WET or weak
Apparently Treasurer Scott Morrison did not hand down a 2016-17 budget on May 3, but a plan for the next decade.
It’s a plan for the richer end of Australian society. The tax threshold has been raised from $80,000 to $87,000, but those earning less than $80,000 receive no income tax relief.
It comes as no surprise that this Government says it expects the deficit will return to balance in 2021. What will be a surprise is if this or any government gets the books to balance in any timeframe. This comment from Michelle Grattan in The Conversation on May 4 could hold the truth:
“This is surely a warning that the next budget of a re-elected Turnbull government, with Morrison as treasurer, would have the axe out in a way that was not possible, for both economic and political reasons, this time.”
Planning for a decade could indicate the Turnbull Government is confident of re-election not only this year, but in 2019 and 2022 as well. There was a time when the budget was for the year but nowadays treasurers and chancellors put forward tax increases that escalate over a period of years.
Treasurer Morrison has done this with tobacco excise and excise-equivalent customs duties through four annual increases of 12.5 per cent per year from 2017 until 2020. The increases will take place on September 1 each year and will be in addition to existing indexation to average weekly ordinary time earnings.
No matter one’s view on smoking, it’s worth remembering that in March 2008, then UK chancellor Alistair Darling introduced a four-year tax escalator under which the duty rate on all alcoholic drinks was set to increase by 2 per cent above the rate of inflation. In March 2010 Mr Darling announced the escalator would be extended for a further two years, to 2014-15.
Returning to this year’s Australian budget, the alcohol focus was on wine. There is to be a reduction in the wine equalisation tax (WET) rebate cap from $500,000 to $350,000. This will be implemented on July 1, 2017, and reduced further to $290,000 on July 1, 2018, with tighter eligibility criteria from July 1, 2019.
The official statement: “Around nine out of ten current claims are for less than $290,000. A phased reduction of the cap will help affected winemakers transition to the new arrangements. Under the tightened eligibility criteria, a wine producer must own an interest in a winery and sell packaged, branded wine domestically. The requirement to own an interest in a winery ensures that the rebate can only be accessed by wine producers who have a stake in the wine industry. This approach addresses stakeholder concerns about ‘virtual winemakers’ accessing the rebate.”
The Winemakers’ Federation of Australia (WFA) recommended restricting the rebate to packaged, branded wine because bulk and unbranded wine product contributes to structured arrangements that exploit the rebate.
At first the theory looks fine, but there are issues. In essence the WFA and the Government have said that to get a rebate a producer needs to have skin in the game, such as a winery. Unfortunately, neither the Government nor the WFA have defined the term “winery”, though Assistant Treasurer Kelly O’Dwyer and Assistant Agriculture Minister Anne Ruston said in their release that “a wine producer must own a winery or have a long-term lease over a winery and sell packaged, branded wine”. Packaged, branded wine is in containers (bottle or bag) of five litres or less.
This is something that concerns Tim Cox, director of Cox Wine Merchants, whose brand is Allegiance Wines. Cox has wines made for his brand at various wineries around the country. Will he have to build or buy a winery and ship grapes or juice to that point to have wine made?
Cox says investing in a winery would be beyond his means, and the same would apply to many others in his situation. The need to do so would drive these smaller and honest brand owners out of business, leaving the field for the biggest companies and those small wineries that make their own wine.
Many wineries take on some contract winemaking. Will this disappear, reducing their income?
David Hutton, general manager, wine operations, at Vinpack, part of the Woolworths-owned Endeavour Drinks Group, which provides contract winemaking, says the rebate doesn’t affect the company own brands as they max out the rebate in the first couple of weeks.
On contract winemaking he says: “I can’t really give you a wider read as we aren’t privy to the amount of rebate claimed by growers or producers who use our packaging services. Equally unpredictable is how producers/growers who presently max out their rebate will respond to the reduction.”
As far as losing the ability to claim WET rebate, Cox says should it happen to him it will leave him treading water and restrict growth.
How will a change in WET affect various parts of the industry?
The WFA Expert Report says: “ATO data shows 214 entities received 70 to 100 per cent of the full rebate in FY12. The WFA estimates this accounts for $88 million (29 per cent of total WET rebates paid in that year). It also shows there were 1411 recipients of less than $100,000.”
