FORD, Mr John, Assistant Commissioner, Private Groups and High Wealth Individuals, Australian Taxation Office

WHEELER, Mr Tom, Assistant Commissioner, Indirect Tax, Australian Taxation Office

[11:32]

CHAIR: I remind committee members and officers that the Senate has resolved that an officer of a department of the Commonwealth or of a state shall not be asked to give opinions on matters of policy and shall be given a reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted. Would you like to make brief opening statements?

Mr Wheeler : I have an opening statement that I would like to table on behalf of Mr Ford and myself. Thank you for the opportunity to appear before the committee today. The Australian Taxation Office has responsibility for the excise laws, including excise licences to manufacture, grow and store tobacco in Australia, and for the collection of excise revenue for the government. These licences, as you know, are subject to strict rules and conditions. Since 2006 no-one has been licensed to grow tobacco for commercial sale or personal use in Australia. More recently, the manufacture of tobacco products in Australia has ceased, with companies now importing all tobacco products from overseas into Australia.

The ATO, under delegation from the Department of Immigration and Border Protection, also manages the storage of legal tobacco products that have been imported into Australia and warehoused, and the associated customs warehouse licences issued under the Customs Act. These imported goods, as you know, are referred to as excise-equivalent goods, as they are subject to customs duty at the rate equivalent to excise duty.

Customs warehouse licence applications are subject to a risk assessment by the ATO and must satisfy certain statutory criteria. The ATO also undertakes a risk-based compliance approach to ensure that licensees maintain control of the warehouse, warehouse goods and any activity undertaken in the warehouse, and also that they maintain appropriate records that provide a clear audit trail of the goods that enter, leave and are stored in the warehouse. The movement of under-bond customable goods is subject to strict controls and permissions, also.

Based on the low levels of domestic illicit tobacco seizures since 2006, the ATO considers that the overall domestic production of illicit tobacco products is small. Further, based on reported cross-border seizures of illicit tobacco, the ATO considers that illegal importations are the major source of illicit tobacco products entering the domestic market. We recognise, however, that it is important that we work with other Commonwealth and state law enforcement agencies to support their response to the illicit tobacco sourced from imported product. In this regard, we support our partners by removing the profit from individuals and organised groups who profit from their involvement in illicit tobacco. We share intelligence with partner agencies involved in a whole-of-government response and we second ATO officers to joint task forces.

Whilst we believe the current intelligence available, coupled with the actual seizures, justifies an assessment that domestic cultivation or manufacture is not currently the primary source of illicit tobacco in Australia, we recognise that organised crime groups are very adaptive and agile and look at areas of opportunity, and this may lead them to undertake greater domestic cultivation of tobacco in the future. Therefore, we continue to work with our partner agencies and the tobacco industry to gain further intelligence and ensure we have continuing focus on the risks that present around domestic cultivation.

In the context of that risk around domestic cultivation, which may increase over time, I would like to note two key things. Firstly, there are inconsistencies in the penalties for tobacco offences between the Excise Act and those that are contained within the Customs Act. Secondly, prosecutions require illicit tobacco's origin to be proved before prosecution or penalty infringement notices can issue. Where crops are located during the cultivation phase, this burden of proof can be met. If they are in the ground, that is fine. However, once cultivation has occurred the burden of proof can be difficult to meet.

To summarise, the ATO continues to work closely with the cross-agency interdepartmental committee on illicit tobacco to ensure a whole-of-government response to illicit tobacco and the strengthening of Australia's regulatory framework.

CHAIR: Mr Ford, do you have anything to add?

Mr Ford : No.

CHAIR: Can you run through a few things for me so I can clarify them. When a lawful shipment of cigarettes comes into the country, there is no import duty, but there is excise—is that correct?

Mr Wheeler : No. It is subject to customs duty.

CHAIR: What is the current rate of customs duty?

Mr Wheeler : Customs duty is the same rate as excise duty, which is 53.733c per stick or $671.68 per kilogram.

CHAIR: So it is 53c per stick. So there is 53c customs duty and 53c additional excise.

Senator LEYONHJELM: It is the same thing.

CHAIR: So the customs and excise other one thing, at 53c?

