Small wineries aren’t toasting the new wine tax reforms

Everyone is in furious agreement of the need for immediate reform of the current system of wine taxation and rebates but it seems that nobody can agree on the nature of that reform.

The Rural and Regional Affairs and Transport References Committee of the Senate (‘Committee’) recently recommended that the Wine Equalisation Tax (‘WET’) rebate be phased out over five years.

The WET is a tax and rebate scheme built around the price of wine, cider, mead and sake products and is well known for its complexity. Producers offset their WET liability by claiming back a percentage of the wholesale price (real or notional) of their product.

The criticism of the current system is that it allows low-price and bulk producers to subsidise their products, distorting the market. (Reform suggestions include moving to a simpler volumetric tax or eliminating the WET and moving to GST instead.)

The Committee highlighted the flaws of the WET rebate system;

  • it is subject to widespread rorting
  • it inhibits wine industry restructure
  • it erodes the value of premium Australian wine
  • it is increasingly paid to major wine retailers
  • it discourages mergers and
  • it supports New Zealand producers at the expense of local producers.

Despite these serious problems, the WET rebate is critical to the profitability and sustainability of a number of small producers.

This is especially so in the current wine landscape where international demand for Australian wine is diminishing, the market is oversupplied and an estimated 84% of producers in 2014 were not covering their costs.

Despite peak industry groups and stakeholders in the wine industry suggesting various reforms to the WET rebate, the Committee recommended its phased removal. The savings from its abolition would be used to create a ‘structural adjustment assistance program’. This will include an annual grant to genuine cellar door operators.

On paper, removing the WET rebate is certainly a simpler solution than reform.

If the removal of the rebate has its intended effect, the wine industry will change in structure towards a premium product and reduce the wine glut. This will favour small producers and premium houses in the long-term.

However, if Parliament removes the rebate but retains the tax, small producers may need to merge or secure outside investment to stay viable until the long-term benefits kick in.

Changing any industry as a whole, as the Committee seeks to do, inevitably creates winners and losers.

However, we believe whole industry reform isn’t achievable in a piecemeal fashion and abolishing the rebate without reforming the tax threatens the viability of vulnerable producers and ignores the core issue in the industry.

If you have any questions about this or would like any assistance please contact Rebecca Halkett, Head of our Food & Agribusiness team.