13.6 What tobacco taxes apply in Australia?

13.6.1  Types of taxes levied in Australia

Two taxes are levied on tobacco products sold in Australia. The majority of the tax burden is made up of a specific excise tax, and then a 10% goods and services tax (GST) is added at the time of sale.

13.6.1.1  Tobacco excise

Table 13.6.1 shows the definitions of tobacco products used since 1999 to determine which excise rate applies to different types of tobacco products.

The rate of excise per kilogram on loose tobacco (either roll-your-own (RYO) tobacco or pipe tobacco) is determined using a weighting factor (referred to as the equivalisation weight) to convert loose tobacco into cigarette equivalents based on an assumed amount of tobacco per stick. Prior to 2017, this equivalisation factor was set at 0.8 grams of tobacco per cigarette. Over subsequent years, this was progressively reduced to 0.7 grams in 2020 and will further reduce to 0.6 grams by 2026—see Section 13.6.3.7 Harmonisation of roll-your-own tobacco excise for further information. This means the tax burden per kilogram of loose tobacco has risen since 2017 at a greater rate than it has for factory-made cigarettes (see Table 13.6.2 below).

Imported tobacco products are subject to customs duty when they cross the Australian border. Since 1995, locally made tobacco products have been excised at the same rate as imported products. Tobacco product manufacturing ceased in Australia in 2016. All tobacco products sold in Australia are therefore subject to excise-equivalent customs duty and none are subject to excise duty. For brevity, the shorthand term ‘excise’ will be used throughout this section.

Tobacco excise rates are subject to twice-yearly indexation in Australia. Since 2013, on 1 March and 1 September of each year, the excise has been adjusted by an indexation factor determined by changes to Average Weekly Ordinary Times Earnings (AWOTE) over the previous six months.^1,2 That is, the excise on tobacco is adjusted to take into account recent changes in average income in the population.

13.6.1.2   Goods and Services Tax

A 10% goods and services tax (GST) applies to all taxable products and services in Australia, with the exception of basic food items and educational and medical services.^3-5 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 the GST was introduced on 1 July 2000.⁶

GST is calculated by adding 10% to the sale price, meaning that GST comprises 9.1%, or one-eleventh, of the final price paid by consumers for their tobacco products.

13.6.2  Current excise tax rates in Australia

Table 13.6.2 shows the current tobacco excise rates applicable in Australia, and for the preceding 10 years. From March 2015 to March 2025, the excise on factory-made cigarettes increased 3-fold, while the excise on roll-your-own tobacco increased 3.7-fold. Increases in March each year reflect indexation of the excise rate. Increases in September for 2015 to 2020, and then in 2023 onwards, include both indexation and further schedule increases to the excise rate—see Section 13.6.2.1 Current scheduled changes to tobacco excise rates. This includes changes to the RYO equivalisation weight from 2017 to 2020, and 2023 and 2024. There were no scheduled above-indexation changes to excise in September of 2021 or 2022.

Figure 13.6.1 shows the excise rates applicable from late 1999 onwards—when excise for cigarettes was first levied on a per stick basis—in current dollars (that is, with no adjustment to take into account inflation between then and now) at each point in time that the excise rate changed. Large increases in tobacco excise are evident in 2010, in December 2013 and then each year in September from 2014 to 2020, and again in 2023. Excise policy reforms that resulted in these excise increases are described further in Section 13.6.3 Major changes to Australian tobacco tax policy. Likewise, Figure 13.6.1 also shows  the relative change over time in excise on factory-made cigarettes (dollars per stick) and that on roll-your-own tobacco (dollars per kilogram); it is evident that the excise rate on roll-your-own tobacco increased at a faster rate than cigarettes with progressive changes to the loose tobacco equivalisation weight between 2017 and 2020, and again in 2023 and 2024.

