CHAIR —Welcome. Who is the designated hitter from your side? Mr Sutton, would you introduce your colleagues and express, in synopsis, an overview of your submission? Then your team might answer questions from the committee.

Mr Sutton —Mr Brian Croser is executive chairman of Petaluma Winery and is here as President of the Winemakers Federation. Mr Tony Battaglene is General Manager of the recently opened Wine Bureau in Canberra. Ms Jane Mitchell is a principal of Mitchell's Wineries, one of the regional wineries in Clare and also representing the Australian Regional Winemakers Forum. Mr Stephen Strachan is the Senior Analyst from the Winemakers Federation, and Ms Margot McGregor has recently joined the federation as the Executive Officer of the Australian Regional Winemakers Forum. I would like to explain what some of those positions represent in terms of our structure.

The Winemakers Federation has been operating since 1990. It consists of two electoral colleges. The Australian Regional Winemakers Forum was established in 1984 specifically to look after the interests of small regional winemakers and has representation on its board from all states of Australia. It represents 332 members, primarily small and regional winemakers, and has a very strong focus on the regionality of the Australian wine industry as it applies to investment and tourism and the general contribution to the Australian regional economy. The other electoral college, which has been in operation since the 1920s, is the Australian Wine and Brandy Producers Association. It represents some 51 large wineries.

Each of those two electoral colleges contributes five councillors to the Winemakers Federation executive council. All executive council decisions require an 80 per cent majority. The reason for that is that all decisions need to have a substantial degree of support from both sides, both large and small in the industry. The Winemakers Federation membership represents over 90 per cent of all wine production in Australia. I will hand over to Mr Croser, who can give a synopsis of the federation's position.

Mr Croser —Thank you for hearing our case. We understand the pressures on your time and we feel quite privileged to be here. The Winemakers Federation of Australian represents the industry on a whole range of issues, although sometimes I think probably we focus on tax a bit too much. Research, education, environment, industrial relations, health, trade regulation and tourism, to name a few, are the important issues that our industry is involved in.

Senator HARRADINE —And quality of product.

Mr Croser —That is inherent in research and education as the drivers of that, plus our wonderful environment.

The Winemakers Federation has taken, quite responsibly, a whole of industry, whole of economy approach to taxation reform. To make sure that we had academic integrity in our deliberations and our recommendations, we commissioned the Centre of International Economic Studies, a subunit of the University of Adelaide run by Professor Kym Anderson, to model quite specifically the effects of various tax regimes on the Australian wine industry. From those studies, which we make available to you—and we do have a summary of the outcomes—it is quite clear that a GST only was highly beneficial to the Australian wine industry as a component of the Australian economy relative to the current situation of a wholesale sales tax of 41 per cent. Wine is one of the victims of the I guess very targeted and not broad spread current taxation system; $100 million of benefits accrue to the economy and to the Australian wine industry from a GST only environment.

We quickly recognised that the government had revenue imperatives which were legitimate in the taxation reform process and that it was most unlikely, in fact improbable, that the wine industry would be asked to produce less revenue than it currently produces for government. So we established a plank of our policy as revenue neutral.

The next question was: should we be pursuing an ad valorem tax or a volumetric tax, which has different implications for different segments of the Australian wine industry? Ad valorem is a continuum of the wholesale sales tax system which the industry has lived with on and off in different magnitudes over 50 years. So we had that modelled to raise the same revenue as the current wholesale sales tax system, which is $560 million, and ad valorem was significantly better than volumetric for the total industry. Specifically, ad valorem protected the viability of the MIA, Riverland and the majority of the 5,000 independent grape growers that exist within our industry and are such an important part of it.

Overhead slides were then shown—

Mr Croser —Significantly, with GST, ad valorem or volumetric produces a positive result for our industry, which is an agriculturally based manufacturing industry with a high export component that is growing rapidly. But volumetric is better than ad valorem, as the figures to my left demonstrate. Sorry, have I said that the wrong way around? Please expunge that. I have only been doing this for 10 years. Ad valorem is significantly better than volumetric, and in terms of relative percentages that is demonstrated by the charts on my left. Everyone wins, but some segments are favoured more than others. Under an ad valorem system, which is a continuation of the current system, the non-premium wine sector benefits more than the premium wine sector, but both sectors benefit under a GST plus whatever top-up tax system.

Further, the ad valorem system recognises the distinct difference between wine and other alcoholic beverages. Both our research and the research that was presented during the wine inquiry of 1994-95 demonstrated quite clearly that there is little cross-elasticity of demand between wine and beer and spirits. That is wine of any sort, either in bag and box, in $8

bottles or in expensive bottles. They are not substitutes. They are used differently in the community and are not directly substitutable. Of course, beer and spirits are taxed under the volumetric regime, and we feel very comfortable that wine should remain in the ad valorem mode of taxation. We would advance the case that wine makes a lesser contribution to the negative externalities of alcohol abuse in this country. We have quite a deal of evidence presented in our submission to you. Regardless of whether it is bag and box or bottle, that is the case; there is no significant difference in a research between bag and box and bottle in contribution to externalities. The thing that is every day raising its head in the international media and in Australia and from respected international medical research organisations is the fact that moderate alcohol consumption has positive externalities, so the story for wine in particular is not all negative.

