In amongst the details from last night’s 2016 federal budget, there was one ‘reform’ announced that has the potential to devastate small Australian wine producers…
According to this joint media release from Assistant Treasurer Kelly O’Dwyer and Assistant Agriculture Minister Anne Ruston, the WET (Wine Equalisation Tax) rebate will not only be scaled back, but eligibility terms will be tightened significantly.
These changes, by itself, are nothing new, having been first suggested in a comprehensive Treasury discussion paper last year. In fact, it was the wine industry itself (the big players at least) who were the one pushing for reform, spearheaded by the Winemakers Federation of Australia (WFA).
There is one element, however, that goes beyond the scope, and could have far-reaching impacts. It comes via this line in the press release:
‘Under the tightened eligibility criteria for the rebate, a wine producer must own a winery or have a long term lease over a winery and sell packaged, branded wine domestically’.
As mooted in the discussion paper, this tightened criteria would help to stop bulk wine producers gaming the WET rebate (as Box 6 in the Treasury paper shows). But by limiting the rebate to those entities that ‘own a winery or have long term lease over a winery’ you’re not only cutting off the bulk wine producers, but also hurting any small grapegrower who has their wine made at a contract facility (like half of Tasmania), or any boutique winemaker who uses someone else’s winery (a large list, I’ll include a few examples below).
The press release does note that final details of what is defined as a ‘winery’ and eligibility criteria details will be established through ‘further consultation’. But the wording of these initial ‘reforms’ does sound settled, and they potentially could serve to stifle innovative wine production.
To explain the potential impacts of such a change, let’s run through an example.
Imagine that I’ve got a small vineyard in Sydney’s outskirts. I’m not sure what sort of masochist would plant grapes in Sydney (someone who likes spraying), but I’m doing it anyway. Now when it comes to harvest my grapes, I take them down to a contract winery in the Southern Highlands, where they charge me to use their facilities. I use this winery because they’re close and have a modern crusher/destemmer, press and refrigerated tanks. I still run the whole process myself, purely because I want to make sure that when the wine tastes bad it it is all my fault, and the winery charges me plenty to use their plant.
Now previously, when I finally bottle my wine and sell it, I would receive a full rebate on the 29% WET tax paid. My vineyard isn’t massive, so even with the newly rounded down rebate limit of $290,000 I’d get all my WET back. Case closed.
With the new changes, however, I’d get none of the WET back because I don’t own a winery. I own the vineyard, have made the wine and even sold it myself, yet due to the tightened eligibilities I’m now 29% worse off than my dodgy neighbour – who has declared his back shed a ‘winery’ and is now pumping out some brown and volatile wines (that he can sell 29% cheaper than me!).
Immediately you can see the limitations of this mooted reform, which, in its current form, would do more harm than good. It would decimate contract winemaking (which is very very important) while potentially pushing up wine prices.
If you think my example is too abstract, then just have a look at this quick list of producers who I’ve crossed paths with recently who would instantly be 29% worse off because they don’t own or lease a winery (even though they may own vineyards and/or make the wine):
Vinteloper
Stargazer
Ten Minutes By Tractor (wines made at Moorooduc Estate)
Head Wines
Ministry of Clouds
La Violetta
That’s hardly an exhaustive list, but just a few that came to mind quickly (and some may well have lease arrangements). In many cases, we’re talking about winemaking side projects, so it’s not like these producers fall into the ‘bulk producers gaming the system’ basket. Any sommelier trying his hand at winemaking and making a single barrel at a friends winery would be caught afoul of this law change, which simply makes more established.
Worst hit would be the Tasmanian wine industry, where – according to this 2013 submission from Wine Tasmania – there are over 160 licensed producers but only 30 processing facilities. That leaves 130 labels that would miss out on the 29% WET rebate. Indeed, that submission notes about how problematic this ‘tightening’ could be for Tasmanian producers (worth a read to highligh how problematic this eligibility tightening could be for Tassie wine).