13.6.2.1  Scheduled changes to tobacco excise rates

Two sets of scheduled changes to tobacco excise were announced in the 2023–24 Federal budget:⁷

1. Excise rates for all tobacco products are to be increased by 5% annually in addition to routine indexation, starting 1 September 2023 to 1 September 2025.
2. The equivalisation weight used to calculate the per kilogram excise rate on loose tobacco will reduce from 0.7 grams to 0.6 grams over four years: 0.675 grams in 2023, 0.6500 grams in 2024, 0.625 grams in 2025, and reaching 0.600 grams on 1 September 2026. This will progressively raise the excise on roll-your-own tobacco.

13.6.2.2  Tax as a proportion of total price

As a specific tax, excise makes up a fixed dollar value of the price of each product (only varying with pack size). As of March 2025, the excise payable on a pack of 20 cigarettes was $28.06. For a 25-gram pouch of tobacco, the excise payable was $53.97. However, the proportion of the final price that is tax is highly variable, based on the pricing of the product in question. A budget brand with a lower purchase price will have a higher total tax proportion than a premium brand with a more expensive purchase price that contains the same number of cigarettes. Australia in particular has a highly segmented tobacco market with a broad range of products offered at different price points—see Section 13.4.3 Price segments.

Figures 13.6.2 and 13.6.3 show the percentage and value of the major price components of tobacco products at different price points but same pack size, for FMC and RYO products, respectively. GST is a fixed proportion of the final sale price, while the excise rate is a fixed dollar value. The retailer margin is estimated at a 12.5% mark-up of the products wholesale price. ⁱ The remaining value is assumed to be the manufacturers component of the final price.

Figure 13.6.2 shows that the total tax share of this typical budget cigarette brand was 83.0%, or $31.51 of the $37.95 advertised price. In contrast, the total tax share of the typical premium brand depicted here was 60.1%, or $33.06 of the $54.99 of the advertised price. In the budget brand, excise was three quarters (73.9%) of the final price, compared with just over half (51.0%) of the final price of the premium brand. The manufacturers component made up only 8.9% of the advertised price of the budget brand, compared to 31.8% of the premium brand.

The same pattern is observed within roll-your-own tobacco products, noting that the overall tax share was higher for premium RYO products. The premium RYO brand cost $10 more than the budget RYO brand. Figure 13.6.3 shows that the total tax share of a budget RYO pouch was 84.1%, compared to 74.9% for a premium brand. Three-quarters of the advertised price of the budget brand was excise, compared to almost two-thirds of the premium brand, with the manufacturers component much larger in the premium brand than the budget.

13.6.3    Major changes to Australian tobacco tax policy

Tobacco tax policy in Australia has undergone several major reforms since the 1980s. Figure 13.6.4 demonstrates the impact of tax policy on real tobacco prices by plotting the price per stick of a popular brand of cigarettes (at that time) from 1940 to present. Prices are in 2012 dollars to adjust for the effects of inflation: these prices show real increases over time over and above changes in prices and incomes. The figure is annotated with major events that impacted the price and taxation of tobacco products over this period, which are described in detail below and in Section 13.4. Product innovations from the tobacco are also annotated (dashed lines) that either prompted, or were in response to, tax reform.

The effects of early increases in state licence fees—first introduced in 1974—were mitigated by the introduction of larger and larger pack sizes that provided cigarettes at a cheaper cost per stick than those available in smaller pack sizes (see Section 13.4.2 Pack and pouch sizes for more detail). It was not until the very large increases in state fees and excise duty in the mid-1990s that cigarettes became significantly more expensive. Cigarette prices increased steadily until the large and immediate April 2010 tax increase, and then increased more sharply during the period of eight scheduled 12.5% increases to customs duty and excise that occurred annually from 2013 to 2020.

Relative to the real price (adjusting for inflation) of the leading brand in 1940, prices were 1.1 times higher in 1990, 2.3 times higher in 2000, 3.3 times higher in 2010 (before the 25% increase), 4 times higher in 2011 (after the 25% increase), and 8.5 times higher in 2021 (after the eight annual 12.5% excise increases). In the 21 years from 2010 to 2021, before the 25% tax increase of April 2010 and after the eighth and final scheduled 12.5% excise increase), the real price of popular cigarettes increased by 260%.