We have looked at the ad valorem taxation regime that might apply to the wine industry and have made recommendation to government that the continuation of the ad valorem system should be as near to the wholesale sales tax mechanism as possible, for simplicity and for the minimisation of compliance costs. The WET tax that is now proposed by Treasury meets those specifications. It is applied at the last point of wholesale and it is a continuation of the existing system of application. We are very happy with that mechanism.

If in fact revenue neutrality is the goal, the $560 million of wholesale sales tax currently collected from the industry would be collected by a 19.5 per cent WET tax plus GST. That would collect $560 million. We recognise as an industry that the government is introducing a new tax, a GST, in which the S stands for service and taxing a new section of the community. We recognise that we will not achieve total revenue neutrality at $560 million. There will be some contribution from our industry, specifically from the on premise restaurant trade and cellar door sales, which represents the tax on service. In restaurants and in cellar door sales, where the small winemakers of Australia concentrate their products, there is significantly higher mark-up than in the retail stores, the off premise sale points, and the GST picks up an added revenue from the industry through taxing that service.

So we have suggested to Treasury that 24.5 per cent should be the WET tax rate applied, which would raise $634 million, which is $70 million more than the current wholesale sales tax—I guess, a government bonus as the tax on service for our industry. The columns on my left demonstrate the wholesale value broken up between the various sale points—the retail off-premises stores, the restaurants on premises and the cellar door sales—translated to retail values. So $1.4 billion of wholesale value Australian wine in the domestic marketplace translates to $3.2 billion of retail sales. Currently the 41 per cent wholesale sales tax collects $559 million from those sales. The WET at 24.5 per cent, as we suggest, would collect $634 million, the bulk of the difference—in fact all of the difference—coming from the cellar door sales, $28 million to $47 million, and from the on-premises sales, $139 million to $194 million; from that area of the industry where the small winemakers are concentrating their sales.

Treasury, we have divined, in their papers have rated 31.7 per cent, which represents a windfall to government above the present situation of some $147 million. Again, the extra money that Treasury would be raising would be raised squarely from on-premises and cellar door, where the premium wine of Australia is sold. As background to our submission, the states have always recognised the role that the small winemakers play in regional economies.

They have recognised the very important infrastructure provided by small wineries in the 50-odd wine regions of Australia and in doing so they have exempted, in the past, those small wineries that have legitimate cellar door sales. I am talking not about the large mail order wine lists of large mail order corporations but about the small wineries of Australia.

The states have exempted those small wineries from the licence fee that was a state tax on the right to be a vigneron and sell wine at the cellar door. They exempted that until the High Court case turned over the state collection of licence fees. It was converted to a 15 per cent wholesale sales tax to add on to the hard fought and won 26 per cent wholesale sales tax regime, to make a total of 41 per cent wholesale sales tax. We have had the pretty onerous and tortuous circumstance of having the Commonwealth government collect that 15 per cent, return it to the state governments, and then the state governments return it to the cellar door sales operators as a rebate on cellar door sales for those small operators. That is under threat with the change of fiscal arrangements between states and the Commonwealth.

Our position is that the neatest, best and most targeted way to recognise the role of small winemakers in the Australian regional economy—which is significant—and the neatest way to compensate for the additional tax that is being raised by the WET plus GST regime, largely from the small winemakers and quality producers of Australia in on-premises and cellar door sales, is to exempt those small winemakers from WET tax at legitimate cellar door. For all of those 800 small cellar door operators selling 100 tonnes or less than 100 tonnes—this is about 6,000 cases of wine; almost the consumption level of the average Australian—our suggestion is to exempt them from the WET tax, up to the level of $500,000 of retail sales at cellar door. This level would exclude the large, mail order operators.

The cost of that exemption to the Treasury would be $20 million to $30 million. On their model they are already picking up $140 million extra through service charge and on our model they are picking up $70 million. So it is not a very big return and our model has very targeted and beneficial effects for these community operators. That of course would mean that there would be no tax on samples at cellar door. Currently there is: the wholesale sales tax is paid on samples that are given to consumers and potential purchasers. There is no GST on samples, because there is no sale, but we would advocate strongly that there should be no WET on cellar door sales at all for the 800 regional contributing small winemakers of Australia. I rest our case there, unless any of my colleagues have anything to add. I do emphasise that we are supporting ad valorem, not volumetric, tax!

CHAIR —It is my normal procedure to invite the deputy chair of the committee to ask the first question but, given that this is the wine industry and Senator Murray has a background in it I might, with respect to you, Senator Ferguson, concede the honour to Senator Murray.

Senator MURRAY —I no longer have extensive investments in your industry; my conflict of interest now arises from about two glasses a day. Let us go through the various elements. The first is the export side. Is there any downside to the government's tax package from the point of view of exports?

Mr Croser —From the point of view of exports alone and for our modelling, we have commissioned ACIL to do an examination of the effect on the costs to a large winery, a

medium sized winery and a very small winery. The cost structure of Australian winemaking is very important to export competitiveness—and the tax package as proposed by government reduces the input costs to the winemaking process by about 1.2 per cent, which is less than the average reduction of costs across the economy of three per cent. That 1.2 per cent reduction in costs is concentrated at the high end because the cost reduction for small operators is significantly less, which is another disadvantage of the system for the small operators.

Because the level of domestic demand increases, because the level of economic activity from our industry in the domestic market increases and benefits from the cashflow and profitability of that under the proposed tax package, that creates an industry that is healthier to support the very extensive growth that is going on in exports. The industry is a very capital intensive industry, $2 of capital for $1 of sales. There is no other industry, I think, that has that sort of ratio. It needs a very healthy and profitable domestic market to support the large inventory increases and the large marketing efforts that are being made in export markets. The answer is that the package, as we perceive it for the wine industry alone, is supportive of the export endeavours of the industry.