Mr Wheeler : Perhaps I could clarify. If the product is imported it is subject to customs duty at those rates that I just mentioned. In the past, when the product was manufactured in Australia it was subject to the excise regime, and the excise duty is the same.

CHAIR: Is that payable upon importation? You mentioned customs bond stores, or something under Customs control. Is that all paid immediately upon importation?

Mr Wheeler : No, it is not. Customs would be better to provide an answer on that.

CHAIR: In your response to the submission, you put in here the number of seizures and the estimated excise avoided. For 2014-15 you had that at $8 million, and for 2013-14 you had it at $13.4 million. If I look at the KPMG report—I am not sure if you are aware of that—they are talking about—

Mr Ford : We only look at domestic production. Those are the amounts that have been seized from domestic cultivation—crops in Australian soil.

CHAIR: If you look at the KPMG report, are you concerned that there is a significant loss of revenue to the Taxation Office?

Mr Wheeler : We are aware of the KPMG report. We are also aware of other reports by others who have tried to quantify the size of the illicit market. The Tax Office, however, does not currently have an estimate of the potential loss of revenue arising from the consumption of illicit tobacco in Australia. As part of our work on measuring tax gaps across the different taxes, we are exploring ways to estimate the tax gap for tobacco.

CHAIR: Is that something you have as a work in progress?

Mr Wheeler : Yes. We are currently partnering with an Australian university to help us undertake a waste water analysis which looks at the chemicals in waste water to detect the existence of nicotine.

Mr Ford : I would only add that in terms of when the results are available, it would be a total revenue loss amount that could be quantified from that. It will have some degrees of confidence around it. There are some assumptions that will necessarily have to be made. In the context that it will be a total amount, only a portion of that would be in relation to excise duty. A portion would relate to customs duty. I do not think we are going to be able to quantify with any science which portions they are, other than to look at current seizures that come through the border compared with cultivation amounts. Our view is that predominantly—

CHAIR: Can you tell us how far away you are with that work?

Mr Ford : It is an ongoing piece of work. It is at least 12 to 18 months away.

CHAIR: Illegal sources of illicit tobacco would have loss of GST and excise, or would it also include a component for loss of company profits or personal income tax paid. I imagine it is all cash under the table and there is very little income tax being paid on it

Mr Ford : Ultimately, we are working towards tax estimates on all taxes we administer. We already release an estimate in relation to GST. We do not break it down to say, 'This specific part relates to tobacco.' In terms of your question about the quantification, I think where we end up with tobacco is to say that there is X amount of consumption based on the work that we have undertaken—this is being overly simplistic, I need to say—we will try to work out the total amount of consumption that has occurred in the community; we will subtract from that the amount that we know has been cleared through Customs and ourselves; and the difference between the two would tell us how much has come from a market other than the legitimate market. If you think about the difficulties in trying to confirm total consumption, that is why we are working with a number of scientists et cetera to see how we can do that.

CHAIR: Are there other products and sectors of the economy that you currently do that for?

Mr Ford : Yes. At the moment we have released tax gap estimates on GST. We have also released an estimate on luxury car tax. I believe we are currently working on estimates for our income tax products, et cetera. We have provided a report to government on our tax gaps work.

Senator LEYONHJELM: Just to pursue this metabolite study a little further, are you thinking more than 12 months before you have any additional information?

Mr Ford : I would like to check with the people who are actually running that project. I have had some involvement in the past. It is a highly scientific approach to testing metabolites. As I understand it there are other products that people consume in the nightshade family of vegetation, such as tomatoes et cetera, which give readings similar to tobacco. So there is going to have to be a validation process to see how accurate we can get. At the moment I would say that it is highly experimental and we are not sure whether it will give us a robust and confident estimate.

Senator LEYONHJELM: That is what I was getting at. At the moment it is a bit of a look see with a bit of heroism thrown in.

Mr Ford : Certainly it is highly experimental.

Senator LEYONHJELM: I will not pursue that any further, because I understand that. I thought your submission was fine and covered the ATO's perspective quite nicely. Am I right in assuming that it is not illegal to grow tobacco for personal consumption?

Mr Wheeler : It is illegal for personal consumption.

Senator LEYONHJELM: So it is in the same category as cannabis?

Mr Wheeler : Yes.

