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Submission No. 7 Back to full list of submissions
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WINEMAKERS’ FEDERATION OF AUSTRALIA

SUBMISSION TO THE REVIEW ON BUSINESS TAXATION

Table of Contents

1. CONTACT DETAILS

Chief Executive

General Manager

2. INTRODUCTION

3. WINEMAKERS' FEDERATION OF AUSTRALIA

4. EXECUTIVE SUMMARY

5. BACKGROUND

5.1 Wine Industry Contribution to the Australian Economy

6. Why we need a new tax system

6.1 Implications of tax reform for the Wine Industry

6.2 What’s wrong with the current system

6.3 Taxation objectives

Economic growth

Equity

Simplicity

Consistency and certainty

6.4 Reforms to the design processes for policy, legislation and administration.

6.5 Research and Development funding

6.6 Tax concessions

6.7 Removal of Sales Tax anomalies

6.8 Tax Deductibility of Valid Business Expenses

7. References

 

1. CONTACT DETAILS

Mr Ian Sutton

Mr Tony Battaglene

Chief Executive

General Manager

Winemakers' Federation of Australia

Canberra Wine Bureau

PO Box 647

GPO Box 1322

MAGILL SA 5072

CANBERRA ACT 2601

Phone: 08 8364 1122

Phone: 02 6249 7162

Fax: 08 8364 4489

Fax: 02 6249 8653

 

2. INTRODUCTION

This submission to the Review of Business Taxation arrangements chaired by Mr John Ralph, AO, has been prepared by the Winemakers' Federation of Australia.

The submission outlines the views of the Winemakers' Federation of Australia on the general framework and process matters relating to business taxation reform in Australia raised in the discussion paper Review of Business Taxation: A Strong Foundation. Following the release of the third discussion paper, a further submission will be provided dealing specifically with the Government’s approach for reforming the taxation of business entities and investments as they relate to the wine industry.

3. WINEMAKERS' FEDERATION OF AUSTRALIA

The Winemakers' Federation of Australia is the Australian wine industry’s peak voluntary national body. The Federation’s members in total produce around 90% of Australian wine.

It is comprised of two electoral colleges – the Australian Wine & Brandy Producers’ Association, and the Australian Regional Winemakers’ Forum.

Due to the high level of vertical integration in the wine industry, the Federation represents members on a wide range of issues, from primary production (grapegrowing) to manufacturing (winemaking), distribution and marketing.

 

4. EXECUTIVE SUMMARY

The Australian wine industry has successfully demonstrated the benefits of transforming an agricultural commodity into a quality, value added product. Australia now exports $860M of wine annually to more than 80 countries and has an international reputation as an exporter of quality premium wine at a competitive price. The industry has shown exceptional growth, with exports growing at a compound rate of 35% in the thirteen years since 1984/85, when total exports reached $16.9M.

Domestic wine sales are valued at over $1.2 billion per annum, adding over $500M in Wholesale Sales Tax (WST) to government revenue. Wine industry tourism directly contributes $400M - $500m to the Australian economy, from an estimated 7 million visits annually and considerably more via its linkages to other sectors of the tourism industry.

With close to 1000 wineries in Australia, ranging from small boutique wineries to large multi-national companies located in 45 defined grapegrowing regions in Australia, in all Australian States, the grape and wine industries play a vital role in regional economic development and are a major source of regional employment.

The industry considers that taxation reform is imperative to maintain its position in the international market place as a dynamic innovative producer/exporter of quality wine. Taxation certainty is a critical issue in the industry, as it directly influences the risk of investment in the industry. Given the capital intensive nature of the industry, and the long investment lead times, an increase in industry risk can have devastating and long lasting effects.

Further business tax reform in the form of lower company tax, abolition of payroll tax and the elimination of anomalies in the current tax system will significantly benefit the wine industry.

