House of Representatives

Explanatory Memorandum

(Circulated by authority of the Acting Minister for Revenue and Financial Services, Senator the Hon Mathias Cormann and the Assistant Minister for Immigration and Border Protection, the Hon Alex Hawke MP)

Chapter 1 - Tobacco duty harmonisation

Outline of chapter

1.1 The Excise Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017 (ETA Bill 2017) and Customs Tariff Amendment (Tobacco Duty Harmonisation) Bill 2017 (CTA Bill 2017) amend the Excise Tariff Act 1921 (ETA 1921) and Customs Tariff Act 1995 (CTA 1995) to harmonise the duty rates for excise and excise-equivalent customs duty applying to different tobacco products. The Bills ensure that tobacco products in stick form and other tobacco products, such as roll your own tobacco, receive comparable duty treatment. The rates are harmonised by four annual adjustments of duty, starting from 1 September 2017.

1.2 For the purposes of this Chapter a reference to:

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other tobacco is a reference to tobacco other than tobacco in stick form (for example loose leaf tobacco, most cigars and snuff); and

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in stick form tobacco is a reference to tobacco that is in stick form not exceeding a weight of 0.8 grams per stick of actual tobacco content (for example most types of cigarettes).

Context of amendments

1.3 Excise duty is a tax on certain goods produced in Australia, including tobacco products. Imported goods, equivalent to domestically produced goods subject to excise, are known as excise-equivalent goods and attract excise-equivalent customs duty that applies at the same rate as the excise duty on locally produced goods.

1.4 Prior to these amendments the stick rate and the rate for other tobacco were both worked out by reference to the duty rate applying to 0.8 grams of tobacco. As the average tobacco content of cigarettes is now lower than 0.8 grams, other tobacco was subject to a comparatively lower rate of excise and excise-equivalent customs duty per gram compared to in stick form tobacco.

Summary of new law

1.5 These amendments adjust the excise and excise-equivalent customs duty rate for other tobacco over four years to align it with the amount of duty applying to the average per stick tobacco content of cigarettes. Accordingly, from 1 September 2020 roll your own tobacco and other tobacco products have duty imposed at the same rate per kilogram as cigarettes containing the average tobacco content rate per stick.

1.6 The rate per kilogram of duty for other tobacco is adjusted progressively each year so that it is equivalent to the in stick form rate for cigarettes containing 0.7 grams of tobacco from 1 September 2020. This is achieved by working out the excise rate and excise-equivalent customs duty rate for other tobacco by applying a weight conversion factor to the indexed in stick form rate. The weight conversion factor is adjusted progressively each year so that the change is phased-in over four years.

1.7 The adjustments to the excise and excise-equivalent customs duty rate for other tobacco coincide with the scheduled 12.5 per cent rate increases and indexation that applies to excise and excise-equivalent customs duty for these dates. This reduces compliance cost impacts from the price changes for other tobacco products that arise from the adjustments.

Comparison of key features of new law and current law

Detailed explanation of new law

1.8 The amendments made by the ETA Bill 2017 and CTA Bill 2017 adjust the rate of excise and excise-equivalent customs duty on other tobacco to harmonise it so that the rate for other tobacco better reflects the average tobacco content of in stick form tobacco. Accordingly, the lower rate of duty that applies to other tobacco such as bulk tobacco used to make roll your own cigarettes is harmonised from 1 September 2020 so that it is taxed at the same effective duty rate as the in stick form rate for cigarettes. This is achieved by:

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working out the duty for other tobacco by reference to the indexed in stick form tobacco duty rate; and

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phasing in the adjustment to harmonise the excise duty and excise-equivalent customs duty rate for other tobacco over four years.

1.9 The amendments made by the ETA Bill 2017 and the CTA Bill 2017 remove the fixed amount of excise and excise-equivalent customs duty on other tobacco in the ETA 1921 and CTA 1995. The duty rate is replaced with a formula linking the per kilogram rate of other tobacco duty to the in stick form tobacco duty rate from 1 September 2017.

