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A New Tax System (Wine Equalisation Tax and Luxury Car Tax Transition) Bill 1999



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Bills Digest No. 165  1998-99

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A New Tax System (Wine Equalisation Tax and Luxury Car Tax Transition) Bill 1999

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Contents

 

 

Passage History

A New Tax System (Wine Equalisation Tax and Luxury Car Tax Transition) Bill 1999

Date Introduced:   24 March 1999

House:   House of Representatives

Portfolio:   Treasury

Commencement:   1 July 2000

Purpose

This Bill will assist with the implementation of the Wine Equalisation Tax (WET, or Wine Tax) and the Luxury Car Tax (LCT). It will provide certain measures to deal with the transition from a Wholesale Sales Tax (WST) reg ime to one incorporating the Goods and Services Tax (GST), the WET and the LCT.

The transitional measures will perform the following primary functions:

  1. Allow a special credit against any subsequent GST liability for WST embedded in stocks of wine, as defin ed, on hand at the date of implementation of the GST system.
  2. Provide a transitional credit against a liability to WET for any WST previously borne on wine, reduced by any WST, WET or special credit for embedded WST which has been credited or refunded.
  3. Provide rules for determining whether WST or LCT will apply.

Background

1.0  Transition to Wine Equalisation Tax

The A New Tax System (Goods and Services Tax Transition) Bill 1998 (GST Transition Bill, or GST Transition Act once enacted) provides for the allow ance of a special GST credit for WST embedded in the price of stock on hand at the start of 1 July 2000 so as to avoid the inappropriate double taxation that would result.

However, the GST Transition Bill excludes stocks of alcoholic beverages of the type mentioned in subsection 15A(1) of the Sales Tax (Exemptions and Classifications) Act 1992 as such products, including wine, are to be subject to a different approach in order to maintain their effective retail price. In the case of wine, the WET is the proposed measure.

This Bill will allow a special GST credit for that portion of WST paid on stock representing the difference between the WST rate of 41% and the proposed WET rate of 29%.

This Bill will also ensure that a credit for WST previously borne is available to offset any liability to WET, but reduced by the amount of any WST refunded, or any entitlement to a WST credit, WET credit or any special GST credit for embedded WST.

2.0  Transition to Luxury Car Tax

The proposed LCT arrangements are to commenc e on 1 July 2000. However, LCT is not intended to apply to the supply of a luxury car upon which WST has been paid.

Accordingly, this Bill provides that LCT will not apply in the situations specified therein, which are outlined in the Main Provisions section of this Bills Digest.

3.0  Recent History

On 13 August 1998 the Government released details of its long awaited tax reform plan, embodied in the publication entitled Tax Reform: not a new tax, a new tax system (Tax Reform Plan).

A key aspect of the Tax Reform Plan is the introduction of a GST to replace the current WST, as well as a number of State indirect taxes. The Tax Reform Plan as a whole formed a major component of the Government’s policy platform leading up to the Federal election held on 3 October 1998.

Following the Governments re-election, a package of 16 Bills were introduced on 2 December 1998 to implement a GST as well as some of the other tax reform measures contained in its Tax Reform Plan. Six of those Bills introduce the GST, namely:

  • A New Tax System (Goods and Services Tax) Bill 1998
  • A New Tax System (Goods and Services Tax Administration) Bill 1998
  • A New Tax System (Goods and Services Tax Transition) Bill 1998
  • A New Tax System (Goods and Services Tax Imposition-General) Bill 1998
  • A New Tax System (Goods and Services Tax Imposition-Customs) Bill 1998, and
  • A New Tax System (Goods and Services Tax Imposition-Excise) Bill 1998.