Senator MURRAY —Is it true that the volume growth in wine exports is very much dependent upon remaining price competitive?

Mr Croser —Extremely.

Senator MURRAY —Are you aware that both the Treasury and the very skilled professional modellers maintain that over the longer term, which they define as I think about eight years or more, the benefits of the tax package will be wiped out by currency appreciation? In other words, there is an automatic adjustment. Do you think that is a plausible or realistic assumption, that currency will automatically adjust for greater price competitiveness from Australia?

Mr Croser —We have not looked at that length of time or, specifically, at that issue. Currency is an important factor in the Australian wine industry's competitive platform but it is not the most important. The Australian wine industry has prospered for the last 12 years in exports through some fairly substantial variations in the relative value of our currency and I think it has been quite clever in hedging at the appropriate times—and hedging for the appropriate length of time—and in producing products by cross blending between regions that hit a cost point as well as a price point in international markets, dampening the effects of currency fluctuations. I would rank currency fluctuations as being a major issue but, of the major issues affecting our competitiveness overseas, the more minor of those major issues. The most important is the quality and consistency of Australian wine and the high reputation it has for integrity and purity.

Senator MURRAY —Turning to the domestic side, the committee is hampered somewhat in its evaluation of the effects by the publicly available statistics because the Bureau of Statistics and the Treasury agree that people underestimate their expenditure on alcohol. Therefore, the effects of the tax package on demand and disposable income available for your industry is less clear than for other categories. Given the difficulties put up by the WET and its various alternatives, do you consider the net result of the tax package changes,

particularly as they affect income tax cuts, for instance, particularly for the higher income earners, will be to grow domestic demand considerably?

Mr Croser —Yes, I do. That is based on the increased income for Australians which has a net effect in increasing sales of wine. Wine is cross-elastic with other Australian products; it is discretionary consumer expenditure. It is cross-elastic with holidays, music, books and a whole range of things Australians spend their discretionary dollars on. In being so, any increase in the perceived net wealth of Australians will increase the consumption of that whole gamut of products. And the package, complete with WET tax, does not change the relativities of those products, the price of those other products which are the competitive products with wine, in a negative sense. For that reason, wine is modelled to be advantaged under this package. But that is for wine: that is all we have looked at.

Senator MURRAY —Principally it would be for off-premise, I would assume, because on-premise is affected by the fact that the restaurant sector's overall cost structure will increase with a loss of jobs and turnover, and the tourism sector is estimated to be falling by about 4.5 per cent. There will be a decrease in demand there. So you will see a greater shift in demand at the off-premise rather than the on-premise level. Is that how you see it?

Mr Croser —That is as we would perceive it because the price rises are exacerbated by the GST being added on to by retail margin in on premises and in cellar door sales where the mark-up from the wholesale price to the retail price is greater in percentage terms. Therefore, there will be a magnified effect. To put that into numerical perspective, under the Treasury's 31.7 WET tax proposal, the off-premise retail store cost of wine to Australians would be increased by three per cent, cellar door sales by four to five per cent and the on-premise restaurant by six to seven per cent. So you are correct.

Senator MURRAY —With regard to the abuse side of things, and no discussion about alcohol can leave that outside consideration, it would be I guess self-evident that alcohol abuse is more likely to occur from off-premise consumption than on-premise, simply because that is where most of the volume is, and because restaurant consumption generally speaking does not produce that binge drinking. Alcohol pricing is affected by the sin tax attempt to reduce consumption at the unacceptable levels, so we have the promotion of lower alcohol products.

With regard to the wine industry, however, low alcohol products are not really a major feature in the same sense that you have low alcohol beers—and the same applies for spirits, as you would be aware. Would the profitability of your industry, and jobs and turnover, be affected by a pricing regime which continued to differentiate between, and in fact tried to increase, the gap between higher alcohol by volume products and lower priced products and the rest of the market? With regard to your industry, if the large-scale consumption of, say, bag-in-the-box wines were to be decreased and bottled wine were to be increased, would that affect the profitability and jobs impact of your industry materially?

Mr Croser —The answer is yes, and significantly. But let me say that, first of all, that scenario would have no net effect on the abuse of alcohol per se through the medium of wine. Wine is the most benign of the three alcoholic beverages in that it is mostly consumed, whether it is cask or bottled, at home with a meal or in a restaurant with a meal. Our own

ABS-commissioned survey demonstrates that there is no difference in fact between the levels of abuse of bottled wine and cask wine.

Senator HARRADINE —What is the latest evidence in print?

Mr Croser —There is, however, a significant difference between cask wine and bottled wine, which the economists have pointed out, in that cask wine is more price elastic than bottled wine. The response to price is significantly stronger. Wine as a category is relatively price inelastic but, inside that, disaggregating it, cask wine is relatively sensitive.

If you raise the price of cask wine and wine in bottles at less than $8, which is 70 per cent of the wine consumed by ordinary Australians, you will in fact have a significant effect on the volume of wine consumed, on the livelihoods of 5,000 independent grape growers, on the major enterprises that are exporting our wines—because they are the producers, by and large, of Australia's affordable wine—and on regional economies up and down the riverland system of Australia. Our modelling clearly demonstrates that.

