place a ‘moderate’ excise of 50 cents per gallon on ‘locally produced grape wine’. This was done partly because of the rising consumption of wine, and the evident profitability of the industry, and partly in fairness to consumers of other heavily taxed alcoholic beverages, notably beer.
This proposal also included an increase of 50 cents per gallon in the customs duty on imported wine, to level the playing field, and a very generous exemption for wine produced at home for private use, up to 400 gallons (about 1,800 litres) annually. At that time, note well, it was illegal in Australia to make any amount of beer at home for private consumption. In a further concession to the wine industry, the excise previously applied to spirits used to fortify wine was to be removed.
The excise on wine was implemented through the Excise Tariff Act of 1970. Metrication altered the rate to 11 cents per litre early in 1972, then later the same year the government once again succumbed to the effective lobbying of the wine industry and agreed to reduce the rate of excise by half, to five-and-a-half cents per litre. This reduction was implemented later in 1972.
In December 1972, a Labor government came to power in Australia, for the first time since the late 1940s. One of the incoming government’s first actions was to remove the excise on wine. This was done immediately through provisions in the excise by-laws, then formalised later by the Excise Tariff Act of 1973. Only some minor categories of artificially sweetened wines remained subject to the excise. The Labor government’s position on this matter had been foreshadowed during debate on the excise reduction in 1972 when Al Grassby, member for the important wine-producing Riverina electorate, sought to have the tax removed altogether.
The new government was keenly aware of the double standard implicit in the elimination of the excise on wine while beer remained heavily taxed, and in the fact that the home manufacture of beer was illegal while making wine for private use was not. In 1973, therefore, it passed legislation to exempt from excise any beer produced for ‘non-commercial purposes’, thus making home-brewing legal for the first time since Federation.
The burgeoning wine industry eventually became too big a temptation for the tax collectors, and could no longer be resisted. It remained tax-free only until another newly-elected Labor government made it subject to a 10 per cent wholesale sales tax in 1984. In a submission to Cabinet in 1983, Keating had recommended the imposition of a sales tax on wine and cider at the rate of 7.5 per cent, but a decision was deferred until the 1984 budget. The matter was urgent, in the treasurer’s opinion, because the states, which were developing ‘a good eye for fiscal gaps’, were expected to ‘move in’ and impose their own taxes on wine.
A consequence of the way in which wine is presently taxed in Australia, on its wholesale value rather than it alcohol content, is that the tax applies disproportionately to expensive ‘premium’ wine over less expensive products, such as cask wine. This means that the cheapest way to buy beverage alcohol in this country at present is in the form of inferior wine, and the most expensive way is in the form of spirits and high-priced bottled wine. Beer, the beverage of moderation, sits somewhere in between.
The WET rebate causes further distortions, some intended and some not. The rebate was designed to assist small producers by shielding them from the tax, but it applies to only a proportion of the WET paid by large producers. Consequently, an expensive wine made by a large producer attracts a higher tax per ‘standard drink’ than a similar wine made by a small producer. This fosters small-scale production, and supports some wineries that would otherwise be uneconomic.
History shows that the present complicated, incoherent and anomaly-ridden system of taxing alcoholic beverages in Australia has developed over many years, as the result of a long succession of ad-hoc decisions. It has become particularly confused in recent decades as wine has been added to the revenue mix, and as the methods of applying excise to beer have been modified to encourage the consumption of low-alcohol forms. If the system has one consistent feature, it is the historically favoured treatment of wine over beer, most evident today in the bizarre double standard that allows a small winery to receive a rebate of the first $500,000 of WET paid, whereas only $30,000 excise is returned to a small brewery. The underlying prejudice against beer in Australia is deeply ingrained, and will not be easily resolved.