House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - Alcoholic beverages

Excise tariff amendment bill (No. 1) 2001

Outline of chapter

2.1 This chapter explains amendments to the Excise Tariff Act which change the treatment of alcoholic beverages and give effect to the Governments tax reform measures.

2.2 Schedule 1, Part 2, items 2 to 5 introduce a new structure and rate for alcoholic beverages.

Context of reform

2.3 The August 1998 policy document entitled ANTS outlined the following changes to the existing taxation treatment of alcoholic beverages to take effect on and from 1 July 2000:

•

increase excise on beer and other alcoholic beverages (not covered by the WET) to offset the removal of the 37% WST; and

•

apply excise to other alcoholic beverages, which are currently non-excisable and not subject to WET.

2.4 The changes to the Excise Tariff Act give effect to these policies by introducing a new tariff structure for alcohol.

Summary of new law

2.5 The Excise Tariff Act is amended to reflect a number of changes to the existing treatment of alcoholic beverages. These changes include:

•

increased excise on beer, spirits, liqueurs and alcoholic beverages not subject to WET to offset the removal of the WST;

•

the introduction of a 3-tiered duty rate structure for beer;

•

applying excise duty to all alcoholic beverages not previously covered (other than those subject to WET); and

•

to bring excise duty rates for non-potable spirits into line with rates applying to other spirits.

Detailed explanation of new law

Alterations to the Schedule to the Excise Tariff Act 1921

2.6 The existing definition of beer has been repealed and substituted with a definition that requires beverages classified as beer to meet 4 specific requirements relating to the manufacture and content. This definition provides a distinction between beer and other alcoholic beverages, and reflects the proposed draft definition of beer in the Australia New Zealand Food Standards.

2.7 A definition of other excisable beverage has been inserted that will bring within the Excise regime all Australian made alcoholic beverages other than those subject to WET. It also provides a clear link between the administrative provisions of the Excise Act, and the Excise Tariff Act, which imposes excise duty on alcohol.

2.8 A paragraph has been inserted after the definition of whisky to extend the current exemption from the Excise Tariff of home brewed beer for personal consumption to include other home brewed alcoholic beverages which, if commercially produced, would come within the meaning of other excisable beverages. All distilled alcohol, however, remains within the Excise Tariff.

2.9 In item 1 of the Schedule to the Excise Tariff Act, the current single rate of excise duty relating to beer is replaced with a 3-tiered duty rate structure. The excise duty rate is also increased to make up for the removal of the WST and the introduction of the GST.

2.10 The percentage based rate of excise duty applicable to subitem 1BB of the Schedule, beer produced by BOPS, is reduced to offset the increased $ per litre of alcohol rate applicable to other beer which is used for the calculation of duty on these goods. This reduction recognises that beer produced by BOPS for non-commercial purposes using commercial facilities was not previously liable to sales tax.

2.11 A 3-tiered structure for beer is introduced, with different duty rates for each tier based on alcohol content (exceeding the excise free threshold of 1.15%), namely:

•

low strength beer (paragraph 1C(1) of the Schedule) not exceeding 3.0% by volume of alcohol;

•

mid strength beer (paragraph 1C(2) of the Schedule) exceeding 3.0% but not exceeding 3.5% by volume of alcohol; and

•

full strength beer (paragraph 1C(3) of the Schedule) exceeding 3.5% by volume of alcohol.

2.12 A rate for other excisable beverages of alcoholic strength by volume not exceeding 10% is inserted (subitem 1D of the Schedule) to bring designer drinks, alcoholic sodas, coolers and the like into the excise regime.

2.13 Item 2 of the Schedule applies excise duty to alcoholic beverages exceeding 10% alcohol by volume that are not currently subject to excise or WET (subitem 2H), aligns the duty rate for non-potable spirits (subitem 2O of the Schedule) with rates applying to other spirits and increases the rate of excise duty on spirits to make up for the removal of the WST.

Customs Tariff Amendment Bill (No. 2) 2001

Outline of chapter

2.14 This chapter explains amendments to the Customs Tariff Act which change the treatment of alcoholic beverages and give effect to the Governments tax reform measures.

2.15 Schedule 1, Part 2, items 2 to 13 implement changes to the customs duty on imported alcohol and alcoholic beverages. These amendments complement changes contained in the Excise Tariff Amendment Bill (No. 1) 2001.

