House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP, and the Assistant Minister for Immigration and Border Protection, Senator the Hon Michaelia Cash)

Chapter 1 - Indexation changes and staged increases to tobacco excise and excise equivalent customs duty

Outline of chapter

1.1 The Excise Tariff Amendment (Tobacco) Bill 2014 (Excise Bill) and the Customs Tariff Amendment (Tobacco) Bill 2014 (Customs Bill) amend the Excise Tariff Act 1921 (ETA 1921) and the Customs Tariff Act 1995 (CTA 1995) to:

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increase rates of excise and excise equivalent customs duty on tobacco through a series of four staged increases of 12.5 per cent, commencing on 1 December 2013; and

•

index rates of excise and excise equivalent customs duty on tobacco to average weekly ordinary time earnings (AWOTE) instead of the consumer price index (CPI). The last CPI indexation occurred on 1 August 2013 and the first AWOTE indexation occurs on 1 March 2014.

Context of amendments

1.2 Excise is a tax on certain goods produced in Australia, including tobacco products. Imported goods comparable to those subject to excise, known as excise equivalent goods, attract customs duty that includes a component of the same rate as the excise applied to locally-produced goods. This component is commonly referred to as excise equivalent customs duty. As a result, imported goods and locally-produced goods are taxed in an equivalent fashion.

1.3 Excise Tariff Proposal (No. 1) 2013 and Customs Tariff Proposal (No. 2) 2013 were tabled in the House of Representatives on 10 December 2013. These tariff proposals were necessary to give effect to the first of the series of four 12.5 per cent increases in the rates of excise and excise equivalent customs duty on tobacco, which took effect on 1 December 2013. The tariff proposals were also necessary to give effect to the change in the indexation method for rates of duty on tobacco and tobacco products from CPI to AWOTE.

1.4 The intention to alter the ETA 1921 and CTA 1995 had been previously announced in separate Commonwealth Government Gazette Notices on 29 November 2013, under section 160B of the Excise Act 1901 and section 273EA of the Customs Act 1901 .

1.5 Prior to these amendments, excise duty on tobacco products was indexed according to CPI, with indexation adjustments occurring in February and August to align with the release of CPI figures. Indexation adjustments to the rate of excise on tobacco were also reflected in equal increases in the excise equivalent customs duty that applied to tobacco.

1.6 However, because CPI tends to increase at a lower rate than AWOTE, the excise and excise equivalent customs duty component of the price of tobacco tended to rise at a rate lower than wage growth. These amendments ensure that additional consumer demand is not encouraged in the longer term by a decline in the duty component of the price of tobacco, relative to wages and salaries.

1.7 Despite reductions in tobacco consumption among the general Australian population, tobacco continues to be a major cause of death and disability, with approximately three million Australians still smoking at least daily or weekly. Around 15,000 people die each year of smoking-related illness in Australia (Begg et al. 2007). ^[1]

1.8 These amendments seek to reduce the premature death and disease due to smoking by increasing the rates of duty on tobacco through both indexation changes and staged increases to rates of duty.

Summary of new law

Staged increases

1.9 These amendments provide for a series of four staged increases of 12.5 per cent each to the rates of excise and excise equivalent customs duty on tobacco.

1.10 The first of these increases occurred on 1 December 2013. The three subsequent increases are scheduled for 1 September in 2014, 2015 and 2016 respectively. These subsequent increases coincide with the indexation adjustments scheduled for these dates.

Indexation changes

1.11 These amendments ensure that rates of excise and excise equivalent customs duty on tobacco are indexed according to AWOTE instead of CPI.

1.12 Indexation adjustments still occur biannually, but are scheduled for 1 March and 1 September each year, to align with the publication of AWOTE data by the Australian Bureau of Statistics (ABS).

1.13 The last CPI indexation occurred on 1 August 2013 and the first AWOTE indexation is scheduled for 1 March 2014.

Comparison of key features of new law and current law

Detailed explanation of new law

1.14 Both the indexation changes and the staged increases in rates of duty apply to the rates of duty for tobacco products in stick form and 'other' tobacco. Therefore, these changes apply to products including cigars, cigarettes and snuff. 'Tobacco' is defined in the Schedule to the ETA 1921 to mean tobacco leaf subjected to any process other than curing the leaf as stripped from the plant.

