13.2 Tobacco taxes in Australia

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Tobacco taxes are favoured by governments because of their relatively low level of unpopularity with voters—see Section 13.14—and because of their low administrative costs relative to the income they generate.53, 54

A variety of taxes are applied to cigarettes and other tobacco products internationally. Virtually all countries apply excise duty specified as an amount payable per x number of cigarette sticks. A small number of countries charge excise payable per x grams of tobacco weight. Many countries also apply one or more forms of ad valorem taxes, that is, taxes based on the monetary value of products. These include taxes added to the wholesale value of product sold and sales tax or goods and service tax applied as a percentage to the (pre-GST) retail price.

In Australia, federal excise or customs duty and the more recently introduced Goods and Services Tax (GST) contribute substantially to the price of cigarettes and other tobacco products. In February 2007, a typical packet of 25 cigarettes cost $11.25.

As can be seen in Figure 13.1, of the total cost of $11.25, 53.4% is accounted for by federal excise duty on tobacco, and a further 9.1% by GST, bringing total taxes to 62.5% of final price.

13.2.1 Federal excise and customs duty

The federal government has imposed excise duty on Australian-made and customs duty on imported tobacco products since the passage in 1901 of the Excise Act and the Customs Act.56, 57 Prior to federation, the colonies imposed their own tariffs.58–60[6]

Until 1999, federal excise and customs duty was calculated on the basis of the weight of tobacco products. The Excise Regulations 192561 specified precisely how manufacturers needed to label, calculate and declare excise duty. These also specified how the weight of tobacco products (and the volume of alcohol and petroleum products) was to be calculated. For cigarettes, this included the weight of filter and paper, but not the weight of the packaging.[7]

In the early years of last century, manufactured tobacco was charged at a rate of one shilling per pound (of product weight) and cigars were taxed at one shilling and sixpence per pound. Since 1920, the rate of the duty has been set out in (frequently amended) schedules to the Excise Tariff Act passed in 1921.62 Historically, duty on tobacco in cigarettes was levied at a higher rate than duty on non-cigarette tobacco—see Table 13.1. In November 1983, the then Federal Treasurer, the Hon Paul Keating, changed customs and excise policy in several ways. First, the rate of federal excise and customs duty was linked with the Australian Consumer Price Index (CPI),63 meaning since that time, excise and customs duty have automatically increased in February and August each year in line with the CPI for the six months to the previous December and June. Second, the rate of duty for cigars was immediately made equal to that of cigarettes. Third, the rate for non-cigarette tobacco was increased by $5 a kilo. In subsequent budgets the rate for smoking tobacco was increased further (by another $5 a kilo in the 1984 and 1985 budgets,[8] and then by $1.90 in the 1986 Budget).

Table 13.1 compares the excise duty on cigarettes with that on cigars and smoking tobacco in selected years since 1965.

As can be seen in Table 13.1, rates for smoking tobacco became equal to that for cigarettes in 1986.

Historically, tobacco products produced in Australia were subject to a lower rate of duty than that applicable to imported tobacco products. Customs duty was brought into line with excise duty following the publication in June 1994 of a report of an inquiry by the Industry Commission into tobacco growing and manufacturing industries in Australia.65 Coinciding with the end of the Tobacco Stabilisation Plan—see Chapter 10, Section 10.8.2, the harmonisation of customs and excise duty was in line with government policy to reduce a range of direct and indirect subsidies in an attempt to improve international competitiveness of Australian exports. Table 13.2 compares rates of excise and customs duty (per kilo of tobacco weight) from 1987 to 1999.

As can be seen in Table 13.2, customs duty became equal to excise duty in 1995.