2.16 The amendments also implement structural changes to provide tariff subheadings for goods subject to the provisions of the WET Act.

Context of reform

2.17 The August 1998 policy document entitled ANTS outlined the following changes to the existing taxation treatment of alcoholic beverages to take effect on and from 1 July 2000:

•

increase excise on beer and other alcoholic beverages (not covered by the WET) to offset the removal of the 37% WST; and

•

apply excise to other alcoholic beverages, which are currently non-excisable and not subject to the WET.

2.18 The changes to the Customs Tariff Act give effect to these policies by introducing a new tariff structure and customs duty rates for imported alcohol and alcoholic beverages. Complementary changes are made to the Excise Tariff Act to ensure uniform duty treatment with Australian manufactured products.

Summary of new law

2.19 The Customs Tariff Act is amended to reflect a number of changes to the existing treatment of alcoholic beverages. These changes include:

•

increased customs duty on beer, spirits, liqueurs and alcoholic beverages not subject to WET to offset the removal of the WST;

•

the introduction of a 3-tiered duty rate structure for beer;

•

applying customs duty to all alcoholic beverages not previously subject to duty (other than those subject to WET);

•

bringing customs duty rates for denatured spirits into line with rates applying to other spirits;

•

the provision of Additional Notes which describe wine and wine products that are subject to WET (these notes replicate similar provisions which are contained in the WET Act; and

•

complementary amendments to the Table of paired customs subheadings and excise items in section 19(1) of the Customs Tariff Act. This section provides the link between customable and excisable goods (alcoholic beverages, tobacco and petroleum products), and permits rates of customs duty to be adjusted in line with movements in the rates of excise duty as a result of indexation.

Detailed explanation of new law

2.20 The taxation reforms for alcohol are confined to tariff headings 2203 to 2208 of the Customs Tariff. The amendments contained in the Excise Tariff Amendment Bill (No. 1) 2001 have been reproduced in the structure of the previously listed tariff headings. Certain consequential amendments have been made to associated legislation to ensure the completeness of the changes.

2.21 Item 2 of Part 2 of Schedule 1 to this Bill contains changes to the Table of paired customs tariff subheadings and excise items in section 19(1) of the Customs Tariff Act. It allows the customs rate of duty to be adjusted in line with movements in the excise rate of duty for similar goods. This amendment contains consequential changes to alcohol subheadings and items.

2.22 Item 3 of Part 2 of Schedule 1 to this Bill replaces the superfluous Additional Note 1 to Chapter 22 with a new Additional Note. This new note defines alcoholic strength by volume as a reference to the strength by volume of ethyl alcohol.

2.23 Item 4 inserts Additional Notes 3 to 8. Each of the Notes defines the different type of wine products that are now subject to WET. As WET is applied to the same imported wine and wine products as their Australian equivalents, these Additional Notes replicate the definitions for similar locally made products contained in Subdivision 31A of the WET Act to ensure uniform tax treatment.

2.24 Items 5 to 13 give effect to the tax reform initiatives for alcohol announced in ANTS by legislating a new tariff structure for headings 2203 (beer), 2204 (wine), 2205 (vermouth and other wine products), 2206 (other fermented beverages), 2207 (undenatured ethyl alcohol) and 2208 (spirits and liqueurs) while retaining the existing industry assistance ad valorem rates of duty. In this restructure, new tariff subheadings have been provided for each category of beverage classified within these headings, to apply the requisite excise equivalent rate of duty. This procedure has ensured uniform duty treatment for imported and locally produced alcoholic beverages. The revised tariff structure is outlined in paragraphs 2.25 to 2.29.

2.25 Alcoholic beverages with an alcohol content not exceeding 1.15% by volume of alcohol retain the industry assistance ad valorem customs duty rates as previously. The relevant subheadings which fall in this category are:

2.26 Alcohol and alcoholic beverages (excluding beer) containing more than 1.15% of alcohol and not exceeding 10% by volume of alcohol are subject to the full strength beer rate ($30.46 per litre of alcohol). The relevant subheadings which fall in this category are:

2.27 Alcohol and alcoholic beverages (excluding beer and brandy) containing more than 10% of alcohol are subject to the spirit rate ($51.58 per litre of alcohol). The relevant subheadings which fall in this category are:

2.28 Wine and wine products which are subject to WET and for which this legislation provides separate subheadings are:

2.29 A 3-tiered duty structure is introduced for imported beer. The following parameters have been established:

•

Beer exceeding 1.15% but not exceeding 3.0% by volume of alcohol. This beer is known as light beer and attracts a rate of $41.67 per litre of alcohol. Light beer is classified in subheadings 2203.00.81 and 2206.00.72 in the new tariff structure.