Senator MURRAY —In my state of Western Australia you get rural and regional areas which have a very high instance of alcohol abuse. Interestingly, they often have very substantial numbers of people in their populations who are actually abstainers, and the abuse is limited. But the abuse, principally, appears to reside in the consumption of cask wine, full strength beers and alcohol mixes—the bottled pre-mixed drinks. Is it your view that it is possible for this tax package to be used to promote a price regime which might result in the discouragement of alcohol abuse, focused on communities such as that, where full strength or particular types of alcohol predominate as the abused item?

Mr Croser —Our opinion that price would not affect that situation is based on the fact that those abuse circumstances are very specific. They are tragic and they are, I guess, a stone in the shoe of all Australian winemakers and in the shoe of the community. They are highly visible and they are emotive. We as a community should be doing something about eliminating the base causes of those very highly focused and visible abuse circumstances, and we as an industry are dedicated to doing something about that. However, we would propose that, first of all, price will not affect the abuse of whatever substance it is under those circumstances; it has to be a much deeper social change that will affect that consumption tragedy—beer, spirits, wine, petrol or whatever. However, on a broader basis, the costs of alcohol abuse in the community are not largely centred there; they are the visible circumstances. The costs of the abuse of alcohol, as the economists would tell us, range across the costs to businesses of absenteeism and poor performance at work, the motor car accidents and the health problems. The very broad-ranging effects of alcohol across the community cause most of the costs, the negative externalities, which are the legitimate concern of government in collecting back, as you termed it, the sin tax from the alcohol industry.

We as an industry would make a case that in fact of all of the alcoholic beverages, because of the circumstances under which wine is consumed and because of the size of the industry relative to the other alcoholic beverage industries, our industry is the more benign. Given the international evidence, the medical and social research that have been done and accumulated, that says that the conservative and moderate consumption of wine as an

alcoholic beverage has actual beneficial effects to specific aspects of health—coronary, prevention of stroke and all sorts of things—adding to the value and extent of life and health, the wine industry in fact is a lesser contributor to those negative externalities.

Senator MURRAY —Thank you for the length of time you have given me, Mr Chairman.

Senator CONROY —I am looking at one of your submissions, dated 29 January. You indicate that you have had some modelling done on the general CPI increase. I think you say that you have come up with a five per cent figure. Is it possible to get a copy of your modelling? It is noted at page 8 of that submission. Was that by ACIL or by Dixon and Rimmer?

Mr Battaglene —We can supply that to you.

Mr Strachan —It was done by the Centre for International and Economic Studies out of the University of Adelaide—Wittwer and Anderson.

Senator CONROY —On page 9 of that submission it states:

If the level of a WET tax is set at such a rate as to increase the prices and thus reduce demand, it is likely that a large number of small wineries will become sub-economic.

`Sub-economic'—in less economic jargon does that mean they close down?

Mr Croser —Our page 9 says different things from yours. I think perhaps it from one of my colleagues.

Mr Battaglene —`Sub-economic' means that they could close down. It would definitely have an adverse effect on them, particularly on cellar door operations. I guess that is a key area of concern, that it may cause them to lay off people who are at the cellar door. It depends very much on the level of the WET tax.

Senator CONROY —It goes on to say:

. . . the pressures on these to reduce costs usually in the form of reducing labour costs will increase.

That is economic jargon for job losses.

Mr Battaglene —Yes.

Senator CONROY —I was interested in your comments earlier to Senator Murray. Further on in that submission on page 9 you talk about exchange rates, and you say that `the wine industry is likely to lose from the package'. You indicated earlier that you did not think that was the case. The submission argues that, because your industry already has a lot of exemptions from WST and different inputs, the savings are much less than the average figure that Treasury has calculated and, therefore, because of the exchange rate appreciating, your cost savings—which is the Treasury argument—have to be greater than the exchange rate for you to be better off, export more and all those sorts of things. But in actual fact your

industry is not going to gain all the cost savings that Treasury is calculating. Therefore, as you went on to say, `The wine industry is like to lose from the package.'

Mr Battaglene —That is correct. Based on the Treasury assumptions, if we get a three per cent appreciation in the currency, because we are looking at only a 1.2 per cent decrease in prices, and probably less for small wineries, there may certainly be a transitional loss in that respect. Certainly we expect the increase in demand and the increase in discretionary spending from tax cuts to compensate in the domestic market. As Mr Croser pointed out, we think there are a lot of other effects on the exchange rates that will come through in the future.

Senator CONROY —No, this is a one-off, permanent effect—not short term. Fluctuations come and go, as you said, on a range of things. But the impact of this change is a one-off permanent change in exchange rate. There may be other fluctuations around it. Arguing that other factors may come in later does not take away from what you describe as the transitional effects. I wonder if you could expand a little on those transitional effects.

Mr Battaglene —Certainly, as you say, it is going to be a one-off effect and it will probably come in fairly quickly. Given that—as I think Senator Murray pointed out—price points are very important on our export market, we could be looking at a case there where there could be impacts on demand. We have not really tried to model longer term effects, and I do not think we have the expertise to model them here.

Mr Croser —There is no doubt that the difference in arithmetic says we will be worse off in that sense, but the hedging arrangements of the industry are a long way forward and any transition will be smoothed by the currency hedging arrangements of the industry.

Senator SHERRY —On that hedging issue: how can you hedge indefinitely? Eventually it must catch up with you.

Mr Croser —It is smoothing out the variations. Nobody pretends that we as an industry win. We just smooth out the variations.