You could argue that it might serve to encourage the establishment of a ‘winery’ to work around such restrictions. But there are endless complications around that measure too. In the Adelaide Hills, for example, there are very restrictive planning controls around waste water that mean that setting up a new winery is prohibitively expensive. Or if a grapegrower is not able to able to add any structures to a rural property (a common condition in rural NSW), which basically precludes them from setting up anything resembling a winery on their property.
Again, as the press release states, there is still much consultation to happen. But judged on what has been said already, this has the potential to unfairly favour existing producers with an actual winery over those without, hampering innovation and the growth of wine producers almost unintentionally.
Reform or a massive regression?
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21 Comments
A massive stuff-up more like it ! As soon as I read this I instantly thought of a couple of my favourite wineries who will be affected by this. I don’t mean to get political but this is yet another example of how governments wreck everything when they interfere in the workings of free markets. Given that most products in this country already have a GST applied to them why don’t they remove all excise taxes from all alcoholic products and let all wine producers compete on a level playing field ? Wasn’t the whole point of the GST to simplify the tax system ? Why do wine drinkers have to pay excise as well as GST on a bottle of wine anyway? Wine is a value-added product, something we’re not great at making in this country. Surely we should not be implementing policies that are harmful to value-adding industries ? Or would the likely loss of revenue from abolishing excises mean the fools on both sides of politics might have to start living within their means ? You’d laugh if you weren’t crying.
Madness.
Let’s hope that the ‘consultation’ sets things straight, or everyone will suffer…
Mate, I am sending an email to every National Party MP in NSW, this is their constituency they’re screwing here ! Perhaps they’ve forgotten there’s an election in 9 weeks ? What do they think will happen if/when a lot of growers start going out of business ? That we’ll start drinking the two buck chuck churned out by large wineries ? We’ll probably turn to quality imports, another outstanding outcome for the Australian economy !
I’m surprised there hasn’t been more noise about the rebate being slashed from $500k to $290k.
Treasury came straight out and said they support it!
It seems to demonstrate a lack of understanding for how the industry works. You’d think they would have scenario modelled the outcome to see how it would play out.
Surely sharing costly infrastructure is total common sense in the wine industry rather than creating your own. Doh.
They’re bureaucrats, they have no idea about how things work in the real world.
I think the whole wine fraternity would better served cooling their jets and engaging in the definition and industry consultation. Right now we have nothing but a short press release, it’s meaningless until we see the actual tax legislation. The stated objectives all along have been to protect small wineries and crack down on the bulk traders. It seems fairly unlikely that the nightmare end of days scenario that most are positing is going to be the outcome delivered.
Makes good headlines though, and fodder for 140 character analysis.
Sam
Has there not already been extensive industry discussion & consultation on WET ??
You could be right Sam, but reading the discussion paper from the Treasury enquiry above suggests that the intention is not to support small wineries, per se but ‘stop the rorting’.
The joint WGGA and WFA submission is more encouraging (read it here): http://bit.ly/1q016MR but again we have to ask – will that advice be followed?
Time will tell.
Sam, there might be more consultation, but I doubt there will be anything like an exposure draft of the legislation released to comment on. Chances are the first time the final form of the changes will be made public is when the legislation is introduced.
I’ve been following this for a while and the WFA, major company, and grower association submissions have all been heading in this direction. The silly repetition of ‘end the rebate for Kiwis’, in spite of this being prohibited by our mutual recognition arrangements. The ‘end the rorts’ sloppy argument covering bulk & unlabelled wine production, exploiters of company & label splitting tactics, as well as anyone nebulously-defined as a ‘virtual winery’. And then the loose framing of protecting the contribution small wineries make to regional communities as ‘do they have a cellar door?’… Sloppy thinking and dubious argument, all piled on.
All that slack muddle takes us exactly where we are now, with volumetric alcohol taxation completely off the table, and the adjustment funding possibly going back to some of the same industry bodies that do such a poor job of representing small wine businesses. Given the failure of the representative bodies in the industry to make the undesirable impacts of these proposals visible to Treasury and the Government, I suspect it will now need a direct lobbying effort from these businesses to redirect the proposals somewhere more sensible.
