Advocating for a fair and sustainable spirits tax

Tax reform to unleash our industry’s potential and fuel Australia’s COVID comeback

At a time when Australians need to feel optimistic about this country’s recovery from the worst of COVID-19, few Australian industries offer as much promise as craft distilling. There are now over 300 distilleries in 84 federal electorates – a marked increase since 2014, when Australia had just 28 distilleries. Our industry directly supports over 5,000 jobs and supports a further 15,000 jobs from farm to glass, with our supply chain stretching from primary producers to the hospitality and tourism sectors.

Significantly, more than 60% of these businesses are in rural and regional areas, bringing important economic benefits to these communities. Distillers buy produce from local farmers, attract tourists to their regions, and create jobs, both within their own operations and in the sectors and their supply chains.

Australians’ awareness of the importance of their local industries has only increased during the global pandemic, thanks in part to recent international trade tensions. They are looking for their leaders to support local producers and for their manufacturers to fortify the economy.

‘They [government] need to encourage more business transactions in Australia. A lot of people have suffered a lot because of COVID-19.’ – Victorian tourism and hospitality worker

It’s the right way to grow an industry and share the benefits

Global Spirits & Cocktails Australia members have paved the way for a vibrant local distilling industry. They have built an affinity among consumers for spirits such as rum, bourbon, whisky, vodka and gin through a commitment to quality and centuries-old expertise, innovation, substantial marketing investment, and sponsorship of major music, sports and cultural events. They have established significant supply chains with local manufacturers, contributing to the success of packaging, flavour and glass manufacturers. Local bars have also benefited from their investment through training programs to create world-class bartenders, who have in turn contributed to an emerging small-bar scene, where the quality and provenance of centuries-old spirits brands can be enjoyed alongside emerging local spirits products.

Despite Australian gins, whiskies and rums winning awards around the globe for their quality, Australia currently exports only $4 per capita in spirits compared to $171 in Ireland, $85 in Estonia, $70 in Sweden and $11 in New Zealand.

There is an enormous potential for Australian distilled spirits to be a future export star of premium value-added food and beverage products, similar to the success enjoyed by the Australian wine industry.  Free trade and economic partnership agreements can boost opportunities for Australian distillers, as regional markets are seeing excellent growth in demand for international premium spirits, particularly in economies like Vietnam, the Philippines, South Korea and Japan (all signatories to the recently signed Regional Comprehensive Economic Partnership).

Reducing tax and allowing spirits manufacturers greater margin will be important in the sector’s recovery from significantly reduced trade and tourism throughout the COVID-19 pandemic. Each year, consumers spend 137 billion dollars on leisure and entertainment in Australia, and they are increasingly willing to spend more on unique or special experiences. Australian distilleries not only produce some of the world’s best spirits but are now major attractions in tourism trails – and over 65% are located in rural and regional Australia, supporting a growing hospitality and tourism economy. Their contribution could be far greater.

It’s the right time

The COVID-19 pandemic delivered a series of inconceivable challenges for the spirits and hospitality industries. At the height of the crisis in April 2020, hospitality revenue dropped by $8.5 ‘billion (representing 10% of annual sales) and over 500,000 hospitality jobs were lost across the sector. An initial 23% increase in alcohol sales through bottle shops was not enough to offset a 72% collapse in sales through hotels, pubs and bars. Resulting in April 2020 being the worst on record for Australian spirits, wine and beer producers.

Spirits manufacturers were impacted by volume declines of 21% for full-bottled spirits, and a further 37% volume decline for RTDs. Local distillers reported revenue declines of up to 80% due to the sudden closure of distillery doors and regional tourism in line with nation-wide Stage 3 restrictions.

One hundred and thirty Australian distilleries rose to the challenge of adapting their production lines to produce hand sanitiser to address shortfalls and meet increased consumer and health sector demand.

Spirits & Cocktails Australia and its members, along with the Australian Distillers Association, provided significant assistance to the hospitality and broader community through a range of initiatives, including:

  • In June 2020, Bundaberg Rum announced a $11.5 million fund called ‘Raising the Bar’ to support bars, pubs and clubs throughout Australia as they rebuild following COVID-19. The programme offers free access to digital training through Diageo Bar Academy and funding for equipment to assist with reopening.
  • William Grant & Sons, Diageo, Bacardi, Beam Suntory, and Brown-Forman distilleries shifted production at their facilities to produce hand sanitiser or to supply ethanol to the established manufacturers of hand sanitiser.  Here in Australia, Bundaberg Rum produced 100,000 litres of ethanol for the Queensland Government, to forward to hand sanitiser manufacturers.
  • Spirits Platform created ‘Home Five O’clock-tails’ to support bartenders throughout venue closures.  100 bartenders from across Australia submitted cocktail tutorial videos and were paid $250 for their approved video submissions that were shared and promoted on Spirits Platform’s Simply Cocktails Facebook page and the bartenders’ personal social channels.
  • Bacardi-Martini Australia created ‘Raise Your Spirits’ hosting financial advice sessions for bartenders. Bacardi also offered its partners and their immediate family access to confidential counselling sessions and a host of supporting materials.
  • Pernod Ricard offered ‘Meals for Mates’, providing $1 million toward meals for hospitality workers impacted by COVID-19. The widely utilised program provided a $25 voucher to meals to thousands of hospitality workers, while helping keep the takeaway and delivery industry open.
  • Brown Forman distributed “Friends of Jack” packs to over 1,000 impacted bartenders and partnered with key customer Memento Group to financially support impacted hospitality workers through the ‘Help Out Hospo’ initiative.
  • Spirits & Cocktails Australia partnered with the Night Time Industries Association to support the ‘Keep Our Venues Alive campaign to support hospitality venues throughout the COVID-19 pandemic. Additionally, Spirits & Cocktails Australia donated $100,000  to deliver The Community Spirit, a joint initiative led by Australian spirits distributor Nip of Courage to support local distilleries affected by the worst bushfire season on record and raise much needed funds for charities involved in relief and recovery efforts. This initiative recently received international recognition at the 2020 Spirits Business Awards in London, winning the Ethical Award in the Sustainability and Innovation awards category.
  • Australian craft distillers donated significant volumes of hand sanitiser to Australian charities and community groups.

It’s the right tax policy

Many Government inquiries have recommended reform

Stimulating the spirits industry through meaningful adjustment of current tax settings in the May 2021 Federal Budget will provide the certainty needed for spirits manufacturers to recover from COVID-19 and reinvest in their businesses to create employment and tourism opportunities throughout Australia.

Multiple inquiries, including the 2009 Australia’s Future Tax System Review (the Henry Tax Review), have been critical of inconsistencies in Australia’s alcohol tax system. Other reviews over recent years have identified and articulated the same problem. All have pressed for alcohol tax reform.

Here is how the Henry Tax Review expressed the ways inconsistencies in Australia’s alcohol tax framework disadvantaged consumers:

“Taken together, current alcohol taxes reflect contradictory policies. They encourage people to drink cheap wine over expensive wine, wine from small rather than large producers, beer in pubs rather than at home, and brandy rather than spirits, and to purchase alcohol at airport duty-free stores. As a consequence, consumers tend to be worse off to the extent that these types of decisions to purchase and consume, which may have no spillover cost implications, are partly determined by tax.” – Henry Tax Review, 2009.

In 2015, the Treasury identified that Australia’s alcohol tax settings had come to reflect multiple priorities—raising revenue, reducing social costs of excessive alcohol consumption, and providing support to certain producers.

A decade on from the Henry Review, the same contradictions remain, and the discrimination of spirits taxation is continually widened by twice-yearly CPI increases on excise.

Several other anomalies compound the complexity. Spirits are taxed at one level if they are fermented from grapes (specifically brandy), and at a higher rate if fermented from grain (such as whisky). Cheap wine is taxed lightly, while premium wine is taxed heavily. Additionally, beer is taxed at one rate at the local pub and another when purchased to consume at home.

Australia’s tax on spirits is one of the highest in the world and hampers investment

The tax levied on spirits in Australia is the third highest in the world — only Iceland andNorway’s are higher. Australia’s spirit tax is 67% higher than the level in New Zealand, and 950% — 9.5 times — higher than in the United States.

Additionally, local consumers pay more for spirits than just about anywhere in the developed world. Due to our high spirits excise, it is often cheaper to buy Australian products abroad. For example, a bottle of Starward Whisky, distilled in Port Melbourne, sells for just US$50 in the US, while consumers in Australia pay A$95.

While Australia’s craft spirits continue to receive global acclaim, higher domestic taxes make them less competitive internationally. Without relief to the headline excise rate, Australian distillers will struggle to raise the necessary profits from domestic sales to invest in their business to the necessary level to enable them to export to lucrative growth markets in Asia and around the world. A globally competitive domestic tax would support the growth of Australian spirits exports.

Policy options that promise growth, jobs and investment

A PwC analysis commissioned by Spirits & Cocktails Australia in 2020 revealed that the rate of spirits excise in Australia is now so high that the Government collects less revenue than it would if the rate was lower.

Three policy scenarios were modelled: cutting the spirits excise rate to the brandy excise rate; freezing the spirits excise indexation for three years; and combining both proposals. In all three policy scenarios, PwC’s modelling shows that decreasing the spirits excise increases Government revenue as it accelerates an established market trend that sees consumers shift from lower taxed beer and wine to higher taxed spirits and RTDs.

Together with the Australian Distillers Association, we recommend the government consider implementing option 1, which would maximise its return on taxation revenue while keeping increases to alcohol purchases to less than 1% in volume. 

Further, we recommend that savings created through providing modest tax relief to the spirits industry be reinvested in offering much needed relief to local distillers by increasing the current excise refund scheme limit from $100,000 to $350,000 for two years at a full 100 per cent of excise duty paid on our products.

With a fairer alcohol tax regime in place, the spirits industry has the potential to significantly contribute to jobs growth, the rural supply chain and tourism. Additionally, spirits can emerge as a key value-added agricultural export product.

Read our Pre-Budget Submission