Senator SHERRY —Effectively there is a one-off short, sharp penalty that you can hedge against, but in the longer term the impact has to hit. You can defer the day—

Mr Croser —It might occur in an accumulative sense over a longer period of time rather than, as you have just suggested, as a short, sharp hit. I am sure the industry would not feel a short, sharp hit.

Senator SHERRY —It must hit eventually, because hedging can only put the day off, depending on the individual decisions of sellers and companies in the market.

Mr Croser —And that has to be traded off against other benefits that we see accruing to the industries through the tax package and the domestic market.

Senator SHERRY —With the current calculation you have done, the bottom line is that you are concerned about the rate at which the WET tax is set. You have estimated it is being set at a rate of 31.7 per cent. You say `Treasury'—where did you get that information from?

Mr Croser —Could I hand over to Stephen?

Mr Strachan —As you know, in the tax reform package that was released in the middle of last year, there is a summary table that looks at the price impacts and the tax impacts on a cask, a medium priced bottle of wine and a low priced bottle of wine, if I recall correctly. If you work through that, it is principally a process of elimination with the available data to work out that the rate is approximately 31.7 per cent. We have spoken to Treasury since then—we have met with them on two occasions—and they have confirmed that 31.7 per cent is very close to the rate they used in their analysis.

Senator SHERRY —What is your estimate of the revenue that you think the government would raise as a consequence of a rate of 31.7 per cent versus 19 per cent or 24.5 per cent, which we have figures for?

Mr Strachan —Are you looking at additional revenue or total revenue?

Senator SHERRY —Total.

Mr Strachan —The revenue at 31.7 per cent is $706 million—that includes the GST—compared with the current revenue of about $560 million. I will just point out, and I suspect this might answer your next question: in the analysis that Treasury have done in that document, they have flagged the fact that the wine equalisation tax will net about $600 million in revenue—I think in about 2002.

Senator SHERRY —I am just intrigued at your term `Treasury document'. This is the government's document.

Mr Strachan —Sorry—the government's document.

Senator SHERRY —This is a political document. It is not Treasury we are arguing about; it is the government policy of the day that we are examining. It is the government policy of the day that wants to get extra tax out of your industry. That is the bottom line, isn't it?

Mr Croser —We take your point.

Senator SHERRY —You agree. Is that a yes or a no? Sorry; Hansard cannot pick up a nod.

Mr Croser —The document is a government document; we accept that.

Senator SHERRY —Have you had any success to date in convincing the government that it is wrong; that it should adopt a rate that you very generously want set at 24.5 per cent?

Mr Croser —We are in the process of discussion with government. The tax reform package is a massive exercise for government and bureaucracy, and our part in it is a very small component of it—and we recognise that. We are just in the process of discussing with government and with Treasury the implications of these rates for our industry. There has been no conclusion either way as to what the final rate set will be, as far as we are aware. We believe the 31.7 per cent is a proposed rate. The details of that still have to be finalised between us as an industry and government.

Senator SHERRY —You believe the government has got it wrong; that it is too high?

Mr Croser —If government finally support the 31.7 per cent, we believe that is too high.

Senator SHERRY —But we are told this is not negotiable in the Senate. This is it—the legislation we have got—bang.

Mr Croser —We have not seen the details of the legislation, and I do not think anybody has, including a WET rate.

CHAIR —The legislation has been carried in the House of Representatives—

Senator HARRADINE —And it is in the Senate—

Mr Croser —Not the WET tax.

Mr Battaglene —I guess the legislation is yet to be introduced, and quite clearly there is no rate set there, so we are still hopeful that they are just calculations used in a government document to basically get end revenue results. If we can correct some erroneous assumptions and get that rate to what we think is the right amount, we hope that that will carry the day.

Senator SHERRY —An increase in revenue—if it was 31.7 per cent—to government from $560 million to $706 million is a fairly substantial increase. That would impact on the industry, and downscaling and job losses are inevitable, aren't they?

Mr Croser —Quite specifically it would impact, as I said before, on the on-premises and cellar door sales small operators of our industry. We are proposing to government a quite targeted ameliorative measure, which would be WET exemption at cellar door sales to compensate. But we would hope we are not negotiating over $140 million of extra tax to government. We hope we are negotiating around the $70 million which our industry recognises as the service contribution from the GST tax.

Senator SHERRY —I was going to come to that issue of the regional impact. I have been lobbied—and I do not think I am any different from others—by the small wine growers from Tasmania. I know that there is very grave concern amongst small wine growers and producers who have restaurants and substantial cellar door sales about the impact of this tax. I think it is fair to say that Tasmania is no different. It is a rapidly growing industry. It is very successful with rapid expansion and very high employment growth in rural and regional areas. If this tax level is maintained, what are the implications for areas such as Tasmania and Western Australia? There are numerous areas where wine tourism is very important.

Mr Croser —Quite explicitly, we have put in a submission that the implications are that some of those marginally economic enterprises—small family enterprises—could be made subeconomic unless the tax rate is a moderate increase on the current tax take from the industry and unless there is compensation, an ameliorative effect, specifically targeted at the 800 small winemakers and grape growers of Australia—which would not cost the government a lot of money.

Senator SHERRY —Mr Sutton, you presented us with a submission which has actually gone to another committee. I just wanted to ask a question about the fuel excise impact. It is of interest to me because of the pass-on effect of reductions in prices. You say:

Because of the relatively small contribution of fuel costs in proportion to other costs to the production chain for wineries, it is unlikely that the proposed excise changes will alter investment of resource allocation decisions by the wineries.