The Wine Industry accepts that the introduction of the Goods and Services Tax (GST) will partially address the problem of differential rates of wholesales sales tax between different industries, but it should be noted that a number of industries will be subject to a differential tax burden following the introduction of the GST. These include alcohol, fuel, tobacco, gambling and luxury cars. Unless these taxation levels are set against a clearly defined broad set of policy objectives a great deal of uncertainty for investment decisions in those effected industries is likely to remain. In addition, continuing high taxes on these industries for the purpose of revenue raising will result in the continued misallocation of resources and diminish the positive effects of tax reform on economic efficiency.

While the 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 negative externality effects) then the government should consider reducing and then removing such distortionary taxes. Any new taxation system should have built into its processes a mechanism for a regular review of any differential taxes, or for that matter concessions with a terms of reference dictated by the objectives of equity, simplicity and efficiency/economic growth.

 

The business tax system should interfere to the least extent possible with the best use of existing national resources and ensure that the business tax system does not influence business decisions unnecessarily. In particular, the business tax system should not adversely impact on Australia’s competitiveness on either the domestic or export markets, and the government should be mindful in imposing taxes that they do not inadvertently place our competitors at an advantage. For example, in Australia, the level of tax proposed by the Department of Treasury on the wine industry is one of the highest in the world, significantly greater than our major competitors including France, Chile, United States, Italy and South Africa. Although, simplicity and equity demand consistency in taxation treatment across and between industries, there are situations where circumstances dictate policy discretion.

The Wine Industry sees gains could be made from the integration of policy development, legislation and administrative processes. However, it sees the principle problem is in the policy development phase, where tax policy appears to be developed in isolation from either industry or the relevant government portfolios that are responsible for dealing with those respective industries. This results in often-inappropriate policy, which while it may increase revenue collections in the short term, often has the result of forcing industry into inefficient activities. Consequently, the wine industry supports the inclusion of the private sector in the policy formulation process but also recommends that the consultative process within the bureaucracy needs to be improved and formalised so those relevant government departments can provide appropriate policy advice to Treasury on taxation decisions.

The issue of tax concessions is a contentious one. The Wine Industry would support the retention of limited taxation concessions that recognise the special characteristics of particular industries. However, the industry understands that such concessions must be regularly reviewed. However, in the case of the removal of depreciation concessions, such action must not be taken retrospectively. As a general principle, the Wine Industry recommends that when tax concessions are deemed appropriate they should be consistent across all business entities and not restricted to any particular ownership structure. In addition, other considerations, such as environmental considerations should also be addressed when reviewing tax concessions.

Under current sales tax law, goods which are not sold, but are applied to a manufacturer’s own use, are subject to sales tax (such use being known as an "application of own use" or AOU rules). In the wine industry goods supplied include wines used for tastings at the cellar door, wines used for tastings at other promotions as well as wines given away at other general promotional activities. The impact of high AOU levels for the wine industry is to increase the current nominal rate of sales tax from 41% to approximately 43%. In other words, the effective sales tax rate on domestic sales is up to 4% higher than the nominal rate would indicate. As a general rule, advertising expenditure is exempt from sales tax (except for expenditure such as printed material applied to own use). As cellar door wine tastings and other promotions are, in effect, a means of advertising in the wine industry (and because of the significant level of AOU’s in the industry compared to others) it is clearly appropriate that this tax is removed.

With the removal of the WST, this provides an opportunity to remove this anomaly and the wine industry would recommend that the WET is not applied to goods which are not sold, but are applied to a manufacturer’s own use including inter alia, cellar door wine tastings and other promotions. As a matter of general principle, anomalies that existed under the wholesales tax regime should be removed in the tax reform process.

 

  1. BACKGROUND

5.1 Wine Industry Contribution to the Australian Economy

The Australian wine industry has successfully demonstrated the benefits of transforming an agricultural commodity into a quality, value added product. Australia now exports $860M of wine annually to more than 80 countries and has an international reputation as an exporter of quality premium wine at a competitive price. The industry has shown exceptional growth, with exports growing at a compound rate of 35% in the thirteen years since 1984/85, when total exports reached $16.9M.