Of those top 214 it’s probable 14 or so are so large the WET is immaterial, and the 1411 that claimed less than $100,000 will not be affected. But the 200 remaining could be badly hurt, losing $150,000 from the bottom line in FY2017 and $210,000 in FY2019 and beyond. It’s not something they could bear. The answer could be in renewed export effort.
When TKR discussed this issue with one knowledgeable in the ways of the Australian wine industry they privately made this comment: “My other take is that this may well motivate a chunk of the industry to look at their new tax bill and compare it to what it might be under a revenue-neutral volumetric.”
Some of those 200 will be growers/quasi-producers who will stand to lose out. What might they do in response? To seek an answer on behalf of growers, TKR asked Andrew Weeks, executive director of Wine Grape Growers Australia. He said:
“Basically I am positive about the budget. It has been made very clear to industry, and industry has also noted that the previous system was not sustainable. If things remained the same, the Government would end up rebating the same or more amount that it collected. Continuation of the same was an inevitable ‘death by a thousand cuts’.
“The desire for change was to remove the perverse impacts resulting from the ability to sell bulk wine at unsustainable prices, which has acted as an incentive to retain wine in an overheated domestic market. This has flowed on to growers, with low value wine requiring low value fruit for it to exist. Rather than being a conscious attempt to reduce production, I see this as recognition that the current system is unsustainable, and the moves to tighten eligibility and reduction of the cap allowing part savings to be invested into a marketing push, effectively a self-funded way of encouraging the industry to trade its own way out of trouble.
“There will be more to come, as you say around definition of a winery or producer to determine how this works in a practical sense. There will be some sensitivity during this phase about reducing damage to genuine industry participants. In regard to removal of vines, many growers have reacted to lower prices by boosting yields, as the majority of their COP [cost of product] is fixed.
“In my time dealing with growers I lost count of the number who said, ‘If only I could be profitable at lower yields, it would be so much better – less input costs, less ag risk’. Lower amounts of fruit will not necessarily be a direct translation to less area required, if we can increase demand and in turn boost value of wine, and the contributing fruit.
“The transition period into the new arrangements also seems a good balance, given that many businesses who are likely to be adversely affected by rebate reform will have time to restructure, they are not doing anything illegal, albeit against the initial ideal of the rebate during inception, and they will ideally benefit from increased marketing, and also the positive changes to company tax.”
It’s a fingers-crossed answer, as is the official WFA response, part of which reads:
“[WFA president Tony D’Aloisio] highlighted that just as important for the industry as the injection of funds was the change to the eligibility criteria and this change should come into effect immediately and not wait three years as proposed. The anti-avoidance measures should also come into effect immediately.
“‘The industry sees removing the claims for bulk and unbranded wine as important drivers to industry’s restructure and we believe these changes need to happen now rather than later to assist in returning the industry to profitability,’ Mr D’Aloisio said.
“The Government did not accept that the rebate cap remain unchanged. It has proposed a progressive reduction to $350,000 and then $290,000 from 1 July 2019. This reduction will have an economic impact of removing some $300 million over the forward estimates for businesses with significant investment in regional Australia. With only $50 million back in funds for marketing this reduction needs much greater scrutiny. It is not clear how the proposed reduction in the cap will aid the industry in its recovery after years of declining profits.”
The WFA does not want an increase in total tax revenue and would like to keep the rebate at $500,000, but “stop the rebate going to unintended recipients and shut down the schemes”. It doesn’t define “schemes”. The trouble being, they may be unethical but not illegal.
Acting WFA CEO Tony Battaglene told TKR the budget didn’t provide the full result the WFA was looking for but went some way to stopping more than one rebate being given the same lot of wine. Asked about the failure to get the New Zealand producers’ rebate scrapped, Battaglene said the WFA would consider whether to spend more time and money on a venture that the Government is not prepared to work on. Battaglene said the WFA would consult with industry and then with the Government on the detail of what constitutes a winery.
The changes to the WET rebate are expected to raise $300 million in revenue for the Government over the next four years. In turn 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 to benefit regional wine-producing communities.
Will the $50 million be enough to boost export markets? Will prices rise enough to sustain growers? Possibly exports will increase, but we doubt the grower situation will improve a great deal, and more will leave the industry.