In 2023, the real price of the leading cigarette brand was lower than in 2022. However, the first of three 5% annual excise increases from September 2023 resulted in a real increase in cigarette prices. In 2024, the real price of the leading brand of cigarettes in Australia was 8.7 times higher than in 1940. 

13.6.3.1  Federal excise duty to 1999

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 Act⁸ and the Customs Act.⁹ Prior to federation, the colonies imposed their own tariffs.^10-12 Until 1999, federal excise and customs duty was calculated on the basis of the weight of tobacco products. For cigarettes, this included the weight of filter and paper, but not the weight of the packaging. 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 1921.¹³ Historically, duty on tobacco in cigarettes was levied at a higher rate than duty on non-cigarette tobacco.

In November 1983, the then federal treasurer, the Hon. Paul Keating, changed customs and excise policy in three ways:¹⁴

1. The rate of federal excise and customs duty was linked with the Australian Consumer Price Index –see Section 13.6.3.4 Indexation.
2. The rate of duty for cigars was immediately made equal to that of cigarettes.
3. The rate for non-cigarette tobacco was increased to ‘catch up’ to cigarette excise, initially 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, and then by $1.90 in the 1986 Budget).

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 from an Industry Commission inquiry into the tobacco growing and manufacturing industries in Australia.¹⁵ 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.

Throughout the 1990s, health groups lobbied for increases in federal excise duty.^16,17 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 1992 ¹⁸ and increases announced in the 1993 budget¹⁸ of 3% in August 1993 and 5% in February and August 1994 and February 1995.¹⁹ 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 10 May 1995.²⁰

Figure 13.6.5 shows the rate of the federal excise duty on cigarettes  from 1975 to 1999, expressed in constant 1989–90 dollars to take into account rising prices (inflation) over that time. The declining value of excise was restored by introduction of indexation in the 1983 budget and increases in excise rates, federal duty on cigarettes remained fairly steady in real terms over the late 1980s and early 1990s, increasing significantly only in the late 1990s with the above-mentioned increases in excise. 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.

13.6.3.2  Excise reform of late 1990s

Until 1999, Australia was virtually the only country in the world that combined an excise based on weight and so-called ‘ad valorem’ fees based on wholesale value of sales. Under this system lower-weight cigarettes attracted less federal excise and customs duty than heavier cigarettes. This effect was amplified by the manner in which ad valorem fees were imposed on wholesale prices and final retail price calculated, providing an incentive for lighter cigarettes and for packaging a larger quantity of cigarettes in the same packet.¹⁶ Coupled with large increases in state franchise fees on tobacco, Australia provided a unique context in which larger and larger pack sizes were introduced by tobacco companies. This led to the introduction of packs of 25s in 1976 by Rothmans Pty Ltd for its Winfield brand, and then packs of 30s, 40s, and 50s throughout the 1980s and 1990s by all of the major tobacco companies across numerous brands.

In 1999, after extensive lobbying by health groups,^16,17 the government moved from levying excise and customs duty on manufactured cigarettes on the basis of weight to a system based on the number of cigarettes. This system is summarised in Table 13.6.1 above. This reform removed the incentive to produce packs containing numerous cigarettes, however, packs larger than the standard 20-stick size had become a prominent, evolving, feature of the Australian tobacco market that persisted for decades following this change—see Section 13.4.2.

13.6.3.3  State tobacco licence fees

State licence fees on the sale of tobacco products were first introduced in Victoria in 1974 with two components.²¹ The first was a set amount charged each year and the second was an amount based on the value of tobacco sold in the immediately preceding month. All other state and territories had introduced similar licence fees by 1989, and the rates levied within each state substantially grew over time.^22-28 For example, in New South Wales, 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.

These fees attracted controversy and legal challenges from the tobacco industry as to whether these charges were fees or in fact excise (which can only be imposed federally). This prompted a comprehensive review of the tax system, shortly after which the state licence fees were abolished, and the per stick excise system and then GST were introduced.⁶ The impact and removal of these state licence fees is described in detail in Technical Appendix 13.6.4.

