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Monday, 30 August 2004
Page: 26730

Senator SHERRY (9:05 PM) —The incorporated speech read as follows—

The Labor Party has been campaigning for relief for small winemakers from the wine equalisation tax since the WET was introduced by the Howard government as part of the GST package.

That was 5 years ago.

Labor was the first to propose a rebate from the WET for cellar door sales.

It was proposed by Joel Fitzgibbon who, as both the Member for Hunter and Shadow Minister for Tourism, was concerned about the effect of the WET on tourism in wine regions.

At the time—1999—the wine industry was in uproar because they had been promised an `equalisation' tax but found that the tax burden on premium wines had been significantly increased.

What the government had actually promised was to equalise the effect of the new and old tax regimes at the value end of the market.

With ad valorem taxation that increased the burden on premium wines significantly.

Labor established a wine tax committee, to examine the problem and develop an appropriate response.

The other members of the committee were the Member for Kingston David Cox, the Member for Hunter Joel Fitzgibbon, the Member for Bass Michelle O'Byrne, and the Member for Cowan Graham Edwards.

We consulted widely, visiting small and medium size winemakers in the Hunter, Swan, Tamar and Yarra Valleys and Margaret River.

From these consultations, what became clear was that the large wineries need to maintain ad valorem taxation for the overwhelming majority of the industry's sales—and this is critical to the irrigation areas that supply grapes for value wines—while a vocal group of small winemakers, particularly in Western Australia and Tasmania, wanted volumetric taxation because it would provide them with the tax relief that many desperately needed.

What was needed was an appropriate exemption from the WET that could resolve this dilemma for the wine industry.

Collectively the industry needed ad valorem taxation.

An exemption set at an appropriate level would remove the extra burden the WET placed on small premium wineries and they would therefore be able to survive within the existing ad valorem tax regime.

It would be preferable for a number of design reasons, that I will go into later, to determine the exemption as a WET free threshold set at an appropriate number of litres of production—not alcohol content.

That was the proposition the committee consulted on in the Hunter, Swan, Tamar and Yarra Valleys, in Margaret River and with the major wine companies.

Over the year that we consulted, the wine industry adopted four different tax policy positions of its own.

These included cutting the WET rate and later only paying the GST.

Both of these options would have been expensive to the revenue and made value wines even cheaper—neither of which we were prepared to contemplate.

The Prime Minister eventually was forced to promise the Australian Democrats an exemption to get the GST through the Senate.

The Treasurer tried to ignore that commitment for many months and the Democrats—but not the Labor Party—had all but given up on it ever being delivered when the Treasurer was instructed by the Prime Minister to negotiate an arrangement.

The result, having been negotiated by a reluctant Treasurer and a pair of Democrats was an inconceivably complex beast.

The cost of the rebate was shared with the States and the Commonwealth's contribution phased out above a threshold.

That is a difficult arrangement in terms of tax administration and compliance.

The Labor Party never thought it was adequate and never gave up on providing something better.

When the wine industry was able to unite around a policy position that would see the WET rate of 29% maintained with an appropriate number of litres as a WET free threshold, it was clear that a solution was within reach.

They had originally wanted a one million litre exemption but had settled on 600,000 litres.

At the 2001 federal election Labor offered an exemption from the WET for wineries producing up to 50,000 litres.

The industry would have preferred more.

However the government did not match it and instead offered a review.

After the election when the terms of reference for the review were released they did not include the issue of taxation—the industry had been led up the garden path.

David Trebbeck from ACIL Tasman conducted the review.

He found that all anybody in the industry wanted to do was talk about tax so he wrote a very good chapter on that but felt constrained by his terms of reference not to make any recommendations.

The industry continued to campaign for a 600,000 litre exemption. Two budgets went by with the government refusing to respond. Small wineries profitability continued to be low.

It was not until an election year budget, with nine marginal seats with significant wine industry interests spread on either side of the electoral pendulum that the Howard government reluctantly decided to act.

The only thing that has changed the government's mind is that Labor has made it an issue and some of the Coalition's regional seats are vulnerable.

The proposition that they have brought forward is for a rebate on the WET for the first $1 million of wholesale value.

At a 29% WET rate that has a value of up to $290,000 for each winery.

How that relates to the value of a WET exemption expressed in litres depends on the average value of a winery's production.