In addition to introducing the GST, the Tax Reform Plan also proposed to introduce a wine equalisation tax and a lu xury car tax. On 24 March 1999 a package of ten Bills introduced the WET and the LCT, namely:

  • A New Tax System (Wine Equalisation Tax) Bill 1999
  • A New Tax System (Wine Equalisation Tax Imposition-General) Bill 1999
  • A New Tax System (Wine Equalisation Tax Imposition-Customs) Bill 1999
  • A New Tax System (Wine Equalisation Tax Imposition-Excise) Bill 1999
  • A New Tax System (Luxury Car Tax) Bill 1999
  • A New Tax System (Luxury Car Tax Imposition-General) Bill 1999
  • A New Tax System (Luxury Car Tax Imposition-Customs) Bill 1999
  • A New Tax System (Luxury Car Tax Imposition-Excise) Bill 1999
  • A New Tax System (Indirect Tax Administration) Bill 1999, and
  • A New Tax System (Wine Equalisation Tax and Luxury Car Tax Transition) Bill 1999.

4.0  GST Overview

The GST proposed is a broad-base d indirect tax on final private consumption in Australia. It will tax the consumption of most goods, services and any other things, including things imported into Australia, but not to consumption outside Australia. The GST rate proposed is 10%.

The GST is based on the Value Added Tax (VAT) system, which has been adopted by nearly all OECD countries and more than 80 others around the world. The GST concept of taxing final private consumption is achieved by:

  • imposing tax on supplies made by entities registered for GST purposes, and
  • allowing those entities to claim a full credit for any GST they have paid on business purchases (or inputs). Such credits will be known as input tax credits.

Consistent with other GST and VAT regimes, there will be two types of no n-taxable supplies, 'GST-free' and 'input taxed', known in most other countries with a GST or VAT as 'zero rated' and 'exempt' respectively.

GST-free supplies will not be taxed and input tax credits will be allowed on things acquired to make the supply. The main activities that will be GST-free include exports, certain expenditure by tourists, health and medical care, education, childcare, charitable activities and religious services.

Input taxed supplies will similarly not be taxed, however no input tax credits will be allowed on things acquired to make the supply. The main activities that will be input taxed are financial services and residential rents.

The main Bill implementing the GST is the A New Tax System (Goods and Services Tax) Bill 1998 (GST Bill, or GST Act once enacted).

5.0  Wine Equalisation Tax

5.1  Brief History of Wine Taxation

The Australian wine industry has been subject to an array of taxation measures over the years, commencing in 1930.

These measures are summarised in the following tabl e:

 

Year

Taxation measure

1930

General rate of Wholesale Sales Tax (WST) of 2.5% introduced

1931

WST of 2.5% removed

1970

Excise of 50 cents per gallon applied

1971

Excise of 50 cents per gallon halved and then removed after six months

1984

WST of 10% introduced

1986

WST increased to 20%

1993

WST increased to 31%

1993

WST reduced to 22% in October

1994

WST increased to 24%

1995

WST increased to 26%

1997

High Court decision on State franchise/licence fees led to an increase in WST from 26% to 41% with the additional 15% rebated to the State governments and in turn rebated to wineries for their cellar-door component of sales

5.2  Current Taxation of Alcoholic Beverages

Alcoholic beverages in Australia are essentially subject to either sales tax (w hich is an ad valorem tax) or volumetric excise or both.

Ad valorem tax is a rate of tax, which is fixed according to the value of the dutiable transaction or item.

A volumetric tax is also an indirect tax but one directly related to the alcohol content of the beverage.

Wine is subject to sales tax at the rate of 41 per cent.

Beer and spirits are subject to a combination of sales tax at the rate of 37 per cent plus a volumetric tax, which is calculated by multiplying the percentage of alcohol content of the beverage by a fixed dollar amount per litre.

5.3  Wine Equalisation Tax Overview

As part of the Tax Reform Plan, the Government proposed that wine, and beverages consisting primarily of wine, will become subject to a wine equalisation tax to replace the d ifference between the current 41 per cent WST and the proposed GST. The WET will be in addition to any GST that may be payable.

The introduction of a WET will mean that after the abolition of WST and its replacement with a GST, wine prices should be equalised back to current levels.