13.6.3.4  Indexation of excise duty

Indexation of tobacco excise was introduced in 1984. On 1 February and 1 August of each year until 2014, indexation was in line with changes in the consumer price index for the six months to the previous December and June, respectively.¹⁴ From 2014, the index against which these changes to excise were made was altered to reflect changes in Average Weekly Ordinary Times Earnings (AWOTE) from the preceding six months.^1,2 These changes occur on 1 March and 1 September each year.

This change from CPI to a measure of average weekly earnings means that changes in tobacco excise reflect changes in the amount of income available to consumers, rather than changes in the price of goods. During periods when wage growth exceeds inflation, indexation in line with wage growth ensures that tobacco products do not become more affordable as incomes rise. During periods when inflation exceeds wage growth, increases in the cost of petrol, food and other essentials in this scenario put additional pressure on spending that likely offsets the effect of the increases in tobacco excise duty being slightly smaller than would have been the case for inflation-based indexation. Thus, wage indexation would seem to be more effective than price indexation for ensuring that tobacco products do not become gradually more affordable over time.

13.6.3.5  April 2010 25% excise increase

Between 1999 and early 2010 there were no increases in excise and customs duty on tobacco products other than twice-yearly indexation. On 29 April 2010, the Australian Government announced a 25% increase in tobacco excise and customs duty to take immediate effect on 30 April²⁹ (at the same time, announcing the proposed plain packaging of tobacco products that was later introduced between October and December 2012).

13.6.3.6  Scheduled excise increases: 2013–2020

In 2013, a series of four annual 12.5% increases in tobacco excise began. This policy was extended for another four years from 2017, so that in the eight years from 2013 to 2020, tobacco excise increased by 12.5% annually. Other than in 2013 (when the increase occurred on 1 December), these increases all coincided with the 1 September scheduled excise adjustment, so that the 12.5% increase was applied in addition to indexation.^30,31 The excise on a standard cigarette rose from $0.35 in September 2012 to $1.10 in September 2020 (current dollars), a real increase of almost 275%.

13.6.3.7  Harmonisation of roll-your-own tobacco excise

In 2017 a further policy was introduced to address the disparity in excise between factory-made cigarettes and cigarettes made with roll-your-own tobacco.^30,31 Until 2017, the excise on roll-your-own tobacco was calculated using an equivalisation weight of 0.8 grams. This equivalisation weight assumed smokers used 0.8 grams of tobacco per cigarette; in other words, the excise on RYO tobacco was equivalent to FMCs if smokers rolled their cigarettes with 0.8 grams of tobacco. However, RYO smokers generally roll their cigarettes with far less tobacco per stick than 0.8 grams, meaning RYO was effectively taxed at a lower rate per cigarette than FMCs. Evidence from Australian smokers shows that RYO cigarettes are rolled with an average of 0.5 grams of tobacco per cigarette,^32,33 and that the tobacco weight used by Australian RYO smokers may be continuing to decline.³⁴

The harmonisation legislation addressed this by progressively decreasing the assumed weight of RYO cigarettes for excise purposes over four years to 0.7 grams. Over the four years to 2020, the assumed weight decreased by 0.025 grams annually when calculating RYO excise in September of each year, in addition to the 12.5% annual excise increases. This ‘RYO harmonisation’ policy resulted in the excise on RYO tobacco increasing at a greater rate than that of FMC cigarettes from 2017 to 2020.

This is demonstrated in Figure 13.6.6, where the actual excise per RYO stick—calculated using the equivalisation weight applied at that time—is plotted against the excise payable on cigarettes rolled with 0.8 grams, 0.7 grams, and 0.6 grams of tobacco at the same point in time. The orange line (actual excise) shows the gap between the excise rate at that time, and the amount of excise payable on lower-weight cigarettes.

Cigarettes rolled with 0.7 grams of tobacco attracted 12.5% less excise than the actual excise rate until September 2017, and cigarettes rolled with 0.6 grams of tobacco attracted 25% less excise until September 2017. In September 2020, after the implementation of the first RYO harmonisation policy, RYO cigarettes rolled with 0.6 grams of tobacco attracted 12.5% less excise per stick than the current excise rate. This gap shrunk to 9% with the commencement of the second RYO harmonisation policy in September 2023 and was approximately 6% at March 2025.