1.10 The harmonisation of duty rates between in stick form tobacco and other tobacco is phased-in by four annual adjustments made on the dates on which indexation applies (1 September replacement day) to reduce compliance costs from the changes. This ensures that the resulting duty rate increases for other tobacco apply progressively. This is consistent with the four 12.5 per cent duty increases that apply to all tobacco products commencing on 1 September 2017 (Excise Tariff Amendment (Tobacco) Act 2016 and Customs Tariff Amendment (Tobacco) Act 2016).

1.11 The 1 September replacement day is the day on which the excise and excise-equivalent customs duty rates are increased for indexation. This is the later of 1 September or the fifth day after the Australian Bureau of Statistics publishes the Average Weekly Ordinary Times Earnings (AWOTE) indexation rate for the most recent reference quarter. This ensures that if there is a delay in the date of indexation because of the late publication of the new AWOTE amount, then the adjustments to the duty rate for other tobacco made by these amendments apply on that later date to avoid two changes to the rate, one on 1 September and another on the replacement day several days later.

1.12 The formula to determine the excise and excise-equivalent customs duty rate for other tobacco is:

Duty rate for other tobacco = In stick form rate / Weight conversion factor


Where:

In stick form rate is the excise or excise-equivalent customs duty rate applying at the time the other tobacco product is:

•

if subject to excise duty - entered into home consumption; or

•

if imported - at the time for working out the rate of excise-equivalent customs duty that applies to that product when entered for home consumption.

Weight conversion factor is the quantity of tobacco in stick form tobacco products are taken to contain, expressed in kilograms. This is as follows:

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1 September 2017 - 0.000775 kg;

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1 September 2018 - 0.00075 kg;

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1 September 2019 - 0.000725 kg; and

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1 September 2020 and onwards - 0.0007 kg.

The duty rate must be rounded to two decimal places of a dollar and rounding up if the third decimal place is five or more. [Schedule 1 to the ETA Bill 2017, item 4, section 6AAB of the Schedule to the ETA 1921; Schedule 1 to the CTA Bill 2017, item 4, section 19ACA of the Schedule to the CTA 1995]

Example 1.1 Determining excise duty rate and excise-equivalent customs duty rate for other tobacco on 1 September 2017

Step 1 - Determine the indexed in stick form tobacco duty rate

The in stick form tobacco duty rate on 1 March 2017 is $0.61726

The following indexation factors apply on 1 September 2017:

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AWOTE indexation factor, calculated using the June 2017 quarter as the base quarter and the December 2017 quarter as the reference quarter, for the purposes of this example is taken to be 1.001 (for this example, assume that the AWOTE indexation factor was published more than five days before the 1 September 2017 indexation day).

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Additional factor for indexation is 1.125.

The in stick form duty rate on 1 September 2017 (following the application of the existing indexation method) is equal to (rounded to five decimal places):

= Tobacco duty rate on Indexation factor Additional factor the day before the x for the indexation x for the indexation indexation day day day

= $0.61726 x 1.001 x 1.125

= $0.69511

Step 2 - Use the indexed in stick form tobacco duty rate to determine the duty rate for other tobacco

The other tobacco duty rate per kilogram of tobacco on 1 September 2017 following indexation is equal to (rounded to two decimal places):

= In stick form rate Weight conversion factor

= $0.69511 0.000775 kg

= $896.92 per kilogram of tobacco content

Note: the rates of duty and AWOTE amounts used in this example are for illustrative purposes only. They are not estimates of expected future AWOTE figures to be released by the Australian Bureau of Statistics or estimates of future rates of duty on tobacco.

1.13 The amendments made by the ETA Bill 2017 amend excise duty subitem 5.5 in the table in the Schedule to the ETA 1921 to replace the set rate of duty to refer to the legislative provision that contains the formula set out in paragraph 1.12. [Schedule 1 to the ETA Bill 2017, item 5, table item 5.5 of the Schedule to the ETA 1921]

1.14 The amendments made by the CTA Bill 2017 amend the tobacco duty rates in Schedules 3, 5, 6, 7, 8, 9, 10, 11 and 12 to the CTA 1995 listed following this paragraph with a reference to the legislative provision that contains the formula set out in paragraph 1.12.