Do you believe there will be any cost savings as a result of the change to fuel excise?

Mr Sutton —I might ask Tony to answer that question, if you don't mind.

Mr Battaglene —We relied, for our figures, on some research by ACIL Economics. Your question is: will there be any savings? I think there will be some savings. I think the larger companies will be able to get more savings than smaller companies because of their greater market power, but it is not possible to quantify it at this stage, from my perspective.

Senator SHERRY —You are saying there will be some savings. There is a one to 1.5 per cent figure mentioned in the submission. Can you guarantee to this committee that those price savings will be passed on to consumers?

Mr Battaglene —No.

Senator SHERRY —Why not?

Mr Battaglene —I am not in a position to guarantee anything that the market will do. We can give you the best research and opinions we have, but I do not think any one of us has the knowledge to see how cost savings will or will not be passed on. Certainly, some will be. Large companies have a lot of market power out there and they can pick and choose between suppliers, so there will certainly be some pass on. I think we can be positive about that. But whether the full cost savings are passed on I am not in a position to make a judgment about.

Senator SHERRY —The estimated inflation rate depends on the effective full 100 per cent pass on of these tax changes, these tax reductions, where they occur? Why can't you give us that guarantee, that undertaking?

Mr Croser —I would think that the ultracompetitive nature of the Australian wine industry among the large players would ensure that those savings—whatever they are, and we estimate them to be 1.2 per cent—would be passed on at that level. I think where Mr Battaglene would have difficulty is in saying what will happen in the 800 small cellars or

sales operations around Australia where they already feel—and I think quite rightly—victimised as against other products in wearing this 41 per cent wholesale sales tax. They would view any relief from cost or taxation as being a support for their marginal enterprises. I think Mr Battaglene is basically saying he cannot underwrite the actions of those small producers. Their total sum of action would be inconsiderable.

Senator HARRADINE —Going to your submission on page 7, the second paragraph, you say:

However, the industry is also concerned the Department of Treasury (Treasury) policy position is inconsistent with the rider that the WET `will be levied at such a rate that price of a four-litre cask of wine will increase by 1.9%'.

Could you explain that to us.

Mr Croser —Quite specifically, revenue neutrality has been our policy. We are prepared as an industry to front up to the fact that this tax reform process implies that the industry will produce no less revenue to government. Even though we could make some arguments that we perhaps should, that was politically and economically not possible. Revenue neutrality is really the central plank of our policy. Treasury's statement or the government's statement that the price of a cask of wine will increase by 1.9 per cent implies that there will be greater price increases for bottled table wine sold in retail, even greater price increases for bottled wine sold at cellar door, and even greater again price increases for bottles sold at the restaurant. The implication is a large increase in revenue to the government, which we have estimated at in fact $140 million.

Senator HARRADINE —Why do you use the figure of 1.9 per cent, or why are you accepting the figure of 1.9 per cent as the accurate figure?

Mr Croser —Implicitly, we do not. We would argue that in fact the real issue for us and for government is the revenue neutrality of the—

Senator HARRADINE —I am sorry; I will put the question another way. Why are you putting down 1.9 per cent? Are you not aware that in evidence to this committee the Treasury has amended that in the first year to I think at least 3.9 per cent?

Mr Battaglene —That 1.9 per cent does not relate to the CPI; in fact, it is how Treasury calculate their wine equalisation tax. So they have worked out 1.9 per cent on that price for wine, and that is how much revenue they want to increase by. And then they calculate the WET tax on that 1.9 per cent increase. It is not related to the CPI and whether they have amended that. It is a figure that we have got from the document and that is a policy figure, I believe.

Senator HARRADINE —You have made submissions to Ralph, have you?

Mr Battaglene —We have made a submission to the first part, and we will be making another one following the release of this final paper.

Senator HARRADINE —Many of your small winemakers operate with family trusts: are you happy with the proposal that family trusts and those sorts of entities be taxed as companies?

Mr Battaglene —We have not either consulted with our members widely enough or done the research on that yet. We will be making a full submission to the Ralph that will deal with those issues. I think it would be premature for us to comment when we have not talked to all our members on it.

Senator HARRADINE —Is it premature for us to ask you questions about that and expect a more positive answer as to what your policy is in respect of the taxing of that type of entity as company?

Mr Croser —We have no knowledge of the extent of use of trusts as a mechanism within our community of winemakers. We certainly will be asking them about that and other aspects of the Ralph committee's terms of reference and how it might affect them. To be quite frank, we have been preoccupied with the discussions of WET tax to this point of time, but we are putting forward to the Ralph committee a submission and we will be putting to our members basically a question of what it is in the Ralph committee terms of reference that they would like us to address. I happen to feel that perhaps that will become an issue.

Senator HARRADINE —But the proposal has been around for more than a year and was focused fairly clearly, was it not, by the government as part of its general tax reform policy?

Mr Battaglene —We just do not have a policy position on it yet. While I think it is going to become a key issue, it is one that we have not come to a policy decision on. As members of the executive I do not think we can say something without getting our members to agree on that position. It will be a key issue.

Senator FERGUSON —Before I ask a question, Mr Chairman, I would like to correct the record. I note that in your welcomes this morning you welcomed Mr Phil Gaetjens from the Treasurer's office. I would like to correct that. He does not work for the Treasurer's office but in fact is a member of the government's legislative tax reform unit. You also at that stage omitted to welcome Mr Chris Fry from the shadow Treasurer's office who has travelled with this committee to every day's hearing. I think that perhaps you should have welcomed Mr Fry as well as Mr Gaetjens to this hearing.