Domestic wine sales are valued at over $1.2 billion per annum, adding over $500M in Wholesale Sales Tax (WST) to government revenue. Wine industry tourism directly contributes $400M - $500m to the Australian economy, from an estimated 7 million visits annually and considerably more via its linkages to other sectors of the tourism industry.

With close to 1000 wineries in Australia, ranging from small boutique wineries to large multi-national companies located in 45 defined grapegrowing regions in Australia, in all Australian States, the grape and wine industries play a vital role in regional economic development and are a major source of regional employment. The Population Census of 6 August 1996 identified 7,400 people whose main occupation was grapegrowing and 8,300 whose main occupation was in the manufacture or blending of wine. At almost 16,000 employees, direct employment has increased by more than 6,000 full time employees since the 1991 Census. Furthermore, casual and part time employment is estimated to provide another 3,500 full time equivalent jobs. A further 4,900 people are employed in wholesaling (beer, wine and spirits) and 7,600 in retailing.

In recent years, per capita consumption of wine in Australia has increased, following a sustained period of modest annual declines. A long-term gradual decline in consumption of cask and fortified wine has been offset by an increase in bottled wine consumption. In the last decade the share of bottled table wine sales has increased from 27% to over 38%. Bottled red wine sales are currently growing by 10% annually and bottled white by 6%.

The nature of this transformation has meant that the value of the domestic wine market has increased considerably (since bottled wine per litre values are higher than cask wine), without any significant increase in volume of wine sold.

In real terms (1995/96 Australian dollars) and excluding State and Federal sales taxes, the wholesale value of Australian wine sales in 1996/97 was 92% greater than a decade earlier (Wittwer, 1997, pg11).

This increase was attributable mainly to the growth in export markets and a 44% increase in the pre-tax real wholesale price of Australian wine (including exports).

Domestic sales, however, were dampened by the extent of these price increases. They were dampened even further by the introduction in 1984 of a 10% wholesale sales tax, which was raised to 20% in 1986 and to 31% in 1993 (later brought down to 26%) (Wittwer, 1997, pg12).

 

6. Why we need a new tax system

    1. Implications of tax reform for the Wine Industry

The wine industry fully supports the need for taxation reform and the rationalisation of business taxes. A number of positive factors affecting the outlook for the wine industry under taxation reform include:

  • Higher disposable income levels (associated with income tax cuts) to increase both savings and consumption:
  • Increased savings to benefit capital intensive industries, such as the wine industry, by increasing availability of resources for investment;
  • Increased consumption expenditure will potentially increase wine sales, particularly bottled wine sales (bottled wine sales are strongly correlated to movements in household disposable income). However, the ultimate outcome will be heavily dependent on taxation levels on wine.
  • The level of economic activity will be higher (ANZ Securities, February 1998, pg10);
  • The level of corporate profits and household income will be higher (ANZ Securities, February 1998, pg10);
  • The unemployment rate will be lower.

These factors will all have positive implications for the Australian wine industry.

However, the major influence of taxation reform on the wine industry will be the level of taxation applied to wine under the taxation reform package. The Government has decided to maintain existing alcohol, tobacco and fuel taxes, to provide sufficient revenue to ensure that the tax mix is saleable. In principal, the wine industry opposes this potential outcome, as it is a departure from the principles of delivering an efficient broad based consumption tax and a sound case can be argued that the Australian wine industry should be treated the same as all other industries.

However, in formulating its policy, the industry has acknowledged the existing political reality that a low broad based consumption tax will require that alternative revenue sources will be used to deliver this outcome. In accepting the political inevitability of a top-up tax on wine above the general broad based consumption tax level, the industry in no way concedes that this tax is a punitive tax based on the external costs of wine consumption. The Tax Package announced the creation of a Wine Equalisation Tax (WET) to replace the difference between the current 41 per cent wholesale sales tax and the proposed GST. This position, which amounts to a revenue neutral position is supported by industry. However, the Tax Package also states that the WET will be levied at such a rate that price of a four-litre cask of wine (will increase by) 1.9%. This position is at odds with the earlier statement, and is not supported by industry.