  • WET will be a single stage tax applying generally to assessable dealings in wine, unless an exemption applies, at the wholesale level
  • Wine will include any fruit wine or vegetable wine. WET will also apply to any assessable deal ings in cider, perry, mead and sake
  • WET will be imposed on the wholesale selling price of wine
  • If wine is not sold by wholesale:
  • tax will be imposed on the retail sale or use of the wine, and
  • will be based on alternative values such as the notional wholesale selling price
  • If the wine has already been taxed, then a credit for the earlier tax will reduce the tax payable on the later dealing, and
  • WET will be calculated on the GST-exclusive value of wine in most cases.

6.0  Luxury Car Tax Overview

As a result of the introduction of the GST togeth er with the abolition of WST, motor cars in general would fall in price.

Luxury cars, however, would fall in price even more dramatically as they are currently subject to 45% WST on the value above a 'luxury' threshold, as opposed to 22% WST which applies generally. The luxury threshold is specified in Schedule 6 to the Sales Tax (Exemptions and Classifications) Act 1992 as being a taxable value more than 67.1% of the motor vehicle depreciation limit, currently $55,134.

WST is assessed on a taxable value known as the uniform taxable value (UTV), which is a set percentage approved by the Commissioner of Taxation for use in the motor vehicle industry. The UTV is 77.75% of the tax-exclusive recommended retail selling price. The UTV is also relevant for the purposes of the luxury threshold test specified in Schedule 6 to the Sales Tax (Exemptions and Classifications) Act 1992 .

The resultant effect of the above WST rules is that luxury motor cars for WST purposes are, broadly, those cars with a recommended retail selling price in excess of $47,581 WST-exclusive, or $55,720 WST-inclusive.

The Government does not believe a dramatic price reduction for luxury cars 'is appropriate'. To ensure, therefore, that luxury cars only fall by about the same amount as a car just below the proposed luxury car tax threshold, the Government proposes to introduce the luxury car tax.(1)

The Rate of LCT is to be 25% calculated on the value of the car above a LCT threshold.

The LCT threshold proposed is a GST-inclusive value equal to the car depreciation limit that applies under Subdivision 42-B of the Income Tax Assessment Act 1997 for the year in which the supply of the car occurs. As mentioned earlier, the car depreciation limit for the 1998-99 financial year is $55,134. This is a departure from that proposed in the Tax Reform Plan, which stated that the LCT threshold would be equal to a GST-inclusive value of $60,000(2).

The LCT proposed is a single stage tax that will be imposed on taxable supplies and importations of luxury cars. It will be in addition to any GST that may be payable, but not levied on the GST-inclusive price. It will be levied on the value of the car after GST has been excluded.

The payment of LCT is to be incorporated into the net amount payable under the GST system, or in the case of importations, paid with customs duty. A system of quoting is designed to avoid LCT becoming payable until the luxury car is sold or imported at the retail level. Generally, a recipient will be entitled to quote if the car supplied to them is expected to be held solely as trading stock.

Unlike the GST, an entity that buys a luxury car in the course or furtherance of an enterprise will not be entitled to an input tax credit for any LCT payable.

Main Provisions

1.0  Wine Equalisation Tax

1.1  Special Credit for Wholesale Sales Tax Paid on Stock

Clause 3 will provide a special credit for GST purposes for wine, as defined, on hand at the start of 1 July 2000 that is held for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business.

The amount of the special credit will be equal to 12 / 41 of the amount of WST borne in respect of the wine. The amount of WST effectively borne will therefore be 29%, which is equal to the proposed rate of WET.

1.1.1  Drafting Error

Reference is made to a non-existent provision of the A New Tax System (Wine Equalisation Tax) Bill 1999 (WET Bill, or WET Act once enacted). Presumably the reference to Subdivision 90-A should be to Subdivision 31-A.

1.1.2  Possible Anomaly

Wine is defined in sub-clause 3(6) to have the meaning given, presumably, by Subdivision 31-A of the WET Act. Sub-clause 31-1(1) of the WET Bill provides that wine includes any fruit wine or vegetable wine.

As the note in clause 31-1(1) states, clause 27-1 of the WET Bill provides that the WET Act will apply in relation to cider, perry, mead and sake in the same way as it applies to wine. However, wine is not defined so as to include those products.