1.15 These amendments affect subitems 5.1 and 5.5 in the Schedule to the ETA 1921 and subheadings 2401.10.00, 2401.20.00, 2401.30.00, 2402.10.20, 2402.10.80, 2402.20.20, 2402.20.80, 2403.11.00, 2403.19.10, 2403.19.90, 2403.91.00 and 2403.99.80 in Schedules 3 and 5 to 9 to the CTA 1995. [Schedule 1, item 4 of the Excise Bill, subsection 6AA(1) of the ETA 1921; Schedule 1, item 75 of the Customs Bill, section 19AC of the CTA 1995]

Series of staged increases in rates of duty

1.16 The first in the series of four 12.5 per cent increases (staged increases) in the rates of duty occurred on 1 December 2013. The effect on rates is set out in Table 1.1. [Schedule 1, items 1 to 3 of the Excise Bill, Schedule (cells at subitems 5.1 and 5.5, column headed 'Rate of Duty') to the ETA 1921; Schedule 1, items 1 to 72 of the Customs Bill, Schedule 3 (subheadings 2401.10.00, 2401.20.00, 2401.30.00, 2402.10.20, 2402.10.80, 2402.20.20, 2402.20.80, 2403.11.00, 2403.19.10, 2403.19.90, 2403.91.00 and 2403.99.80, the rates of duty in column 3), Schedule 5 (cells at table items 43A, 44 to 51, 51A, 52 and 54, column 3), Schedule 6 (cells at table items 46A, 47 to 54, 54A, 55 and 57, column 3), Schedule 7 (cells at table items 46 to 54A, 55 and 56 column 3), Schedule 8 (cells at table items 52 to 60, 60A, 61 and 62, column 3) and Schedule 9 (cells at table items 50 to 61, column 3) to the CTA 1995]

1.17 The remaining staged increases are scheduled to occur on 1 September 2014, 1 September 2015 and 1 September 2016. These coincide with the indexation adjustments scheduled for those days. [Schedule 1, item 4 of the Excise Bill, subsections 6AA(1) and (6) of the ETA 1921; Schedule 1, item 75 of the Customs Bill, subsections 19AB(1) and (6) of the CTA 1995]

Indexation changes

1.18 These amendments ensure that the rate of increase in excise and excise equivalent customs duty applying to tobacco and tobacco products keeps pace with growth in wages and salaries, by indexing the relevant rates of duty according to AWOTE. This ensures that additional consumer demand is not encouraged in the longer term by a decline in the duty component of the price of tobacco, relative to wages and salaries.

1.19 For the purposes of these amendments, AWOTE is defined, in relation to a quarter, as the estimate of the full-time adult average weekly ordinary time earnings for persons in Australia for the middle month of the quarter, published by the Statistician in relation to that month. Consistent with references to AWOTE in other parts of the tax law, the definition of AWOTE refers to the Original series published by the ABS. [Schedule 1, item 4 of the Excise Bill, subsection 6AA(12) of the ETA 1921; Schedule 1, item 75 of the Customs Bill, subsection 19AB(12) of the CTA 1995]

1.20 As the AWOTE figures are published according to a different timetable than the CPI figures, the change in indexation method requires a change to the timing of indexation adjustments in the rates of duty applying to tobacco and tobacco products. To align with the expected publication dates of AWOTE figures, indexation adjustments are scheduled for 1 March and 1 September each year (indexation days). [Schedule 1, item 4 of the Excise Bill, subsection 6AA(12) of the ETA 1921; Schedule 1, item 75 of the Customs Bill, subsection 19AB(12) of the CTA 1995]

1.21 To work out the new rate as adjusted for indexation, the rate applying before the indexation day (the original rate) is multiplied by the 'indexation factor'. However, an indexation adjustment only occurs if the indexation factor is equal to or greater than one, ensuring that indexation adjustments cannot reduce the rates of duty. [Schedule 1, item 4 of the Excise Bill, subsection 6AA(1) of the ETA 1921; Schedule 1, item 75 of the Customs Bill, subsection 19AB(1) of the CTA 1995]

1.22 Where a tariff alteration proposed in the Parliament has substituted a rate with effect prior to an indexation day, the rate proposed in the tariff alteration is to be treated as the original rate. The new rate incorporating the indexation adjustment must be worked out according to the same number of decimal places as the original rate. [Schedule 1, item 4 of the Excise Bill, subsections 6AA(2) and (8) of the ETA 1921; Schedule 1, item 75 of the Customs Bill, subsections 19AB(2) and (8) of the CTA 1995]

1.23 The indexation factor is worked out by dividing the most recent AWOTE amount by the highest AWOTE amount for a previous quarter, which may not necessarily be the AWOTE amount for the immediately preceding quarter (with the exception of the indexation factor for the March 2014 indexation calculation). [Schedule 1, item 4 of the Excise Bill, subsections 6AA(3) and (12) of the ETA 1921; Schedule 1, item 75 of the Customs Bill, subsections 19AB(3) and (12) of the CTA 1995]