Taxation certainty is a critical issue in the industry, as it directly influences the risk of investment in the industry. Given the capital intensive nature of the industry, and the long investment lead times, an increase in industry risk can have devastating and long lasting effects.

Further business tax reform in the form of lower company tax, abolition of payroll tax and the elimination of anomalies in the current tax system will significantly benefit the wine industry.

 

6.2 What’s wrong with the current system

Together, A New Tax System and the Review’s terms of reference identify three key problem areas of the business tax system in urgent need of reform:

    • the differential taxation of different business entities;
    • the lack of a coherent framework for taxing investment income; and
    • the need to reform the framework and processes applying to the design of business tax policy, legislation and administration to provide greater certainty to taxpayers and to reduce compliance and administration costs.

The Wine Industry fully agrees with the Review, that an overriding cause of the dissatisfaction and frustration with the current tax system is its complexity and ad hoc nature due to:

  • the absence of transparent objectives and principles underpinning design of the business tax system and;
  • unsatisfactory processes for implementing tax policy design within that system.

To respond to these limitations, the Review proposes a reform strategy comprising:

  • a suggested design framework of national objectives and supporting principles; and
  • proposed reforms to the design processes for policy, legislation and administration.

The Wine Industry accepts that the introduction of the Goods and Services Tax (GST) will partially address the problem of differential rates of wholesales sales tax between different industries, but it should be noted that a number of industries will be subject to a differential tax burden following the introduction of the GST. These include alcohol, fuel, tobacco, gambling and luxury cars. Unless these taxation levels are set against a clearly defined broad set of policy objectives a great deal of uncertainty for investment decisions in those effected industries is likely to remain. In addition, continuing high taxes on these industries for the purpose of revenue raising will result in the continued misallocation of resources and diminish the positive effects of tax reform on economic efficiency.

While the 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 negative externality effects) then the government should consider reducing and then removing such distortionary taxes. Any new taxation system should have built into its processes a mechanism for a regular review of any differential taxes, or for that matter concessions with a terms of reference dictated by the objectives of equity, simplicity and efficiency/economic growth.

While this Review does not seek to analyse the implications of the GST on business, it is important that it considers, or is at least aware of the impact of those taxes that will be enacted to replace the WST system in addition to the GST.

The Wine Industry recommends that the new taxation system should have built into its processes a mechanism for a regular review of any differential taxes and concessions with a terms of reference dictated by the objectives of equity, simplicity and efficiency/economic growth.

 

 

6.3 Taxation objectives

The Review is proposing three national objectives around which to structure debate towards formation of a national consensus on the required design principles:

  • optimising economic growth;
  • ensuring equity; and
  • facilitating simplification.

Economic growth

The Winemakers Federation of Australia agrees that in raising revenue for the Commonwealth the business tax system should interfere to the least extent possible with the best use of existing national resources and ensure that the business tax system does not influence business decisions unnecessarily. In particular, the business tax system should not make Australia an unattractive location for inbound investment, nor drive existing domestic investment offshore purely on the basis of tax considerations. The taxation system should not adversely impact on Australia’s competitiveness on either the domestic or export markets, and the government should be mindful in imposing taxes that they do not inadvertently place our competitors at an advantage. For example, in Australia, the level of tax proposed by the Department of Treasury on the wine industry is one of the highest in the world, significantly greater than our major competitors including France, Chile, United States, Italy and South Africa.

In addressing business taxation, the degree to which taxation policy will influence the competitiveness of the Australian wine industry, compared with its offshore competitors must be considered. The wine industry does not seek protection, but it does propose that taxation reform must be administratively simple and non-distortionary in nature.