For small winemakers producing premium product that is the equivalent of a WET free threshold of less than 100,000 litres.

For large wineries producing a preponderance of value wines it is the equivalent of a WET free threshold of over 250,000 litres.

So the government has not delivered to the industry the industry's policy, either in terms of tax design or quantum.

The government's rebate provides an effective exemption for a majority of small wineries producing below the rebate limit.

For the major wineries the value of either an exemption threshold expressed in litres or a rebate expressed in dollars is insignificant to their overall tax position but they will view the concession relative to the cost of running their cellar door operations.

The value and design of the exemption or rebate is most sensitive for small and medium wineries whose production exceeds the threshold or rebate.

There are three good reasons for sticking to an exemption set as a litre threshold:

First, an exemption set as a litre threshold will not require indexation to maintain its value.

It must be remembered that the Howard government has given no commitment to index the rebate—so its value will be eroded over time.

Second, a WET free threshold set in litres allows small wineries to move their wines up in value either by improving the quality of their product or its marketing and so get more out of the exemption, which they couldn't once they reach the level of the rebate.

Third, for a given cost to revenue an exemption set in litres will give more value to small and medium sized wineries than it will give to the major wineries producing predominantly value wines.

It needs to be remembered that the exemption is primarily for small wineries.

The large wineries already receive their primary benefit—having an ad valorem tax regime.

For these reasons Labor will be sticking to its own policy of providing an exemption set at an appropriate number of litres.

However, because small wineries need WET relief now, Labor will not be opposing this bill.

We believe we can provide the wine industry with a better tax regime than this rebate.

Indeed it is not entirely clear why the Howard government has decided on a rebate.

We expect it is partly to do with wanting to differentiate itself from the Labor Party policy.

It may also be because it is simpler for the ATO to deal with a value based rebate on a value based Business Activity Statement.

Unfortunately it means that the value of the rebate will be eroded significantly over time unless it is indexed periodically.

The rebate is intended to replace current Commonwealth and State rebate arrangements for the first $1 million of wholesale value.

The Treasurer has written to the States requesting that the value of the State rebates be returned to the Commonwealth to offset part of the net cost.

The States all agreed to do this when they wrote in support of the WFA's policy that would have provided the exemption for the first 600,000 litres of production.

While that 600,000 litre exemption has not been provided and detailed arrangements for return of the State rebates below the first $1 million of wholesale value have not been agreed I assume the States will be cooperative on this issue.

The wine industry position is that the State rebates should be retained in some form to ensure that no wineries are worse off under the new arrangements.

The Howard government has given no explicit or implicit acceptance of that principle.

The States are currently working cooperatively with the industry on developing arrangements to provide rebates above the Commonwealth arrangements and the South Australian Treasury is taking the lead in that process.

It will be a complex procedure because some wineries—or related entities—have cellar door operations in more than one state so the states will want to come up with some rules for allocating their rebates.

During the Senate Economics Legislation Committee Hearing on this Bill on Monday, Treasury officials were able to clarify a number of issues. The costing of this measure in the budget papers is the net figure, after the removal of the current Commonwealth rebate arrangement.

However, it does not represent the net cost after the removal of the state rebates—which should be returned to the Commonwealth.

Late amendments to the Bill extend the rebate to producers of cider, mead, perry and sake.

The bill also contains three integrity measures:

First, the bill provides associated entity rules to prevent wineries claiming multiple rebates or a winery splitting its operation when it reaches the limit of the rebate.

This is critical to containing the cost to the revenue of a rebate or exemption arrangement.

Second, the bill closes off a loophole in the present Act that would allow a winery to avoid the WET by exporting and then re-importing wine.

There is no evidence that this has occurred and indeed in most cases given Australia's geography relative to even our nearest neighbours this would be prohibitively expensive except for small quantities of very high value wine.

The third requires all packaging costs to be included in the WET cost base.

Obviously if the wholesale value of the wine is held down by excluding the packaging costs then the value of the rebate can be artificially extended to cover more product.

Labor supports these three integrity measures.

The bill also contains a measure to remove the concession of accelerated depreciation for vineyard plantings.

This concession has existed since 1993 when it was part of an agreement between the then Labor government and the industry on future tax arrangements.

There is a view in the industry that this concession has contributed to oversupply of wine grapes and there has been some consensus about getting rid of it.

Labor supports removal of this concession.

Question agreed to.

Bill read a second time.