•

Beer exceeding 3.0% but not exceeding 3.5% by volume of alcohol. This beer is known as mid strength beer and attracts a rate of $35.38 per litre of alcohol. Mid strength beer is classified in subheadings 2203.00.82 and 2206.00.73.

•

Beer exceeding 3.5% by volume of alcohol. This beer is known as full strength beer and attracts a rate of $30.46 per litre of alcohol. Full strength beer is classified in subheadings 2203.00.89 and 2206.00.79.

2.30 Brandy made wholly from grape spirit is classified in subheading 2208.20.10 and attracts a rate of $48.17 per litre of alcohol.

Regulation impact statement - as tabled with Excise Tariff Proposal (No. 2) 2000 on 21 June 2000

Policy objective

2.31 The August 1998 policy document entitled ANTS outlined the following changes to the existing taxation treatment of alcoholic beverages, to take effect from 1 July 2000:

•

introduce a WET to replace the difference between the 41% WST and the GST (the legislation for this measure is already in place);

•

increase excise on beer and other beverages(not covered by the WET) to offset the removal of 37% WST; and

•

apply excise to other alcoholic beverageswhich are currently non-excisable and not subject to the WET.

2.32 The changes to the Excise Tariff Actin this Excise Tariff Proposal give effect to these policies (except the WET) by introducing a new tariff structure for alcohol. The new structure contains:

•

a 3-tiered structure for beer with different duty rates for each tier, based on alcohol content;

•

two new subitems to impose excise on alcoholic beverages not currently subject to excise; and

•

adjusted rates of excise duty to offset the removal of the WST.

2.33 In setting the pricing policy in ANTS, the Governments objectives were to limit the change in excise so that the retail price of a carton of full strength beer need only increase by the estimated general price increase associated with indirect tax reform (1.9%). The new duty rates for beer will ensure the retail price of a carton of low alcohol beer need not rise and, in some cases, may fall slightly. With other beverages, the change in the rates of excise is limited such that the retail price of whisky, which is currently heavily taxed, need not change. The brandy rate will increase but remain below the rate applying to other spirits.

2.34 In addition to the measures required to implement the ANTS policies, the Excise Tariff Proposal includes a new definition for beer to reflect the proposed draft Australia New Zealand Food Standards beer definition, being alcohol which is the product of the yeast fermentation of an aqueous extract of malted or unmalted cereals, whether or not containing other sources of carbohydrates; contains hops, or extracts thereof, or other bitters; has not had added to it, at any time, any alcohol from any other source; and contains more than 1.15% by volume of alcohol.

Implementation options

2.35 Excise duty is levied when excisable goods such as beer and spirits are entered into home consumption by the manufacturer or licensed distributor. Levying excise duty at this point achieves the relative price impacts on beer and spirits as outlined in ANTS.

2.36 The reforms to the taxation arrangements were announced as part of ANTS. That document explicitly indicates that alcohol tax reform policy objectives are to be implemented by changing the existing excise regime. This will ensure that the principles and concepts underlying alcohol tax reform are familiar and well accepted by excise clients. Accordingly, no other options were considered.

2.37 This Excise Tariff Proposal to alter the Excise Tariff Actis supported administratively by:

•

the Excise Amendment (Alcoholic Beverages) Bill 2000, which was tabled in the Parliament on 6 April 2000, to give effect to the administrative arrangements for the collection of excise for alcoholic beverages not currently subject to excise; and

•

the Excise Amendment Regulations 2000 (No. 1), No. 116 of 2000, to extend the licensing and manufacturing provisions to manufacturers of other excisable beverages and allow the use of imported spirit in the local production of other excisable beverages.