1.24 The previous quarter cannot be earlier than the June quarter of 2013. Accordingly, the indexation factor for the first indexation adjustment using AWOTE in March 2014 is determined by dividing the AWOTE amount for the December 2013 quarter by the AWOTE amount for the June 2013 quarter. The indexation factor must be worked out to three decimal places. [Schedule 1, item 4 of the Excise Bill, subsections 6AA(4) and (12) of the ETA 1921; Schedule 1, item 75 of the Customs Bill, subsections 19AB(4) and (12) of the CTA 1995]

1.25 Where the scheduled indexation day coincides with one of the staged increases, the adjustment in the rates of duty due to the staged increase is included as part of the new rate of duty in the broader indexation calculation (called the 'additional factor for the indexation day'). That is, in these circumstances, the adjustments occur simultaneously. However, each scheduled staged increase occurs even where the indexation adjustment is not made because the indexation factor is less than one. [Schedule 1, item 4 of the Excise Bill, subsections 6AA(1), (5) and (6) of the ETA 1921; Schedule 1, item 75 of the Customs Bill, subsections 19AB(1), (5) and (6) of the CTA 1995]

Example 1.1 : AWOTE indexation

As at 29 February 2020, the rate of duty on 'other tobacco' is $750.00. The AWOTE amount for the December 2019 quarter (the most recent reference quarter) is 2000.00 while the AWOTE amount for the June 2019 quarter (the base quarter) is 1900.00.

The indexation factor to be applied for the 1 March 2020 indexation day is:

Indexation factor = 2000.00 / 1900.00 = 1.053


As the indexation factor is greater than one, the new rate of duty is determined by multiplying the previous rate by the indexation factor and the applicable 'additional factor for the indexation day'. Because none of the staged increases are scheduled for 1 March 2020, the additional factor for the indexation day is one. The new rate is:

New rate of duty = $750.00 * 1.053 * 1 = $789.75


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

Publication of AWOTE amounts

1.26 If the ABS publishes a revised estimate for AWOTE for a period for which it has already published an estimate previously, the revised estimate is not taken into account in determining the indexation factor. This is consistent with how revised CPI publications were treated when rates of duty for tobacco and tobacco products were indexed according to CPI. [Schedule 1, item 4 of the Excise Bill, subsection 6AA(9) of the ETA 1921; Schedule 1, item 75 of the Customs Bill, subsection 19AB(9) of the CTA 1995]

1.27 If the ABS does not publish the AWOTE figures at least five days before an indexation day, any indexation adjustment is delayed. In such cases, the new rates of duty only apply from the fifth day after the day the AWOTE figures are published. This approach is consistent with how new rates of duty would be applied under CPI indexation. [Schedule 1, item 4 of the Excise Bill, subsection 6AA(7) of the ETA 1921; Schedule 1, item 75 of the Customs Bill, subsection 19AB(7) of the CTA 1995]

1.28 Where a staged increase is scheduled on an indexation day which is affected by the late publication of AWOTE figures, the staged increase component of the increase in rates is also delayed so that it takes effect at the same time as any indexation adjustment. This ensures that taxpayers are only required to comply with one adjustment to the rates of excise and excise equivalent customs duty on tobacco and tobacco products, therefore limiting the compliance costs from rate adjustments. [Schedule 1, item 4 of the Excise Bill, subsections 6AA(1), (6) and (7) of the ETA 1921; Schedule 1, item 75 of the Customs Bill, subsections 19AB(1), (6) and (7) of the CTA 1995]

Example 1.2 : Late publication of AWOTE figures

For the 1 September 2015 indexation day, ABS publishes the AWOTE amount in respect of the June 2015 quarter on 30 August 2015 (the publication day).

As the publication day is less than five days before the 1 September 2015 indexation day, the indexation adjustment does not take effect on 1 September 2015. Equally, the staged increase scheduled for 1 September 2015 does not take effect on that day.

Instead, the new rates of duty take effect on 4 September 2015. The new rates of excise and excise equivalent customs duty incorporate both the staged increase originally scheduled for 1 September 2015, as well as any applicable indexation adjustment (based on the AWOTE figures published by ABS).

Publication of rate changes

1.29 Consistent with publishing rate increases arising from CPI indexation, these amendments ensure that changes in the rates of duty for tobacco and tobacco products must be published by Gazette notice as soon as practicable after the new rate of duty replaces the previous rate of duty. The Commissioner of Taxation is responsible for publishing the new rates of excise duty while the Chief Executive Officer of Customs is responsible for publishing the new rates of excise equivalent customs duty. [Schedule 1, item 4 of the Excise Bill, subsection 6AA(11) of the ETA 1921; Schedule 1, item 75 of the Customs Bill, subsection 19AB(11) of the CTA 1995]

1.30 Because the staged increases are scheduled to occur on days which are indexation days, only one Gazette notice is published in respect of each staged increase and any simultaneous indexation adjustment.