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2401.10.00

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2401.20.00

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2401.30.00

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2402.10.80

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2402.20.80

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2403.11.00

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2403.19.90

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2403.91.00

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2403.99.80

Schedule 1 to the CTA Bill 2017, items 5 to 85, subheadings 2401.10.00, 2401.20.00, 2401.30.00, 2402.10.80, 2402.20.80, 2403.11.00, 2403.19.90, 2403.91.00 and 2403.99.80 in Schedules 3, 5 6, 7, 8, 9, 10, 11 and 12 to the CTA 1995]

1.15 For excise duty purposes, if the applicable rate of duty for other tobacco changes on a particular day, the revised rate applies to goods entered for home consumption on or after that day. For customs purposes, if the applicable rate of duty for other tobacco is revised on a particular day, the changed rate applies to goods imported into Australia on or after that day and goods imported into Australia before that day where the time for working out the rate of import duty on the goods had not occurred before that day. [Schedule 1 to the ETA Bill 2017, item 4, subsection 6AAB(8) of the ETA 1921; Schedule 1 to the CTA Bill 2017, item 4, subsection 19ACA(8) of the CTA 1995]

1.16 For excise, the CEO (that is the Commissioner of Taxation) and for excise-equivalent customs, the Comptroller-General of Customs, must as soon as practicable after the date the rate of duty for in stick form tobacco is replaced publish a notice in the Government Gazette notifying the rate of duty for other tobacco and the goods to which that rate applies. This ensures that the existing requirement for the publication of this duty rate continues in its current form. [Schedule 1 to the ETA Bill 2017, item 4, subsection 6AAB(9) of the ETA 1921; Schedule 1 to the CTA Bill 2017, item 4, subsection 19ACA(9) of the CTA 1995]

1.17 The existing requirements for in stick form tobacco duty rates to be published continue under the existing provisions in subsection 6AA(11) of the ETA 1921 and subsection 19AB(11) of the CTA 1995.

Consequential amendments

1.18 The ETA Bill 2017 makes consequential amendments to the heading, cross-referencing to the tobacco duty item and to simplify the rounding rule in the current tobacco indexation provision in the ETA to ensure it operates as intended. [Schedule 1 to the ETA Bill 2017, items 1, 2 and 3, heading to section 6AAB and subsections 6AAB(1) and (2) of the ETA 1921]

1.19 The CTA Bill 2017 makes consequential amendments to simplify the rounding rule in the section setting out the current indexation method and also to the heading for the section in the CTA 1995 setting out the duty rates to be indexed and updates the cross-references to the duty items in that section. [Schedule 1 to the CTA Bill 2017, items 1, 2 and 3, subsection 19AB(2), heading to section 19AC and paragraph 19ACA(b) of the CTA 1995]

Application and transitional provisions

1.20 The ETA Bill 2017 and the CTA Bill 2017 commence on 31 August 2017. This ensures that the amendments made by these Bills are in place for the AWOTE indexation scheduled for 1 September 2017 so that the indexation and other tobacco rate adjustment can be applied together to minimise the compliance cost impact of this measure. [Clause 2 of the ETA Bill 2017, Clause 2 of the CTA Bill 2017]

1.21 The amendments made by the ETA Bill 2017 and CTA Bill 2017 apply on and from the replacement day, being the later of 1 September 2017 and:

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for excise duty - if subsection 6AA(7) of the ETA 1921 had the effect of replacing a rate of duty for 1 September 2017 on a day later than 1 September 2017 - that later day.

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for excise-equivalent customs duty - if subsection 19AB(7) of the CTA 1995 had the effect of replacing a rate of duty for 1 September 2017 on a day later than 1 September 2017 - that later day.

[Schedule 1, item 6 of the ETA Bill 2017; Schedule 1, item 86 of the CTA Bill 2017]

1.22 The amendments made by the ETA Bill 2017 and CTA Bill 2017 apply to all goods:

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entered for home consumption on or after the first replacement day; and

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imported on or after the replacement day and to goods imported before that time where the time for working out the rate of excise-equivalent customs duty on the goods has not yet occurred.