Assessment of impact

Distillers, excise manufacturers and licensed distributors

2.38 The tax reform changes will impact on a small number (around 20) of manufacturers of alcoholic beverages who are not currently clients of the ATO, that is, those who are producing alcoholic beverages that are not currently subject to excise (e.g. alcoholic sodas). These manufacturers will be required to be licensed and pay excise on their products that will fall within the definition of other excisable beverages. The current annual fee for a licence to manufacture excisable goods is $10.

2.39 In order to calculate their excise liability, these manufacturers will need to record what products they have produced and the volume of alcohol in each production run, have a stock inventory system to identify excisable products, and a system to calculate the excise payable on these products. The systems needed by these manufacturers to calculate their excise duty liability are relatively straightforward. It is envisaged that these manufacturers would already have computer systems to maintain their business records, and that these systems could be readily adapted to meet the record keeping obligations under the Excise legislation.

2.40 The changes will also have an impact on around 50 existing clients who are already paying excise on some of their products. These manufacturers will be liable to pay excise on all alcoholic beverages included in the Excise Tariff. They will need to adjust their current systems to ensure that alcoholic beverages not previously subject to excise are included in duty calculations. Some clients may need to approach the ATO to amend existing approvals to move and store excisable goods without paying the duty liability (underbond goods) to include other excisable beverages. However, there are no fees associated with this approval process.

Retailers and consumers

2.41 Retailers and consumers will be relatively unaffected by the changes to the ExciseTariff. The price of a carton of low alcohol beer need not rise and, in some cases, may fall slightly. The retail price of a carton of full strength beer should only increase by the estimated general price increase associated with indirect tax reform, that is, 1.9%. The change in excise for spirits will be limited so that the retail price of whisky will not need to change.

2.42 The impact on the price of beverages that are currently not subject to excise once they become subject to excise is difficult to determine as it will depend on the level of WST that is currently payable and the excise that will be payable. However, in general the price of these products is expected to rise.

The ATO and Customs

2.43 The changes associated with alcohol tax reform impact on the ATO and Customs. There will be some implementation costs related with updating computer duty rate look-up tables and licensing of new clients. However, as the measures will utilise current excise and customs administration frameworks, the net impact of this measure is expected to be minimal.

Analysis of costs/benefits

Costs of compliance

2.44 The change in the type of products subject to alcohol excise rates will affect approximately 20 new and 50 existing clients. The cost of compliance for new clients arises from needing to obtain a licence, submit plans of their premises and ensure adequate bond facilities initially, and from a need to monitor production, delivery and sales and remit excise on an ongoing basis. Existing clients need only register for a new category of excisable product, and already have systems in place to monitor production and calculate excise payable.

2.45 Based on the small number of new clients affected, the initial cost of compliance is estimated to be less than $300,000. The ongoing cost of compliance is estimated to be minimal.

Administration costs

2.46 There will be very little impact on administrative costs for the ATO or Customs as existing systems and processes will be utilised. There will be no additional salary costs or ongoing administrative funding costs for the measures. Initial implementation costs will be minor, as these will be limited to computer system changes and processing licences for the new clients.

Government revenue

2.47 The increase in excise revenue is estimated at around $1.1 billion per annum, but this is offset by the removal of the WST.

Economic costs

2.48 The increase in excise rates, taken with the removal of WST and the introduction of the GST, should have little impact on resource allocation or consumption patterns. The price impacts for alcoholic beverages are broadly comparable to that expected for all goods and services across the economy.

•

In relation to beer, the consumption of lower alcohol beer should be encouraged over full strength beer.

•

For spirits, there should be little change although there may be an increase in demand for pre-mix spirits which will be subject to the full strength beer excise rate instead of the spirits rate.

•

For ready to drink products not currently subject to excise, there may be a reduction in demand as the measure removes concessional tax treatment and applies a more consistent taxation regime to products in the ready to drink category.

The measure is not expected to have a significant impact on international trade flows.

Consultation

2.49 Ongoing consultation has been undertaken with a number of peak body alcohol industry associations on the tax reform measures and the proposed implementation since the reforms were announced in ANTS.

Conclusion and recommended option

2.50 The alcohol tax reform policy objectives as outlined in ANTS can be achieved with the existing excise regime provisions. This will ensure that the principles and concepts underlying alcohol tax reform are familiar and well accepted by excise clients.