References

1.  Excise Tariff Amendment (Tobacco) Act 2014. 2014; Available from: http://www.comlaw.gov.au/Details/C2014A00009.

2.  Customs Tariff Amendment (Tobacco) Act 2014. 2014; Available from: http://www.comlaw.gov.au/Details/C2014A00008.

3.  A New Tax System (Goods and Services Tax Imposition—Customs) Act  1999 (Cth)  [cited 73; Available from: http://www.austlii.edu.au/au/legis/cth/consol_act/antsastia1999634/.

4.  A New Tax System (Goods and Services Tax Imposition—Excise) Act. 1999 (Cth)  [cited C2005C00390 Available from: http://www.comlaw.gov.au/comlaw/Legislation/ActCompilation1.nsf/0/A5166EC037FEE339CA2570260027F867/$file/ANTSGoodsServTaxImpExcisesAct1999WD02.pdf.

5.  A New Tax System (Goods and Services Tax Imposition—General) Act. 1999 (Cth)  [cited C2005C00391; Available from: http://corrigan.austlii.edu.au/au/legis/cth/consol_act/antsastia1999586/.

6.  Costello P. Not a New Tax: a New Tax System. Canberra: Australian Government, 1998. Available from: https://catalogue.nla.gov.au/Record/1916627.

7.  Chalmers J and Gallaher K. Budget October 2023-24, Budget Paper No. 2: Budget Measures. Canberra: Australian Government, 2022. Available from: https://budget.gov.au/content/bp2/download/bp2_2023-24.pdf.

8.  Excise Act. 1901 (Cth); Available from: http://www.comlaw.gov.au/comlaw/management.nsf/lookupindexpagesbyid/IP200401597?OpenDocument.

9.  Customs Act. 1901 (Cth); Available from: http://www.comlaw.gov.au/comlaw/management.nsf/lookupindexpagesbyid/IP200401390.

10.  Department of Customs and Excise. A brief history of Australian customs activities prior to Federation. Canberra: Department of Customs and Excise, 1965.

11.  James D. Coffers or coffins? Government policy on death from smoking. Information and Research Services Current Issues Brief, 1998; 16(1997–8). Available from: http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Publications_Archive/CIB/CIB9798/98cib16

12.  Department of Customs and Excise. Excise Tariff History (since 1901). Canberra: Department of Customs and Excise, 1965.

13.  Excise Tariff Act. 1921 (Cth)  Act no. 26 of 1921; Available from: http://www.comlaw.gov.au/Details/C2012C00517.

14.  Excise Tariff Amendment Act. 1983 (Cth)  Act no. 27 of 1983; Available from: http://www.comlaw.gov.au/Details/C2004A05276.

15.  Industry Commission. The Tobacco Growing and Manufacturing Industries.  Industry Commission Inquiry Report No. 39. Canberra: Australian Government Publishing Service, 1994. Available from: https://www.pc.gov.au/inquiries/completed/tobacco/39tobacc.pdf.

16.  Scollo M. Closing the Loophole--The Need for Action in 1997. Melbourne, Australia: Anti-Cancer Council of Victoria, 1996.

17.  Scollo M. Federal excise duty on tobacco--proposals for reform. Melbourne, Australia: Anti-Cancer Council of Victoria, 1998.

18.  Dawkins J. Budget speech 1992-93. 18 August Canberra: House of Representatives, 1992.

19.  Willis R. Budget speech 1994-95. 10 May: House of Representatives, 1994.

20.  Willis R. 1995-96 Commonwealth Budget. Canberra: The Parliament of the Commonwealth of Australia, House of Representatives, 1995.

21.  Business Franchise (Tobacco) Act 1974 (Vic).

22.  Business Franchise (Tobacco) Act  (replaced by Tobacco Products (Licensing) Act 1986, and finally by the Tobacco Products Regulations Act 1997. 1974 (SA).