CHAIR —Thank you. I stand corrected.

Senator FERGUSON —Mr Croser or Mr Sutton, on page 7 you talk about Wittwer and Anderson's research, which is down as 1988. I take it that that is research that was done 10 years ago, or is it meant to be 1998?

Mr Sutton —No, it is in fact 1998.

Senator FERGUSON —Could you just give us a very brief outline of the research they did which showed that the combination of a GST and the WET tax would make the industry and the national economy substantially better off?

Mr Sutton —I hand over to Steve Strachan who interacted directly with the Centre of Economic Studies.

Mr Strachan —The model they used was a general equilibrium ORANI model. What they essentially did was model the industry as at 1996-97 and look at the differences between the ad valorem and the volumetric tax. So taking the total tax revenue in 1996-97, looking at collecting that revenue under a GST, WET or volumetric type system, the model used the standard income elasticities, price elasticities. Would you like me to go into that sort of detail?

Senator FERGUSON —No, I just wondered what research was done, that was all.

Mr Strachan —Essentially it was a comprehensive general equilibrium model. What it showed was that the income tax cuts did deliver reasonably substantial benefits to the wine industry due to the income elastic nature of wine demand and that most of those benefits would accrue to the premium sector of the industry. Then when you look at it in the context of the volumetric tax the sort of price increases you would be looking at for the non-premium sector of the industry—up 40 to 50 per cent—would have a fairly substantial negative impact on demand.

Senator FERGUSON —You would be aware that there is not unanimous support for your position in the wine industry for having an ad valorem top-up tax. This committee is going to the evidence from the IWA in Perth. What are the basic underlying reasons for the differing views?

Mr Croser —I am very aware that there is never a unanimous opinion on anything in the wine industry.

CHAIR —This committee can hardly tell you about unanimity of opinion, I might say, Mr Croser.

Mr Croser —This industry is an extraordinarily successful and cohesive industry, despite appearances to the contrary. It has supported greater than 25 per cent growth in exports per annum over the past 12 years. It is regarded as the world leader in the technology of grape growing and winemaking, and it has a plan to the year 2025 that will protect and enhance all the competitive elements that are so important to the continuation of that success.

All I would say is that the central trunk of the tree of the industry is extremely cohesive and very determined that it will not be diverted or perverted by the self-interest of any sector, whether that be the independent grape growers, large winemakers, small winemakers or whatever. The federation representing the bulk of the industry will continue to pursue just two things: the benefit of the total industry and the benefit of the whole Australian economy.

In saying that, I know there are unintended consequences in that some people are—and I use these words very carefully—benefited less than others in the change in the taxation system. It is not that some people and some size of operations in the industry are being negatively impacted by the taxation changes; it is that they will be less benefited—they will receive less beneficial effects—than others in the winemaking and grape growing

community. As we have put forward, the large winemakers of the industry, the medium size winemakers of the industry and even down to the 200-tonne to 500-tonne operations will be significantly advantaged, relative to the small operations.

We as a federation recognise that as being the consequence of having to take a whole of industry, whole of economy approach and we have therefore proposed that the government produce some ameliorative decisions that are specifically targeted at the small sector of the industry. For legitimate cellar door sales operations of less than $500,000 in revenue, a WET tax exemption would not only specifically target those 800 premium producers and produce substantial economic benefits for them but also reduce the compliance costs of running those very small businesses. So a WET tax exemption is our proposal for that compensation.

Senator FERGUSON —I want to go back to the issue of the 1.9 per cent increase in the price of casks. You are aware that the government's proposals were that the WET tax would be set at such a rate that the rise in price of casks would stay in line with the general 1.9 per cent increase in overall CPI. Are you saying to us that, if the current proposals went ahead, the price of a cask would rise in fact by more than 1.9 per cent?

Mr Croser —The current government proposal is that the current cask price would go up by 1.9 per cent, which implies that the price of a bottle of wine in retail would go up by three per cent, which then implies that the bottle of wine in cellar door sales will go up by five per cent and that the bottle of wine in the restaurant will go up by six per cent or seven per cent.

Senator FERGUSON —But are you agreeing that in fact the proposals that the government has put forward will only have a 1.9 per cent impact on the price of a cask of wine?

Senator HARRADINE —And not 3.1 per cent?

Mr Croser —As we understand it—and this has nothing to do with the CPI—the calculation of the 1.9 per cent is a policy decision related to casks. We believe that it is probably related to the effect of the price of a full strength beer. I think that is part of the justification. What we would say is that there is no cross-elasticity of any significance between beer and wine; therefore, to relate the increase in price in any segment of the wine industry to beer will have no net effect on the efficient allocation of resources in Australia.

Senator HARRADINE —I might be totally misunderstanding this, but this goes to the point that I was asking about. You had better settle for the 1.9 per cent. You say that it has got nothing to do with the CPI increases, but in fact it is written here on page 87 of ANTS and it is repeated in your submission that the wine equalisation tax will be levied at such a rate that the price of a four-litre cask of wine need only increase by the estimated general price increase associated with indirect tax reform—that is, 1.9 per cent. You are saying that it has nothing to do with the CPI. I cannot understand that; I would like you to elaborate on that. As I pointed out, the short-term increase is now quoted in evidence by Treasury at 3.1 per cent. Why do you not settle for 1.9 per cent?

