Possible effects of changes to alcohol taxes: IBISWorld

Industry analysts at IBISWorld have compiled an analysis of the beer, wine and spirits industries and assessed how the sector could be affected by switching to a flat volumetric tax. 

Performance of the wine, beer and spirit categories was mixed over the analysis period.

Wine production in Australia has struggled over the past five years with a 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 Andrew Ledovskikh, IBISWorld senior industry analyst.

Beer manufacturing has been a state of flux over the past few years, with the craft segment booming at the expense of traditional beer.

“The craft segment has increased markedly over the past five years, to account for 8.9 percent of industry revenue, up from 5.7 percent in 2010-11,” said Ledovskikh.

Demand for boutique beverages, such as Tasmanian whiskey, has seen revenue in the spirit industry grow strongly over the past five years.

Potential changes to the current taxation system could cause further declines in consumption across the sector.

There is 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 Ledovskikh. “However, all wine, as well as traditional cider, is taxed based on its wholesale value.”

The current Wine Equalisation Tax (WET) is 29 percent of the wholesale value of wine. Therefore, cheaper wine incurs a lower tax burden by volume despite having the same alcohol content as its more expensive counterparts.

Traditional cider producers, currently beneficiaries of the WET rebate, could lose this eligibility under the volumetric excise tax proposal. Non-traditional cider, containing added sugar, flavouring or alcohol, is taxed at the same rate as spirits.

A can of Carlton Draught or similar (1.4 standard drinks) costs 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.

“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 Ledovskikh.

Discussions about changes to the excise tax regime are likely to be fuelled by the upcoming election-year budget.

Referring to a pre-budget submission made by the Foundation for Alcohol Research and Education, Ledovskikh said, “An equal 10 percent 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 percent, and raise $2.9 billion dollars annually.

“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 Ledovskikh.

The flat tax would most likely be equal to the current excise tax rate for full-strength packaged beer, as well as the senate inquiry into the winemaking and grape growing industries.  

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.

 “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,” said Ledovskikh.