Equity

Equity should directly reflect community concerns. The Wine Industry believes that, as a general principle, tax policy that responds directly to community concerns, providing that is underpinned by sound economic principles is valid. This is not to suggest that tax exemptions or concessions should be given on an ad hoc basis. However, if the tax system results in certain groups being adversely effected and inappropriate investment decisions being made then some relief should be considered. For example, in the wine industry there are some 800 small operators who rely for over fifty percent of their income from cellar door sales. These operators contribute strongly to regional employment and tourism in what are otherwise depressed rural areas. Consequently a strong case on economic grounds could be made to provide tax relief for such producers from the proposed WET tax as the increased burden from this additional level of tax is likely to have a serious adverse effect on investment and viability of this sector.

Simplicity

A large problem with the current tax system is that the policy principles underpinning it are unclear. Consequently, this creates sovereign risk which is then exacerbated by poorly thought out policy. If the policy principles are clearly expounded, (and those of equity, simplicity and economic efficiency and/or optimising economic growth are clearly appropriate) then there will be a much more secure base for investment for business in this country. The Wine Industry would maintain that unless there are good economic principles underpinning tax policy, then it is likely to be flawed.

 

Consistency and certainty

Simplicity and equity demand consistency in taxation treatment across and between industries. However, there are situations where circumstances dictate policy discretion. A good example is the application of full absorption costing for the purposes of valuing wine trading stock (see box 1).

Box 1 Trading stock of manufacturer - Absorption Costing

In calculating the profits of a business for income tax purposes, the excess of the value of trading stock on hand at the end of the year of income over the value at the start of the income year is included in assessable income pursuant to section 70-35(2) of the Income Tax Assessment Act 1997 ("ITAA 1997").

For such purposes, the law provides that trading stock may be valued at cost, market selling value or replacement price.

The decision in Philip Morris Ltd v FCT (79 ATC 4352) concludes that the absorption cost method is the appropriate method of determining the cost of manufactured stock on hand at year end. The Commissioner of Taxation considers that full absorption costing is appropriate for wine trading stock (refer IT 2001).

It is submitted that whilst full absorption may be the accepted method for valuing inventory for accounting purposes and may provide a method that reflects the true gains of a manufacturing business of stable growth and high stock turnover (similar to Philip Morris case), it is without doubt inappropriate to the survival and growth of the wine industry from a tax point of view.

For the premium wine maker, turnover ranges between 1.25 and 0.37 times per annum, while for the general manufacturer, the rate of stock turnover is around 10 times per year. In addition, the tax benefit associated with costs of production for the wine maker is significantly lower than manufacturers in other industries. The wine manufacturer is only able to claim 85% to 89% on average of actual costs incurred in each year of production. This is compared to a 100% tax deduction for manufacturing costs of the general manufacturer where stock turnover is significantly higher. This illustrates that wine makers, as opposed to other manufacturers, are incurring production costs for which they are not entitled to a tax deduction in the year the costs are incurred under full absorption costing. This means that the premium wine maker must fund the cost of wine production for a longer period of time without obtaining tax relief for those costs.

 

This policy is clearly inappropriate and inequitable, as it does not have regard to the relatively long stock holding period peculiar to the wine industry. The negative impact on cash flow resulting from full absorption costing has the potential to seriously limit the growth of the wine industry and adversely impact its desired penetration into export markets as a premium wine producer. Paradoxically, this taxation treatment runs contrary to the Government fiscal objective of a long-term increase in national revenue through taxation.

 

Negative cash flow will impact not only current stock funding but also long term funding of the winery operation. This means that the wine maker must seek further capital funding, suffer the higher costs of finance to remain in operation; or release wines earlier, thereby compromising on quality. Fixed and working capital investment in the wine industry without tax relief imposes a significant burden on cash flow. In essence, if the existing taxation position is not addressed, the negative impact on cash flow will result in:

  • a reduced capacity of wine makers to finance debt and equity requirements;
  • a reduced capacity to raise necessary capital; and
  • increased pressure to release stock prior to maturity to reduce stock levels.