23.  Business Franchise (Tobacco) Act. 1975 (NSW).

24.  Business Franchise (Tobacco) Act. 1975 (WA).

25.  Business Franchise (Tobacco) Act. 1980 (Tas).

26.  Business Franchise (Tobacco) Act. 1981 (NT).

27.  Business Franchise (Tobacco) Act. 1984 (ACT).

28.  Business Franchise (Tobacco) Act. 1988 (Qld).

29.  Excise Tariff Amendment (Tobacco) Act. 2010 (Cth); Available from: http://www.austlii.edu.au/cgi-bin/download.cgi/au/legis/cth/num_act/etaa2010266.

30.  Customs Tariff Amendment (Tobacco Duty Harmonisation) Act 2017, 2017. Available from: https://www.legislation.gov.au/Details/C2017A00079.

31.  Excise Tariff Amendment (Tobacco Duty Harmonisation) Act 2017, 2017. Available from: https://www.legislation.gov.au/Details/C2017A00080.

32.  Branston JR, McNeill A, Gilmore AB, Hiscock R, and Partos TR. Keeping smoking affordable in higher tax environments via smoking thinner roll-your-own cigarettes: Findings from the International Tobacco Control Four Country Survey 2006-15. Drug Alcohol Depend, 2018; 193:110-6. Available from: https://www.ncbi.nlm.nih.gov/pubmed/30352334

33.  Partos TR, Hiscock R, Gilmore AB, Branston JR, Hitchman S, et al. Impact of Tobacco Tax Increases and Industry Pricing on Smoking Behaviours and Inequalities: A Mixed-Methods Study, in Impact of tobacco tax increases and industry pricing on smoking behaviours and inequalities: a mixed-methods study. Southampton (UK):  2020.  Available from: https://www.ncbi.nlm.nih.gov/pubmed/32271515.

34.  Cho A, Scollo M, Chan G, Driezen P, Hyland A, et al. Tobacco purchasing in Australia during regular tax increases: findings from the International Tobacco Control Policy Evaluation Project. Tob Control, 2023. Available from: https://www.ncbi.nlm.nih.gov/pubmed/37652676

35.  Excise Tariff Amendment Act. 1997 (Cth)  No. 5 of 1997; Available from: http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/A9B1843D9F303B0BCA256F720019352C?OpenDocument.

36.  Costello P. Explanatory Memorandum. Excise Laws Amendment (Fuel Tax Reform and Other Measures) Bill 2006 and Excise Tariff Amendment (Fuel Tax Reform and Other Measures) Bill 2006. The Parliament of the Commonwealth of Australia House of Representatives, 2006. Available from: http://www.comlaw.gov.au/ComLaw/Legislation/Bills1.nsf/framelodgmentattachments/5F9F9AF8EA680FD5CA25716F0018F551.

13.6.4 Technical Appendix: State licensing fees, 1974 to 1999

In November 1974 Victoria became the first Australian jurisdiction to introduce a licence fee (known as a business franchise fee) on the sale of tobacco products.²¹ The business franchise fee on tobacco had two components. The first 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.^22-28

The fixed licence fee and the percentage levy varied from state to state. Generally the fees were forwarded to state or territory 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 13.6.3 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 that 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, so did the dollar value of the fee. Figure 13.6.7 shows the dollar value (in constant $1989–90, adjusting for inflation) of the fee applicable on a typical packet of cigarettes, Winfield 25s, in New South Wales between 1975 and 1999. In New South Wales, 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 s.90 of the Australian Constitution, which prohibits Australian states and territories from raising revenue from the sale of products.ⁱⁱ 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 New South Wales 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 & Anor v. State of New South Wales & 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 (memorandum from Francey N, Wentworth Chambers Sydney, 8 July 1997 to Michelle Scollo, Director Victorian Smoking and Health Program). The High Court ruling on 5 August 199738 effectively invalidated not just business franchise fees based on sales of tobacco in New South Wales, but also business franchise fees based on sales of tobacco, alcohol and petroleum in all states and territories.