Consequential amendments

1.31 Consequential amendments to the ETA 1921 and CTA 1995 are made to reflect that alcohol and tobacco are no longer indexed using the same method. Prior to these amendments, both alcohol and tobacco were indexed according to CPI. The CPI indexation provision for alcohol has been redrafted in the ETA 1921 using the same style as the new AWOTE indexation provision for tobacco and tobacco products. However, this re-drafting has no impact on the operation of the CPI indexation as it continues to apply to alcohol. [Schedule 1, item 4 of the Excise Bill, section 6A of the ETA 1921]

1.32 The indexation provisions for alcohol and tobacco have also been reproduced in full (with appropriate adjustments) in the CTA 1995. Previously, the CTA 1995 applied the same indexation increases arising for excisable goods under the ETA 1921 to excise equivalent goods. The reproduction of indexation provisions in the CTA 1995 ensures that all information relating to the AWOTE or CPI indexation of imported products is contained within the CTA 1995. However, as these provisions are drafted in essentially the same way as the ETA 1921 indexation provisions, the rates of excise equivalent customs duty are intended to remain equal to the rates of excise duty on excise equivalent goods. This ensures comparable duty treatment continues for both imported and domestically manufactured tobacco. [Schedule 1, item 75 of the Customs Bill, sections 19, 19AA, 19AB and 19AC of the CTA 1995]

1.33 The redrafting of the indexation provisions also makes a technical correction to the indexation provisions in the ETA 1921, to provide certainty, consistent with administrative practice, that indexation is not applied to condensate. This is consistent with section 6CA of the ETA 1921, which is the more specific provision to be used to determine the amount of excise duty payable on condensate. [Schedule 1, item 4 of the Excise Bill, section 6A of the ETA 1921]

1.34 Consequential amendments to remove redundant definitions and update guide material are made to reflect the changes to the indexation approach. [Schedule 1, items 6 to 12 of the Excise Bill, subsection 3(1)(definition of 'index number'), subsection 5(1)(note), Schedule (note 2 to Schedule heading and table heading) to the ETA 1921; Schedule 1, item 74, subsection 3(1)(definition of 'excise item' )]

Application and transitional provisions

Staged increases

1.35 With the exception of some consequential amendments, these amendments commence on 1 December 2013. The changes to give effect to the first of the four staged increases apply on and from the same date. [Clause 2 and Schedule 1, item 3 of the Excise Bill; Clause 2 and Schedule 1, item 73 of the Customs Bill]

Indexation changes

1.36 This commencement date also ensures that the existing indexation provisions are repealed in time so that the CPI indexation scheduled for 1 February 2014 does not apply to tobacco and tobacco products. Instead, the AWOTE indexation amendments for tobacco and tobacco products apply to the 1 March 2014 indexation day and each later tobacco indexation day. To ensure that CPI indexation continues to apply to alcohol, the consequential amendments relating to CPI indexation, apply to the 1 February 2014 indexation day and each later alcohol indexation day. [Schedule 1, item 5 of the Excise Bill; Schedule 1, item 76 of the Customs Bill]

Application of new rates of duty

1.37 Where a rate of duty is adjusted under these amendments, the adjusted rate applies to:

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goods entered for home consumption on or after the day the adjustment is made (for goods subject to excise duty); or

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goods imported on or after the day the adjustment is made, and to goods imported before that time where the time for working out the rate of import duty on the goods has not yet occurred (for goods subject to excise equivalent customs duty).

[Schedule 1, items 3 and 4 of the Excise Bill, subsection 6AA(10) of the ETA 1921; Schedule 1, items 73 and 75 of the Customs Bill, subsection 19AB(10) of the CTA 1995]

Contingent consequential amendments

1.38 A number of the consequential amendments to the ETA 1921 are contingent upon the passage and commencement of the Excise Tariff Amendment (Carbon Tax Repeal) Bill 2013. These amendments relate to updated guide material within the ETA 1921 which refers to the indexation provisions. These provisions commence from the later of:

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the start of 1 December 2013; and

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immediately after the commencement of Schedule 1 to the Excise Tariff Amendment (Carbon Tax Repeal) Bill 2013.

1.39 However, the provisions do not commence at all if Schedule 1 to the Excise Tariff Amendment (Carbon Tax Repeal) Bill 2013 does not commence. [Subclause 2(1) of the Excise Bill, item 4 in the table]