This results in lower quality wines being sold and impairs the ability of the industry to target export sales in higher quality markets – a key strategy in the branding portfolios of most companies.

Clearly the impact of current tax policy undermines the wine industry’s strong commitment to stable accelerated growth in wine sales which is prefaced by the need to produce quality premium wines for both domestic and, in particular, export markets. Australia’s strategy for penetration into export markets is to play a leading role in redefining the market from one with an emphasis on low priced wine (high turnover), to a market more willing to pay for quality and consistency (low turnover).

The problem is further exacerbated as grape harvest and crushing takes place in the second half of the financial year resulting in high wine stock levels as at June year end which are reduced by December. This problem is again peculiar to the wine industry for which tax policy has no regard.

Furthermore, the wine making industry is closely related to the grape growing industry but neither winemakers, nor grape growers, are afforded stock valuation methods available to other primary production activities such as the prescribed minimum valuation of natural increase for livestock and direct costing.

It is recommended that the Government, as a general principle, recognise that taxation has different implications for different industries and should be treated differently in some cases.

6.4 Reforms to the design processes for policy, legislation and administration.

The Review views the Treasury, the Office of Parliamentary Counsel (OPC) and the Australian Taxation Office (ATO) as the three main agencies involved in serving the government in the fields of policy development, legislation and administrative processes. The Treasury is primarily responsible for policy development, the ATO for developing drafting instructions, which the OPC translates into legislation, and the ATO for administration. In the Review’s opinion, substantial gains would attend much tighter integration across, and specification of accountabilities for, the three elements of policy, legislation and administration

The Wine Industry agrees that gains could be made from the integration of policy development, legislation and administrative processes. However, it sees the principle problem is in the policy development phase, where tax policy appears to be developed in isolation from either industry or the relevant government portfolios that are responsible for dealing with those respective industries. This results in often inappropriate policy, which while it may increase revenue collections in the short term, often has the result of forcing industry into inefficient activities.

 

The wine industry supports the inclusion of the private sector in the policy formulation process but also recommends that the consultative process within the bureaucracy needs to be improved and formalised so those relevant government departments can provide appropriate policy advice to Treasury on taxation decisions.

 

6.5 Research and Development funding

The introduction of the rural Research and Development Corporations in the 1980’s was in direct recognition of the need for an outcome focus for the respective R&D Corporations.

The decision to match industry funding with Government funding was in support of this outcome focus and in recognition of the market failure common in R&D and predominant in rural R&D.

In the case of the Grape and Wine Research and Development Corporation (GWRDC) the support from Government has facilitated the development of a highly responsive R&D Corporation, with a very clear focus on delivering outcomes for its key stakeholders - government, grapegrowers and winemakers.

R&D has been recognised as one of the major contributing factors to the current success of the Australian wine industry. This success has delivered substantial benefits to grapegrowers, winemakers and allied industries. More importantly though, it has contributed towards the grape and wine industry contribution to employment, regional growth, export income, international recognition of Australian expertise, and government revenue. It is these factors that justify substantial and continued Government support, via matching funding for R&D.

The industry in its Five Year Plan, has identified at least $500,000 annually in increased R&D requirements. The GWRDC has further emphasised the additional resource requirements in its own Five Year Plan. Retention of the Government matching funding will be critical if the industry is to succeed in applying a rate increase in the levy.

The Wine Industry would strongly submit that the level of government matching funding to the Grape and Wine Research and Development Corporation should be maintained in recognition of the market failure that exists in the industry. Taxation incentives to promote R&D should not be traded off in favour of short-term taxation revenue gains.

 

6.6 Tax concessions

The issue of tax concessions is clearly going to be a contentious item for the Review to deal with as it attempts to determine how to trade off concessions to obtain a lower company tax rate. In this submission, the details of concessions to the wine industry will be used to illustrate general principles relating to tax concessions.

