Tax changes risk causing death of the cellar door

WET tax impact MGI Australia

Changes proposed to the Wine Equalisation Tax – WET – Rebate in the recent Federal Budget will impose severe hardship on many of the smaller wine producers in Australia and will have an even greater impact on wine businesses that sell their own branded and packaged wine, but who have it produced for them under contract by another winery.

Currently any wine producer, including those in New Zealand, regardless of size, is entitled to claim a rebate of up $500,000 annually of any WET paid on sales of wine within Australia. The rate of WET is 29% and is calculated on the wholesale price of the wine.

If a producer sells the wine as a retail sale via a cellar door the tax is calculated on the wholesale price of the wine, not the cellar door retail price. The wholesale price is generally accepted as the price at which the wine would have been sold to an arms-length wholesaler.

The effect of the rebate that is currently available is to remove the WET from the first $1.7 million of domestic sales made in any financial year. This has enabled smaller producers to compete more effectively with larger wine producers.

It has long been generally accepted by the industry that the rebate provisions have been poorly targeted in some aspects. For example, the rebate can be obtained on sales of bulk and unbranded wine. When the rebate was introduced it was stated that the intent of the rebate was to assist smaller producers in the sale of their wine brands. It has gone further than that over recent years.

Following lobbying from the industry, the Federal Government agreed to review eligibility to the rebate. The changes proposed in the Budget are, in my opinion, the equivalent of throwing out the baby with the bath water.

From 1 July 2019 the rebate will not be available for the sale of bulk and unbranded wine. This is a long overdue reform and is generally welcomed. However, the proposed changes require that, to be eligible for the rebate, the wine merchant must either own a winery or have a long term lease over a winery AND sell packaged, branded wine domestically.

The other major proposed change is to reduce the maximum annual rebate from $500,000 to $350,000 on 1 July 2017 and then to reduce it further to $290,000 on 1 July 2018.

The impact of the changes will hit the smaller producers hardest as the rebate in many cases represents almost all of the profit of these producers. Their costs will initially increase by up to $150,000 annually, dependent upon total domestic sales. There will be a further increase in costs of up to $60,000 in subsequent years. It is doubtful that they could recover the lost rebate from increased prices, as such a move is likely to make them non-competitive.

The removal of the rebate for those selling branded packaged wine in Australia will have an even more devastating effect. The result of these proposed changes will be to substantially reduce the number of small producers in Australia and, as a consequence, many a cellar door will close.

The Adelaide Hills wine region is a typical Australian wine region. It attracts many tourists each year because of its array of over 50 cellar doors and the quality of its wines. It is arguably one of Australia’s more sophisticated and beautiful cool climate wine regions. There are just seven wineries in the region and planning restrictions make it unlikely that any more can be built. The impact of the proposed integrity measures limiting the WET rebate will have a devastating impact on this region alone.

It is just over a year before the first impact of the proposed changes and three years before the final and most dramatic impact is felt. Now is the time for the smaller wine producers and sellers to voice their concerns to Government.

Des Caulfield, Director of Taxation and Business Services, MGI Adelaide