It would appear, therefore, that the special credit provided by clause 3 of this Bill will not apply to cider, perry, mead or sake unless such products could properly be characterised as wine according to ordinary concepts.

1.2  WET Credits Relating to Wholesale Sales Tax Borne on Wine

Clause 4 provides for situations where a liability to WST arises or wine has been purchased for a price that includes WST, but then a liability to WET also arises. Clause 4 will treat WST as WET borne for the purposes of the WET Act.

The amount of the credit will be reduced by the amount of any WST refunded, or any entitlement to a WST credit, WET credit or special credit under clause 3 of this Bill.

1.2.1  Possible Anomaly

The comments made in paragraph 1.1.2 above are equally applica ble with respect to credit entitlements under clause 4 of this Bill.

2.0  Luxury Car Tax

Clause 5 provides that LCT will not apply in the situations considered below, which are adequately and succinctly explained in paragraphs 1.21 to 1.30 of the Explanatory Memorandum for this Bill.

2.1  Retail Sale

Paragraph 5(1)(a) provides that the LCT law(3) will not apply to a car sold by retail before 1 July 2000. LCT will therefore not apply to second hand cars in Australia at 1 July 2000.

2.2  Importation

Paragraph 5(1)(b) provides that the LCT law will not apply to a car imported into Australia before 1 July 2000 where nobody was entitled to quote under the Sales Tax Assessment Act 1992 for the importation.

2.3  Application to Own Use

Paragraph 5(1)(c) provides that the LCT law will not apply to a car where there has been an application to own use of the car before 1 July 2000 and, a special credit under section 15 of the GST Transition Act does not arise in relation to the car.

Clause 15 of the GST Transition Bill will provide a special GST credit for WST paid on stock on hand at 1 July 2000.

Concluding Comments

1.0  Wine Equalisation Tax

1.1  Volumetric - v - Ad valorem

Following the release of the Government's Tax Reform Plan and the inevitability of the impositio n of an additional tax on wine, debate turned to the nature of the tax to be imposed. Should the tax be a 'value-based' or 'volume-based' tax?

This has been the subject of considerable debate both within the industry and between the WFA and Treasury.

The WFA, while recognising that they represent members with divergent interests, came to the conclusion that it would support an ad valorem tax and reject a volumetric tax. The WFA came to this policy position after commissioning independent research by the Centre for International Economic Studies at the University of Adelaide on the implications of alternative wine tax options being considered in the context of tax reform.

The results of this research clearly showed that a switch from the current ad valorem wine tax to a volumetric tax which raises the same government revenue would harm the industry as a whole and especially the non-premium sector, even though it would help the premium wine producers and consumers.(4)

The Winegrape Growers' Council of Australi a Inc. (WGCA) supports the WFA in rejecting a volumetric tax.(5)

The Vineyards Association of Tasmania Inc. (VAT) opposes an ad valorem based wine tax arguing that 'the ad valorem nature of the proposed WET adversely impacts on the small (less than 500t) regional winery.'(6)

The National Small Wineries Coalition (NSWC) similarly rejects an ad valorem tax and argues for a volumetric tax on the basis that an ad valorem tax increases the price of quality wine and hurts small wineries.(7)

1.2  Rate: Does it reflect revenue neutrality and is it 'locked-in' at 29%?

The WFA recommended that the WET rate be set at a maximum of 24.5 per cent. It concluded that the true WET level for revenue neutrality would be somewhere between 19.6 per cent and 24.5 per cent.(8)

The rate has been set at 29 per cent.

The WFA also stated that the major influence of taxation reform on the Australian wine industry will be the rate of WET applied to wine under the package. The level will be critical for the continued viability and competitiveness of the industry.

The WFA continued to state that 'as long as the rate of the WET is set so that there is no increase in the tax burden on the industry'(9) the industry would accept the additional tax in the short term.

According to the WFA data, it appears that by setting the rate at 29 per cent the tax burden imposed on the industry has increased.