Throughout the 1990s, health groups actively lobbied for increases in federal excise duty. 67, 68 In addition to the six-monthly CPI increases, the government increased the rate of federal excise applicable to cigarettes and other tobacco products on several occasions. These included a $5 per kilo increase in 199269 and increases announced in the 1993 Budget70 of 3% in August 1993 and 5% in February and August 1994, and February 1995.71[10] The final increment rise of 5% planned for August 1995 was brought forward and increased to an immediate 10% rise in the Federal Budget handed down on May 1995.72[11]

Figure 13.2 shows the rate of the federal excise duty on cigarettes over the period since 1958. The figure is expressed in constant 1989–90 dollars to take into account rising prices over that time.[12]

It is evident from Figure 13.2 that, once its value was restored by the increase and introduction of indexation in the 1983 Budget, federal duty on cigarettes remained fairly steady in real terms over the late 1980s and early 1990s, increasing significantly only in the late 1990s. The level of federal duty on cigarettes in 1998 was about 50% higher in real terms than it was at its lowest point in the early 1960s.

In 1999, after extensive lobbying by health groups67, the government moved from levying excise and customs duty on cigarettes on the basis of weight to a system based on the number of cigarettes—see Section 13.3.1.2 for full details. Excise and customs rates on cigarettes and other tobacco products applicable since 1999 are set out in Table 13.3.

Between 1999 and 2007 there have been no increases in tobacco excise and customs duty on tobacco products apart from adjustments for CPI.

13.2.2 State tobacco licence fees

In November 1974 the Victorian state government became the first Australian jurisdiction to introduce a licence fee (known as a business franchise fee) on the sale of tobacco products.73 The business franchise fee on tobacco had two components. The first component was a set amount charged each year. The second was an amount based on the value of tobacco sold in the immediately preceding month. The monthly (variable) rate was set at 2.5% in 1974 increasing to 10% in 1975. Between 1975 and 1989, all state and territory governments introduced similar fees.74-80

Both the fixed licence fee and the percentage levy varied from state to state. Generally the fees were forwarded to state government revenue collection offices by tobacco wholesalers, however if retailers purchased stock from suppliers other than licensed wholesalers, they also were required to pay both the set and the variable licence fees. The percentage component was by far the more lucrative for governments, and the rate of the levy was frequently increased in all jurisdictions, sometimes more than once within the same Budget period.

Table 13.4 shows the rates applicable in each year in each state and territory.

To cover the cost of these fees, wholesalers built in a component to the wholesale prices which they charged retailers for products.

The dollar value of the state fee component on a typical packet of cigarettes was quite small in early years—just a few cents in 1974. However, as the rate increased[13], so did the dollar value of the fee. Figure 13.3 shows the dollar value (in constant $1989–1990) of the fee applicable on a typical packet of cigarettes, Winfield 25s, in NSW between 1975 and 1999[14].

In NSW, the dollar value of the fee doubled in real terms between 1976 and 1986. Between 1986 and 1996, it increased by a further 400% in real terms. Similar increases occurred in the other states and territories.

Since they were first introduced, the state business franchise fees were somewhat controversial and several legal challenges were mounted asserting that the schemes were in breach of Section 90 of the Australian Constitution that prohibits Australian states and territories from raising revenue from the sale of products.[15] The wording of the various pieces of state business franchise legislation attempted to ensure that the fees were not regarded as excises, based as they were on the value of sales in a previous period rather than on the quantity or volume of products currently being transacted. When the state business franchise fees were first introduced, the fees were quite low, arguably providing revenue sufficient merely to cover administration costs. By 1996, however, fees in NSW and other Australian states had become so high that they were clearly an important source of government revenue, and not merely a levy to cover the cost of regulation.

When the Ngo Ngo Ha and Anor vs State of NSW & Ors case was lodged in the High Court in 1996, many lawyers and government officials correctly predicted that the Court would find the fees to be unconstitutional.86 The High Court ruling on 5 August 199787 effectively invalidated not just business franchise fees based on sales of tobacco in NSW, but also business franchise fees based on sales of tobacco, alcohol and petroleum in all states and territories.