Maybe – just maybe – investing in land and a winery and filling it with equipment is what makes a wine business a producer and entitled to this rebate. Using your friend’s winery? So just buy some grapes and barrels, bottle some wine and get yourself the WET rebate! Well maybe – just maybe – this isn’t the same thing.
The WET rebate isn’t for one’s passion – it’s for your investment!
The main challenge with that outlook is that – as outlined above – it’s often not practical or even feasible for some grape growers to build a winery.
Ultimately a winery is just a highly capital intensive processing facility, and one that contains equipment often only used once a year (like a crusher or sorting table). Why restrict a rebate only to those who are lucky enough to own a processing facility? Further, why not better utilise that facility by making wine for other people (which is less viable as others won’t be able to enjoy the same rebate as you).
Lets hope that this notion is fleshed out better – as it is currently half-baked and potentially very detrimental to winemaking innovation
John, you have to pay the WET first. The rebate isn’t like a grant – you already have to have a fair degree of investment, including collecting the WET in the first place through your sales.
The rebate is there to head off the consequences of the GST introduction, the abolition of sales taxes, and the WET to maintain relative taxation of the different tax treatments of alcohol before the GST change. The consequences to be avoided were small wineries in the regions (who contributed to economic activity in those areas) taking a tax hit that jeopardised the viability of those businesses. The rebate wasn’t intended to reward fake businesses created by company structure splitting, but it also wasn’t intended to knock back startup wine businesses in the regions.
Andrew – lucky enough to own a winery? How about diligent enough and committed enough to save and generate the resources to pay for one? Use once per year? Silly comment – who actually uses a crusher “once per year”. You design a winery’s capacity commensurate with it’s expected throughput.
Andrew you should consider a winemaker who goes the extra effort to develop their own winemaking capacity – no matter how big or small – as one who is demonstrating greater committment to their craft – over the short and long term.
I have no beef with having wine made at a 3rd party winery Andrew – but don’t expect the rewards that are designed for those who have made a greater committment/sacrifice/investment. These two separate scenarios cannot be equated in terms of economic contribution, and the rebate is about economic contribution. Making wine at a 3rd party facility is fine – and many great wines are made this way. Just don’t equate it to developing a winery.
By the way Paul you don’t have to pay WET to receive the rebate – if you sell to a wholesaler they will normally not be charged WET yet the producer claims the value of the WET that would have been charged. They will pay WET when they sell the wine to a retailer.
In the case of vineyard owners who do not own wineries I’m sure Andrew there will be a lot more discussion of this between the industry and government as Sam said. For example the Government’s position is that the “producer” must have domestic sales under their own brand. So I’m sure it will not be as drastic as you have portrayed
Fair comment, though the reality is that plant items in a winery – like a crusher – are literally only used once a year. The process dictates that.
I definitely agree that we must admire those willing to invest in a winery, but I disagree that by making a wine in someone else’s winery your not making a significant ‘economic contribution’. Sure, you’re not investing in a physical plant, but you are paying for service – and likely helping someone else to pay for their winery.
Surely Andrew, the scope within leasing well and truly accommodates your scenario’s use of the Southern Highlands winery. This remains to be seen in the final legislation, but it is a breathtaking assumption to type that the paid use of a winery will be excluded.
I believe that given the nature of wineries having a number of functions that each are carried out just once a year, a “leasing” arrangement can be established to replace a momentary “contract” arrangement. And whilst many functions are once per year, there are a number of these functions, and they don’t all happen at once. A huge proportion of these existing arrangements include maturation and storage until bottling, and some even for post bottling storage also. So it isn’t as if every small producer wants to walk in and out of a winery each year in a flash, switch wineries at a whim, and pay next to nothing to do so. If they do, and are therefore excluded, then they have shown less commitment than other tiny producers whom have an ongoing arrangement with a winery, giving it certainty and a capacity / usage they can forecast.