Additionally, there doesn't appear to be anything in the Bill to suggest that the WET will not be increased above 29 per cent, even though the GST will purportedly be locked-in at the rate of 10 per cent.

1.3  WET: Should it be short term - to be removed in the long term?

WET is a distinct tax imposed on the wine industry in addition to the GST. The goal, with respect to indirect taxes, was stated to be a system that taxes a broad range o f goods and services at a single low rate.(10) WET will mean, however, that the wine industry will still be subject to a differential tax burden following the introduction of the GST.

The WFA support WET, but only in the short term, and has stated:

While the Australian wine industry understands that politically it may not be possible to remove these differential taxes immediately, it considers that unless a sound economic rationale for these can be demonstrated (for example, quantifiable evidence of net negative externality effects) then the government should consider reducing then removing such distortionary taxes in the future.

The NSWC, WGCA, VAT and The Victorian Wine Grape Growers' Council Inc.(11) all oppose the introduction of a wine tax, arguing stro ngly for a GST-only tax on wine, based on the Federal Government's own rationale, namely that any new indirect tax (GST) must be simpler and more equitable than the current WST. A new tax should therefore apply equally across all goods and services. Additional taxes are incompatible with these principles.

1.4  Exemption for Small Business for Cellar-door Sales and Promotional Activity?

1.4.1  Cellar-door Sales Exempt?

The WFA recommended that cellar-door sales for small winery producers should be free from WET, although they should be subject to the GST.

Apparently the amount of revenue raised from small operators' cellar-door sales is small in aggregate terms but on an individual basis is particularly important to the viability of small wineries.(12)

Traditionally State governments levied a tax of approximately 15 per cent on alcoholic beverages through State business franchise fees. However, cellar-door sales were not subject to these fees. In 1997, following a High Court decision,(13) the State business franchise fees were considered unconstitutional and the Commonwealth government introduced measures to collect the revenue on behalf of the States. (Hence the WST rate on wine increased from 26 per cent to 41 per cent).

The revenue is returned to the States. All States then apply a 15 per cent rebate to wineries for all wine sold through the cellar-door and have indicated that they will continue this practice after the introduction of GST and WET.(14)

Therefore, as long as the States continue to honour a liquor subsidy scheme to wineries in respect of cellar-door sales the small wineries will generally be in the same position as they are now. (This assumes the rate of 29 per cent does, in fact, reflect a revenue neutral position for the wine industry.) It is unlikely, however, that relying on State based subsidies is the most desirable and least complicated form of effective exemption from WET.

For small wineries to remain in the current position also assumes that potential distortionary effects of the imposition of an additional tax on the industry over and above the GST will not adversely impact on wine sales. The WFA is of the view that the increased burden from the additional level of tax over the GST is likely to have a serious adverse impact on investment and viability in the small winery sector.

1.4.2  Promotional Activity Exempt?

There are some benefits to the wine industry from the introduction of the GST, including the fact that GST will not apply to promotional activity (eg promotions, tastings and samples). WET will, however, apply to such ap plications for own use.

Currently, as with cellar-door sales, the States rebate 15 per cent to wineries in respect of wine used in promotional activity. The rebate is intended to continue, however, the WFA remain of the view that promotional activity for all wineries should be exempt from WET. Such a position would, they believe, be consistent with the spirit of the Tax Reform Plan.

2.0  Luxury Car Tax

2.1  Rationale for Luxury Car Tax Questionable

One of the problems with the current WST system identified in the Tax Reform Plan was the multiple rate structure; exempt or one of six different tax rates.(15) The goal, with respect to indirect taxes, was stated to be a system that taxes a broad range of goods and services at a single low rate.(16) One of the advantages of the GST was that it would apply only one rate to taxable goods and services.(17)

The indirect tax system proposed includes the GST, the LCT and a Wine Equalisation Tax, introduced at the same time as the LCT. Together, there will be three different tax rates, GST-free supplies and input taxed supplies.

It could be argued that differential rates of tax have potentially distortionary effects, as well as compromise administrative simplicity leading to increased compliance costs.