Mr Battaglene —You are quite correct that 1.9 per cent is their estimated CPI increase. We have been advised by Treasury that they are still using that figure and that the figure is in the ANTS and that there has been no change—

Senator HARRADINE —But I thought you said it had nothing to do with the CPI.

Mr Croser —I said that, and I apologise; my colleague is better informed that I am.

Senator HARRADINE —I thought I was going mad.

Mr Croser —You are perfectly correct, Senator.

Senator FERGUSON —To go back to the business of small wineries, some of my colleagues have had representations from smaller wineries which claim to be doing it pretty tough at present. Could I get some idea of numbers of wineries, if they are doing it so tough? Are there more people exiting the industry than there are entering the industry?

Mr Croser —No. The numbers are burgeoning all around Australia of small winemakers, family enterprises who are entering an industry that, as they see it, gives some hope to the region and their own families for economic viability. Because of the long lead times for investment in our industry, there are a lot of grapes and a lot of aspirations being planted around the country in the 50 winemaking regions that have not yet got to fulfilment and are still a long way from fulfilment.

One of the major forces within our industry for the status quo, which is what we keep arguing for—we are not arguing for concessions; we are just asking not to receive a major knock right now—is that there is so much unrewarded investment in our industry. It needs the stability and the surety that the taxation environment in which this investment is made will not be altered detrimentally during the maturation of those investments, before they come to fruition.

Senator FERGUSON —One final question, Mr Croser. Has there been more consultation in the preparation of the ANTS package and more consultation with your industry in relation to the proposals for tax reform than there was prior to the proposed six per cent wholesale sales tax increase in the 1993 budget?

Mr Croser —Some is better than none, I should say.

Senator BROWNHILL —On page 7 of your submission, you made very clear that from 1984, the previous government introduced a 10 per cent wholesale tax and then increased it to 22 per cent. How many jobs were lost in the industry because of that increase in tax, which was absolutely astronomical and was done without any regard to anyone? And how many jobs will be lost in the industry because of the GST increase?

Mr Croser —I would couch the question in a different way, Senator Brownhill. I would ask what effect it had on the potential job gains of the industry. I am sure that the industry will—regardless of the taxation regime and because of its international competitiveness, the marketplace demand for its product, and the ingenuity and the natural advantages that we

have—continue to grow. It is a matter of whether in fact the government and the taxation regime will allow it to optimise its potential.

I would say that, with the 26 per cent tax regime that was imposed on the industry, firstly, all goods went to 22 per cent and so the relative change for the industry was only four per cent. Secondly, it was put in over time, after heavy negotiations, and so any effects were ameliorated by that negotiated agreement. But I would still say that the potential of the industry was truncated to an extent by that increase in taxation at that time.

CHAIR —I am going to have to leave the chair, and so may I offer my thanks and congratulations to you all for your submissions. The chair will be in Senator Ferguson's hands. It is no insult to you that I have to leave at this point. I do have to step aside. Thank you very much.

ACTING CHAIR (Senator Ferguson) —Senator Gibson now has questions.

Senator GIBSON —I note that you mention in your submission that your ACIL results were that the industry's costs would go down by 1.2 per cent but that that would be largely concentrated on the large end rather than the small end. I note that in the ANTS paper on page 167 the Treasury estimate is also a 1.2 per cent reduction in costs. Leading on from there, you made a proposal with regard to some relief for the small wine growers with less than 100 tonnes of production. Do many of them actually export from Australia? The whole tax package is, in effect, encouraging exports out of Australia in a general sense. Do many of these small growers export, or are the exports largely concentrated with the large firms?

Mr Croser —The exports are largely concentrated with the large firms, if you are talking about volume or dollars. Many of the small winemakers do in fact export, but many do not. There are 800 of them, and it is just too costly for them to set up the infrastructure to do it. I would make a case that those who do so make an extraordinarily valuable contribution to our exporter endeavours—far beyond the economic value of what they do—because of the colour variation and the reputation they bring to the export endeavour of Australian wine.

Senator GIBSON —Can you give us some statistics about the proportion of small growers that are involved in the Australian wine export industry?

Mr Croser —I am advised that there are in fact registered with the Wine and Brandy Corporation—every exporter of wine has to be formally registered—320 out of 1,000-odd players. We had some statistics which demonstrated that the collection of the export levy, which is specifically related to the wine going offshore, indicated that far in excess of 90 per cent in value terms is exported by the top 50 exporters of the industry.

Mr Sutton —That is an approximate figure on the export numbers.

Senator SHERRY —Senator Cook asked me to ask this. If the government does not accept your recommendations, at bottom line do you support the package?

Mr Croser —We would have to reserve our judgment, I guess. From our viewpoint, looking at our industry in isolation, even with the 31.7 per cent, the package is positive for

our industry. We believe the 31.7 would be very punitive on an important segment of our industry, which is the small producers; and that is really why we are reserving judgment.

Senator SHERRY —Because that is where the job impact will be greatest in regional areas?

Mr Croser —Yes; the regional impact would be greatest there.

Senator SHERRY —Senator Harradine asked a couple of questions about trusts. When you have a position on that, I certainly would appreciate a copy of any documentation that you prepare.

ACTING CHAIR —As there are no further questions, I thank all the representatives from the winemakers organisations for appearing before the inquiry today.

Proceedings suspended from 11.29 a.m. to 11.41 a.m.