I’m only theorising here much like yourself, but it is too early to call. The rise of the small virtual producer without enormous capital has been great for existing high quality vineyards and collaborative winery capacity efficiencies. Winery owners enjoying these benefits I’m sure would adjust quickly to be able to capture the same activity (and the additional collaborative labour for their own crush that often comes with it) as they do now, and adjust the payment arrangement to turn a contract fee into a lease. If it means a small producer has to agree not to choose their processing facility year on year at a whim, maybe that is the price to pay.
I was thinking about this earlier and it’s a really tricky definition to get right.
How do you clearly define such a complex contractual arrangement so it accommodates micro producers while also achieving the stated aim of stopping the ‘rorting’? Surely the bias has to be on small winemakers?
we can probably all agree that the successful co-op wine making model refined over centuries in France wouldnt exist under this tax regime. Most wineries in Australia do not currently run at full capacity and need to lease their facilities to grape growers to break even. Efficient use of expensive capex. It would send many wineries broke and leave us with large volume wineries when all the new demand for wine over $40 a bottle is heading towards smaller volume, interesting, niche (sub contracting) producers. Would set the Australian wine industry back two decades and my wine buying would head offshore.
I understand the supposed aim of the WET rebate, but I’ve never seen a clear explanation of what the aim of WET itself is. To the best of my knowledge, it was about retaining tax revenue previously received from wine when the GST was brought in, and retaining relative price levels between wine and other alcohols.
Assuming this second point is intended to prevent wine being a cheap way of fueling alcoholism, it is surely only relevant to wine on the cheap end of the spectrum. If that was the true aim, WET could be structured such that it had a maximum dollar amount per bottle, or in such a way that its effect on the price of wine diminished as the price goes up. A consumer bottle price of $100 can have $20-$25 of that price attributable to WET, including the fact that the WET component compounds with GST.
This is, I suspect, why you can buy some of Australia’s best wine more cheaply after it has been shipped to the UK and sold in the department store that the Queen likes to pick up her Christmas pressies in (Fortnum and Mason) than from Dan Murphy’s. And that’s including the cost of shipping to the UK and their 20% VAT as well.
So from a consumer point of view, WET looks like a fundamentally broken concept. It puts a serious amount of extra cost onto the consumer, unless they happen to be buying something from a rebated producer. But plenty of wine that’s worth supporting is not produced by players small enough to benefit from the rebate. And the rebate system itself doesn’t work properly anyway, it’s being gamed, and fixing it is harming people it’s supposed to help. No doubt there’s a fair amount of admin work required by the wineries to manage their WET status as well.
So why do we really have this tax again? Surely almost everyone would be better off from just scrapping it?
But we’d have less tax dollars. That’s the only real reason I can see that this tax exists at all. It’s really just a luxury car tax for wine, with some built in back doors for those with good accountants.
‘It’s all about the money money money’
Yes, I’m quoting Jessie J. But relevant, as you’re right that money is the main reason why the WET tax is remaining as it is. Plus fiddling with WET is too hard for most governments (especially as it would be very unpopular in regional areas).
As unpalatable as it could be for many, a volumetric tax would be better for Australian drinkers than WET (though it could also increase the price of wine, so a double-edged sword).
Not going to happen any time soon, however…
We already have a tax on wine – GST. And we have a duty as well, which works out about 5%. Do we actually need a third tax on wine? The UK has excise/duty, which is around £1.90 ($3.80ish) per bottle. And then 20% VAT. They don’t have a third tax to top up the tax office’s pockets. WET doesn’t need to be replaced by a different tax, it should just be removed.
This is why I compare it to luxury car tax – it makes the biggest impact and most money not on cheap wine, but more expensive wine. And there is already GST and stamp duty on cars, LCT is just there to make more money from people buying more expensive cars. The only difference is that LCT is honest about what its aiming for – to target tax at wealthier individuals.
With WET, there’s this pretense that it’s about achieving some kind of balance – for small producers, or relative cost of different types of alcohol, etc. It’s all tosh. WET would have been scrapped if it wasn’t making a lot of money. The rebates are just there to try to appease small producers, but it just ends up damaging them instead.