Apr 19 2016
IBISWorld examines the possible effects of changes to alcohol taxes
Ahead of the next federal budget on 3 May 2016 and amidst ongoing debate about taxation on alcohol, industry analysts at IBISWorld have compiled a comprehensive analysis on the current performance of the beer, wine and spirits industries and what a switch to a flat volumetric tax might mean for the sector.
Alcohol production industry performance
Potential tax changes
“An equal 10.0% increase in tax across all alcoholic beverages, combined with a shift to tax wine on a volumetric basis, would result in a decline in total alcohol consumption of 9.4%, and raise $2.9 billion dollars annually,” said Mr Ledovskikh, IBISWorld Senior Industry Analyst, referring to the 2016-17 pre-budget submission by the Foundation for Alcohol Research and Education.
“The current taxation system for alcohol is very complex,” said Mr Ledovskikh. IBISWorld analysts found that there are currently a range of various tax rates applicable to alcoholic beverages across 16 different excise categories in Australia.
“Beer and spirits are taxed on an excise system, with rates of taxation varying by the type and strength of the product,” said Mr Ledovskikh. “However, all wine, as well as traditional cider, is taxed based on its wholesale value.”
“The most common proposal is for a flat volumetric tax on all alcoholic beverages, which has been floating around since the Henry Tax Review,” said Mr Ledovskikh. The flat tax would most likely be equal to the current excise tax rate for full-strength packaged beer. Such a proposal is more likely to be the point of discussion over the next month or so as the long-anticipated election-year budget is handed down.
The discussion surrounding changes to the excise tax regime will also be fuelled by the senate inquiry into the winemaking and grape growing industries. “If such a change were introduced, it would have significant consequences for the alcohol manufacturing sector,” added Mr Ledovskikh. If volumetric taxation is introduced, IBISWorld anticipates the price of bulk wine, draught beer and unflavoured cider without added alcohol or sugar would increase, assuming that the Wine Equalisation Tax is abolished.
Wine Production in Australia has struggled over the past five years under persistent oversupply in both the Australian and overseas markets. “Faced with oversupply and weak prices at home and abroad, many winemakers have struggled to turn a profit. To reduce average fixed costs and maximise their ability to qualify for the controversial Wine Equalisation Tax rebate, winemakers have increased production. This trend has exacerbated existing oversupply problems,” said Mr Ledovskikh.
The current Wine Equalisation Tax (WET) is 29.0% of the wholesale value of wine. Therefore, cheaper wine incurs a lower tax burden by volume despite it having the same alcohol content as its more expensive counterparts.
IBISWorld anticipates that bulk wine producers will see their profit margins decline if a flat volumetric tax is legislated, as their excise tax burden would increase significantly, with cheap wine being taxed at the same rate as premium wines with similar alcohol content. This could help reduce oversupply issues in the domestic market, and strengthen prices. It is also likely, however, to hurt the profit margins of some mid-range wine producers as their excise tax burden increases.
Traditional cider producers, currently beneficiaries of the WET rebate, could lose this eligibility under the volumetric excise tax proposal. Such a move could ultimately increase cider producers’ tax burden, despite the relatively low alcohol content of their products.
“Beer manufacturing is currently in a state of flux. Craft beer is booming, while traditional beer is declining. The craft segment has increased markedly over the past five years, to account for 8.9% of industry revenue, up from 5.7% in 2010-11,” said Mr Ledovskikh.
“Since 2000, the excise burden on low-strength draught beer has declined significantly, while rates applicable to other beers have increased. The biggest increase has been applied to full-strength packaged beer,” said Mr Ledovskikh.
IBISWorld analysts calculated that a can of Carlton Draught or similar (1.4 standard drinks) costs the consumer approximately $0.60 in excise taxes, whereas a pot or middy (1.1 standard drinks) of Carlton Draught would cost approximately $0.35 in excise taxes. However, if consumers choose low-strength beer they will pay approximately $0.05 in excise taxes for a pot or middy, according to IBISWorld analysis.
The Henry Tax Review suggested that a volumetric tax at the current excise tax rate be applicable to full-strength packaged beer. This rate would increase the tax burden of draught beers. Craft beer producers are expected to lose under this system, as smaller breweries rely on draught beer as a higher margin distribution channel that provides much-needed exposure for their products.
“Although wine producers and beer manufacturers have struggled over the past five years, there are some positive signs for spirit manufacturing,” said Mr Ledovskikh.
“There has been strong demand for boutique beverages, such as Tasmanian whiskey, and industry revenue has grown strongly over the period.” These positive signs come despite the challenge to revenue growth posed by falling per capita alcohol consumption and increased health consciousness.
“Spirits incur the highest rate of excise tax per standard drink. The alcopops tax, introduced in 2008, raised the rate of taxation on ready-to-drink (RTD) products to match bottled spirits. A bottle of spirits incurs approximately $22.22 in excise taxes based on 22 standard drinks, whereas an RTD can incur around $1.41 in taxes based on 1.4 standard drinks,” said Mr Ledovskikh.
Non-traditional cider, containing added sugar, flavouring or alcohol, is taxed at the same rate as spirits.
Commenting on the effect of taxation on the alcohol-producing industries, Mr Ledovskikh said: “The effects of any change or changes to alcohol taxes depend on whether a new tax is levied evenly across the various alcoholic products. As with the alcopops tax, an increase in tax on one beverage might lead to substitution, and therefore a redistribution of revenue among alcohol-producing industries.”