Several state Treasury officials, aware of the possibility of the Ngo Ngo Ha vs NSW case succeeding, had commenced negotiations with their federal counterparts late in 1996 and had extracted an undertaking that the federal government would increase federal excise duties on tobacco, alcohol and petroleum, and would pass back a share of the increased revenue to the states should the case succeed. After the High Court handed down its decision, arrangements with the states and territories to honour that commitment were rapidly set in motion.

The Commonwealth agreed to collect a surcharge on each of the three products, and then to pass on the revenue to the states and territories.

Two pieces of legislation were passed to put these cumbersome arrangements into law.

First was the States Grants (General Purposes) Amendment Act (No 2) 1997, which amended the States Grants (General Purposes) Act 1994. This determined a revised share of revenue to go to each state, roughly in line with previous expected revenue, but taking into account concerns raised by a number of the smaller states.

The second piece of legislation related to the manner in which the surcharge on tobacco was to be raised. On the 17 September 1997, the government gazetted a new regime for the taxing of cigarettes, later to be instituted in the Excise Tariff Amendment Act (no 5) 1997.88 After lobbying by manufacturers concerned about the differential effect of the proposed new arrangements on each company's products, the legislation in the end was formulated in a way that replicated the tax structure that was in place prior to the High Court decision. That is, part of the formula for determining excise (and customs) duty was based on weight, and part on the wholesale value of the product sold. The weight-based excise on tobacco increased from $84.27 to $86.92 per kilogram. The value-based component increased from 100% of the wholesale value of tobacco products to about 101.3%. The new schedule stated that the state surcharge would be based on 50.32% of the listed wholesale price which is mathematically equivalent to 101.3% of the pre-wholesale price, just 1.3% higher[16] than the level that had been applicable under the states' business franchise legislation.

In 1997 the federal Coalition government announced a comprehensive review of the tax system. It called for a major overhaul of federal and state taxes, the abolition of state business franchise replacement fees and a raft of state sales taxes and the introduction of a goods and services tax. It was agreed that the revenue from the new Goods and Services Tax (GST) would go to the states and territories to compensate for the revenue no longer to be received from state sales taxes and business franchise fees.

On the 13 August 1998, two weeks prior to calling an election, the government released its long awaited Tax Reform Package, titled Tax Reform: Not a New Tax; a New Tax System.89 The proposal included plans to abolish tobacco replacement payments and to introduce a per stick system of raising customs and excise duty, with the level of the duty to be set so the excise payable on any brand of cigarettes would be no lower than the existing level of duty.[17] The fee payable on large packets of cigarettes would increase substantially, making them much closer in price (per stick) to cigarettes sold in smaller pack sizes.

After the government was re-elected, following a short delay reforms were implemented in November 1999.90

13.2.3 Goods and Services Tax

Unlike in many other countries which introduced goods and services taxes, in Australia (as requested by health groups) the excise duty on tobacco was not adjusted downward when a 10 percent goods and services tax was introduced.89 The GST came into force in Australia on tobacco and all other retail services and products excluding grocery items on 1 July 2000.91-93

As with all other taxable products and services in Australia, the GST is calculated by adding 10% to the pre-GST price. In this way, the GST makes up one eleventh or 9.1% of the final price of each packet of cigarettes, cigars or smoking tobacco.94

13.2.4 Tax levels in Australia compared with overseas

As indicated in Figure 13.1, taxes in Australia made up about 63% of the final price of a typical packet of cigarettes in 2007.

Figure 13.4 shows tax levels in Australia compared with other OECD countries for the year 2003. The figures take into account all excise and custom duties, ad valorem business fees and goods and services taxes applicable to tobacco products in each country.[18]

Tax as a percentage of final price in Australia is low compared with that in New Zealand, Canada, the United Kingdom and other OECD countries. In 2003, Australia ranked 17th out of the 19 high-income OECD countries for which data is available.

Table 13.5 compares the proportion of the retail price comprised by tax on cigarettes in Australia with that in high and middle-income countries including both those in and those not in the OECD.

Australia ranks 30th out of all of the 38 high and upper-middle income countries for which data is available.