The Commonwealth was anxious to honour its commitment to the States to make up the revenue lost from the abolition of state franchise fees after the High Court ruled in August 1997 that these fees were unconstitutional. However, one of the key platforms of the (opposition Coalition) government in power prior to the previous election had been a promise not to increase taxes. A key political objective of the federal and some of the state governments was thus to protect consumers from possible price rises in tobacco, alcohol and particularly petroleum products.

Frantic negotiations ensued between state and federal representatives in the wake of the 1997 High Court decision. The first 'deal' that emerged involved the Commonwealth collecting revenue set to equal the highest rates applicable to each product in any jurisdiction. This meant that the Commonwealth would collect and distribute $6.5 billion rather than the $5 billion formerly collected by the states and territories. The states and territories, in turn, would provide rebates to manufacturers/wholesalers in lower taxing states, to ensure that no state received windfall revenue and no consumers faced huge price hikes. Refer to the  States Grants (General Purposes) Amendment Act No. 1, 131 of 1997.

Within days, however, complications emerged in respect of tobacco. While Treasury officials had anticipated the High Court ruling and had prepared to compensate the States in broad terms, it seems that no-one had carefully enough thought through the precise details of exactly how revenue would be raised by the Commonwealth and exactly how it would be collected. Treasury officials and (relatively new) government advisers involved in negotiations with the States may not have had a very firm understanding of the price structure of cigarettes or the intricacies of collection.

Following the ruling, the Commonwealth announced that the federal excise duty on tobacco would be increased by $167 per kilogram (from $84.27 per kilogram). As had been predicted in the cigarette taxes and prices model developed by the Anti-Cancer Council of Victoria, this led to an immediate price rise in budget cigarettes, in particular in the Wills Horizon brand–heavier than its competitors Holiday (Rothmans) and Longbeach (Philip Morris). As a consequence, WD and HO Wills lodged the strongest possible protest with the Treasurer's office, suspended sales and requested that its shares be suspended on the Australian Stock Exchange (Adams, 1997). Wills Chairman, former NSW premier Nick Greiner, appealed to the Treasurer for the increased excise to be replaced by an ad valorem tax. Rothmans and Philip Morris were also unhappy about the increased excise duty, which would have increased prices by as much as $1.75 per packet, and raised an additional $500 million in revenue. They objected, however, to the Wills proposal, which would have been much more advantageous for the Wills brands.

By the end of the week, confusion reigned and further desperate rounds of negotiations were taking place between federal Treasury officials, officials in state governments and wholesalers and retailer associations for alcohol, tobacco and petroleum products throughout the country.

Confronted by pressure from alcohol wholesalers and retailers, the Victorian, Queensland and Australian Capital Territory governments agreed to fund the prepaid alcohol fees, thereby protecting consumers from a large increase in low alcohol beer and wine prices (Pinkney 1997). South Australia and New South Wales initially resisted pressure to provide such refunds, (correctly as it turns out) asserting that they would miss out on revenue once the Commonwealth took over responsibility for revenue collection, and collections were made on a cash rather than an accrual basis. The Western Australian government was then very concerned about the impact on its total revenue: it had been counting on the over-payments from alcohol and tobacco to subsidise low alcohol beer, cellar door wine sales and petrol prices for off-road users, previously exempted from the state's fuel levy. Western Australia, supported by South Australia and Tasmania, boycotted talks on 25 August with tobacco companies initiated by the Commonwealth (Washington 1997).

By the beginning of September, confusion had degenerated into chaos, and the federal Treasurer had little choice but to threaten withdrawal of the safety net unless the states agreed to his plan. The deal that emerged was a series of trade-offs between all the parties concerned, with the federal government more or less achieving its aims of: maintaining total revenue for the states, even if revenue from individual products might be reduced; minimising price rises particularly of low alcohol products and petrol; and in the case of tobacco, treating each of the three manufacturers in an equitable manner.

In the end, the legislation instituted to cover the new arrangements essentially replicated (exclusively at the federal level rather than at federal and state level) the tax and price structure in place on cigarettes prior to the High Court ruling. 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 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) 1997.³⁵ 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% higherⁱⁱⁱ  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 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.⁶ 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 that the excise payable on any brand of cigarettes would be no lower than the existing level of duty.^iv 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 1999.³⁶