Mr Ford : You need to be licensed to grow tobacco—

Senator LEYONHJELM: And you do not issue licences, therefore you cannot do it. You cannot even have tobacco plant in your backyard?

Mr Wheeler : Not without a licence, no.

Mr HAYES: From the ATO's point of view, if a person benefits financially from illegal activity, that is still taxable, isn't it?

Mr Ford : Correct.

Mr HAYES: I am interested in the demarcation between Border Force and Taxation—whether your responsibilities should be solely contained to only tobacco product domestically grown, as opposed to being somewhat ignorant to the sale of that illegal product to retail organisations in the country at the moment?

Mr Ford : I am not sure that I understand the question.

Mr HAYES: In respect of the amount of retail of illicit tobacco products, I would have thought that taxation would have a clear interest in that at present?

Mr Ford : Certainly. As I think we said in our opening statement, we work with partner agencies, including the Department of Immigration and Border Protection, to remove the profits.

Mr HAYES: On task forces.

Mr Ford : On task forces and referrals, et cetera, in particular with a focus on serious and organised crime. This year to date we have raised liabilities of $101 million against organised crime participants. What I cannot say with any clarity, because we do not record it, is how much of that relates to tobacco as compared to drug importation and other activities. I can say that over a number of years we have focused on those areas in terms of removing those profits.

Mr HAYES: I understand the ATO's role in the asset confiscation task force. The evidence that has been given so far—and I think you heard some of it from retailers this morning—shows the extent that they see their competition to legitimate tobacco sales coming from the illicit market—whether it is out of the boot of cars in a car park, as some put it, or, primarily, retailed under the counter through other retail organisations. Has Taxation formed any opinion on how much loss of revenue that amounts to?

Mr Ford : In an income tax sense?

Mr HAYES: Yes.

Mr Ford : No, not that I am aware of. Certainly, we have a significant focus on the cash economy and I think that would fall under that. I am happy to take that question on notice.

Mr HAYES: Would that be something that taxation would drill down into in terms of investigation leading through to prosecution?

Mr HAYES: In terms of the retail level and prosecution, I will perhaps deal with that first. Our primary response is to deal with the fields. We think that if we can stop the product at the field level it does not get the retailer and therefore it cannot be sold. At times we have done work and looked at retailers, primarily from an intelligence perspective, to see how we can track that back to the fields.

One of the issues we have with prosecutions at the retail level is proving point of origin. Once it is out of the ground and chopped up in a bag, we need to prove that it was manufactured or grown in Australia. That is a very difficult, if not impossible, thing to do once it is in the retail environment.

Mr HAYES: Is that something that we should be looking at?

Mr Ford : That is really a question of policy.

Mr HAYES: I am not asking you to comment on policy, but does the ATO regard that as an inhibitor to a successful prosecution?

Mr Ford : Certainly. We have made that clear in our submission, yes. We have said in our submission that that is an inhibitor to us prosecuting at the retail level.

CHAIR: I want to go back to the study you mentioned you are undertaking on the tax gap. You said you are doing a waste water study to try to give you some indication of what the total illicit market to measure that against the legal market. You said that you were aware of that KPMG report. Obviously KPMG are a fairly reputable organisation. Why wouldn't you just take the numbers from their report and make an estimation of the tax gap from that? What wouldn't you use that report rather than do a different study on waste water?

Mr Ford : I think Tom pointed out there are a number of reputable studies that have come up with a varying degree of estimates.

Senator LEYONHJELM: We only know of one.

Mr Ford : The KPMG—

Senator LEYONHJELM: No. Apart from the KPMG report, we only know of one. It had a very much reduced estimate of the illicit market. We are going to hear a bit more about that. The Department of Health would like to think it is more accurate, but there are methodology issues with that one that are greater than the KPMG ones, as far as I can see. Have you looked at those two?

Mr Ford : Yes, but, if I can take the question on notice, I will get the experts to provide you with that advice.

Senator LEYONHJELM: Yes, that would be good, thank you.

CHAIR: It just seems to me that the raw initial data that you need to start the analysis potentially already exists. The question would be whether a waste water study would be any more accurate than the KPMG report.

Mr Ford : If I can take that on notice, I will get the experts to have a look at that for you.

CHAIR: Okay. We thank you for your attendance here today.

Pr oceedings suspended from 11:52 to 13:03