Furthermore, it could be argued that it is wrong to differentiate between persons on the basis of preferences, as results with multiple rates. In fact, Fact Sheet No: 201 implies that multiple rates are unfair.(18)

3.0  Naming of Wine Equalisation Tax and Luxury Car Tax Bills

Presumably, the titles of the WET and LCT Bills have been used to make it easier for the Parliament to identify those which form part of the Tax Reform Plan package. From a practical perspective however, the titles appear to be unnecessarily lengthy and indeed cumbersome. The words 'A New Tax System' could be deleted from each title without affecting the relevance of the title to the particular piece of legislation.

Endnotes

1 Costello, P., MP, 1998, Tax Reform: not a new tax, a new tax system , at p. 89; Explanatory Memorandum to the A New Tax System (Luxury Car Tax) Bill 1999, at paragraph 1.22 and 5.3.

2  Costello, P., MP, 1998, Tax Reform: not a new tax, a new tax system , at p. 89.

3   Luxury car tax law is defined in the A New Tax System (Luxury Car Tax) Bill 1999 to mean:

  1. this Act; and
  2. any Act that imposes luxury car tax; and
  3. the A New Tax System (Wine Equalisation Tax and Luxury Car Tax Transition) Act 1999 ; and
  4. the Taxation Administration Act 1953 , so far as it relates to any Act covered by paragraphs (a) to (c); and
  5. any other Act, so far as it relates to any Act covered by paragraphs (a) to (d) (or to so much of that Act as is covered); and
  6. regulations under any Act, so far as they relate to any Act covered by paragraphs (a) to (e) (or to so much of that Act as is covered).

4  Senate Select Committee on A New Tax System, Winemakers' Federation of Australia Submission No. 938, at pp. 27 to 29.

5  Senate Select Committee on A New Tax System, Winegrape Growers' Council of Australia Inc. , Submission No. 880. 
 
'WGCA's policy is one of strong support for the current ad valorem system for the wholesale sales tax be maintained for the WET. The alternative, a volumetric tax based on the volume of alcohol in wine, would have a significant negative impact on the industry as a whole, but particularly the three regions of the Riverland, Riverina and Sunraysia because they produce the vast majority of grapes used for wine at the lower end of the market. The three regions also account for over 60% of all winegrape production in Australia and to destroy the economic viability of these regions would have a disastrous impact on the rest of the winegrape growing areas of Australia.'

  1. Senate Select Committee on A New Tax System, Vineyards Association of Tasmania Inc. , Submission No. 84, Executive Summary.
  2. Senate Select Committee on A New Tax System, National Small Wineries Coalition , Submission No. 1322, Executive Summary.
  3. Senate Select Committee on A New Tax System, Winemakers' Federation of Australia Submission No. 938, at p. 28.
  4. Ibid. p 18.
  5. Costello, P., MP, 1998, Tax Reform: not a new tax, a new tax system , at p.77.
  6. Refer to endnotes 5, 6 and 7 and to the Senate Select Committee on A New Tax System, Victorian Wine Grape Growers' Council Inc. , Submission No. 1359.
  7. Senate Select Committee on A New Tax System, Winemakers' Federation of Australia Submission No. 938, at p. 39.
  8. Ha and Anor  v  State of New South Wales and Ors   189 CLR 465.  
     
    Held . By Brennan CJ, McHugh, Gummow and Kirby JJ, Dawson, Toohey and Gaudron JJ dissenting, that the licence fees were duties of excise within section 90 of the Constitution and hence were invalid.
  9. Senate Select Committee on A New Tax System, Winemakers' Federation of Australia Submission No. 938, at p. 38.
  10. Costello, P., MP, 1998, Tax Reform: not a new tax, a new tax system , at p.72.
  11. Ibid., p.77.
  12. Ibid., p.80.
  13. Costello, P., MP, 1998, Tax Reform: not a new tax, a new tax system , Fact Sheet No: 201.

Contact Officer

Simon Lang

23 April 1999

Bills Digest Service

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