The key concession available to the wine industry is the Capital Expenditure Deduction For The Establishment Of Grapevines - 75AA, which came out of the Commonwealth’s 1993 wine industry package and provided a four year write-off period for expenditure incurred after 1 July 1993 in establishing grape vines in Australia for primary production.

75AA covers the purchase, planting, propagation, tendering, tying and training of vines. It is also applicable for rock removal, levelling and fertiliser treatment. It is not applicable for irrigation, channelling and trenching (a more generous write-off is applied in this case), or for trellising.

75AA recognises the long lag time before a vineyard can obtain full production and aims to reduce the distortionary effect of the way depreciation is treated under the current taxation system. It is worth noting that given that it can take more than four years for a vineyard to produce a flow of income.

The Wine Industry would support the retention of limited taxation concessions that recognise the special characteristics of particular industries. However, the industry understands that such concessions must be regularly reviewed. However, in the case of the removal of concessions, such action must not be taken retrospectively. For example if the government was to remove 75AA, then eligible producers currently receiving that benefit should continue to receive the benefits of the accelerated depreciation for the full four years.

However, currently only owner operators are currently eligible to claim the accelerated depreciation rate. The list of those ineligible includes lessee’s, some jointly owned family operations, and some corporate entities with vineyards owned by holding companies. The accelerated depreciation rate was not extended to lessees because of concerns at the potential for tax benefit transfer to finance companies. This has clearly resulted in an inequity in the system.

The current exclusion of lessees is clearly inequitable and as a general principle, the Wine Industry recommends that when tax concessions are deemed appropriate they should be consistent across all business entities and not restricted to any particular ownership structure.

In addition, other considerations, such as environmental considerations should also be addressed when reviewing tax concessions. For instance, the accelerated depreciation rate on capital expenditure on irrigation (75B) has a positive environmental outcome and can therefore be justified on these grounds.

 

6.7 Removal of Sales Tax anomalies

Under current sales tax law, goods which are not sold, but are applied to a manufacturer’s own use, are subject to sales tax (such use being known as an "application of own use" or AOU rules). In the wine industry goods supplied include wines used for tastings at the cellar door, wines used for tastings at other promotions as well as wines given away at other general promotional activities.

In the absence of publicly available information concerning the level of AOU’s in Australia the Winemakers’ Federation of Australia commissioned Coopers & Lybrand to conduct a limited private survey amongst their clients in this regard. They have advised that AOU’s in the wine industry could be up to 4.2% of domestic wine sales. This can be contrasted with AOU %’s for other sectors of the economy at levels that are generally negligible or zero.

The impact of high AOU levels for the wine industry is to increase the current nominal rate of sales tax from 41% to approximately 43%. In other words, the effective sales tax rate on domestic sales is up to 4% higher than the nominal rate would indicate. As a general rule, advertising expenditure is exempt from sales tax (except for expenditure such as printed material applied to own use). As cellar door wine tastings and other promotions are, in effect, a means of advertising in the wine industry (and because of the significant level of AOU’s in the industry compared to others) it is clearly appropriate that this tax is removed.

 

With the removal of the WST, this provides an opportunity to remove this anomaly and the wine industry would recommend that the WET is not applied to goods which are not sold, but are applied to a manufacturer’s own use including inter alia, cellar door wine tastings and other promotions. As a matter of general principle, anomalies that existed under the wholesales tax regime should be removed in the tax reform process.

 

6.8 Tax Deductibility of Valid Business Expenses

The Australian wine industry remains disadvantaged under the current FBT policy, which disallows the tax deductibility of legitimate business entertainment expenses.

That legitimate business entertainment expenses be recognised as an important business and communication tool, and hence a valid tax deductible claim.

7. References

ANZ Securities. Economic Directions: Assessing The Consequence of Tax Reform, February 1998.

Wittwer G., Anderson K., and Osmond R. Growth and Structural Change in the Australian Wine Industry, Paper presented at the 42nd Annual Conference of the Australian Agricultural and Resource Economics Society, University of New England, Armidale, 19 - 21 January 1998.