The federal government and until very recently, state governments, received considerable revenue from duties and charges on tobacco products sold in Australia. By the late 1990's more than one fifth of the retail price of a packet of cigarettes was accounted for by federal excise duty, and almost two thirds by government duty and charges combined. Following the abolishment of state franchise fees in 1997 the shift to a unit basis for excise calculation in 1999 and imposition of a goods and services tax in 2000, and excise adjustments in early 2001, by February 2001 price of cigarettes, taxes as a proportion of final price increased still further, to around 70%.
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| Manufacturers 8 |
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| Federal excise duty |
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| Retail margin 10 |
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| Goods and services tax |
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| Total retail price including GST 10 |
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Source: Commonwealth of Australia7,9 indexed following release of June 98 CPI figures. Anti-Cancer Council of Victoria 8. Australian Retail Tobacconist 10. |
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Tobacco taxes are favoured by governments because of their low administrative cost relative to the income they generate.(1)
The federal government first introduced an excise and customs duties on tobacco products in 1901. Manufactured tobacco was charged at a rate of one shilling per pound, and cigars were taxed at one shilling and sixpence per pound. Prior to federation, the states imposed their own tariffs.(11)
Since 1901, federal duty has been raised as a charge on Australian importers and manufacturers. Until 1999, the levy was calculated per kilogram of weight of manufactured cigarettes (including the filter and paper).(12,13,14).
Historically, duty on non-cigarette tobacco has been levied at a lower rate than that on cigarette tobacco (see Table 7.3). In November 1983, the then Federal Treasurer, the Hon Paul Keating, made two changes to tobacco excise policy. First, the rate of federal excise was linked with the Consumer Price Index (CPI), meaning that since that time, excise has automatically increased in February and August each year in line with half-year CPI increases for December and June.(15). Second, the rate of excise for non-cigarette tobacco was incrementally increased until it equalled the rate for cigarette tobacco, both then rising with changes in the CPI. Table 7.3 shows that the levy became equal during 1986.(16)
Tobacco products produced in Australia historically were subject to a lower excise duty than the customs duty applicable to imported tobacco products. Customs duty was brought into line with excise duty in August 1995. Refer Table 7.4, (16,17). This followed the publication of a report of an Industry Commission inquiry into the tobacco growing and manufacturing industries in Australia, which was published in June 1994. (17). Coinciding with the end of the Tobacco Stabilisation Plan, the harmonisation of customs and excise duty was in line with government moves to reduce a range of direct and indirect agricultural subsidies in an attempt to improve International Competitiveness of Australian exports.
Since the decision to link tobacco excise and customs duty to the CPI, there have been several real increases (above the CPI rises) - refer Figure 7.3. These include a $5 per kilo in 1992 announced in the budget of that year(19), and increases from the 1993 Budget of 3% in August 1993, and 5% in February 1994, August 1994 and February 1995 on top of the CPI adjustments each six months.(20). 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 9 May 1995.(21)
Table 7.5 summarises the federal excise duty collected for selected years since the financial year 1964-65, and converts these figures to 1989/90 dollars to enable comparisons between years after adjusting for inflation.(22,23,24,25,26,27,28). Comparison is also made between the excise collected (in 1989/90 dollars) on a per capita basis, using figures for the Australian population aged 15 and over (27,9) - refer Figure 7.2.
Excise duty rates were linked to the CPI in 1983 to overcome the decline, in real terms, of federal excise revenue.(15). Even with the application of CPI increments, real revenue declined, and only regained the level collected in 1984, in real terms, in 1995-96. This is a consequence of two factors: declining consumption (see Chapter 2, Section 1), and a reduction in the weight of tobacco per cigarette (see Chapter 5, Section 2). On a per capita basis, revenue from tobacco excise duty continued to decline until 1995-96.
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Source: ø ATM 16 Ý Customs Service 17 |
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The recommended retail price of cigarettes across Australia was uniform until November of 1974, when the Victorian state government introduced a state tobacco licence fee.(28). Between 1975 and 1989, all state and territory governments introduced similar fees (29-35). The fee was a charge on both wholesalers and retailers of tobacco products, each of which were required to pay a set licence fee at prescribed intervals. Additionally, wholesalers were required to pay a percentage of the wholesale (dollar) value of tobacco sold in an immediately proceeding period. If retailers purchased stock other than from a licensed wholesaler, they were required to pay licence fees on the same basis as above. Both the licence fee and the percentage levy varied over time and from state to state. The percentage levy component of the licence fee was by far, more lucrative for governments.
The variation in these fees results in different prices for cigarettes between states and territories.
Table 7.6 shows how the licence fees (dollar percentage of value of tobacco sold) have increased over time in each state and territory.(16,36)
Table 7.7 shows the revenue collected from state licence fees on tobacco products since introduction of the fees. Between 1983 and 1997, revenue from state and territorial tobacco taxes has increased more than twenty fold from $138,906 in 1993 to $2,855,684 in 1997.(16,38,39)
In Victoria, South Australia, Western Australia and the ACT, a proportion of funds accrued from state licence fees were diverted into health promotion activities (see also Chapter 13, Section 3).
7.3.1 Avoidance of state fees
As is evident from Table 7.6, licence fees on tobacco products varied considerably over time between the various states and territories. This resulted in considerable diffrenecs between states, in the retail cost of cigarettes. Unfortunately, due to differences in the drafting legislation in each state, there were significant differences betwen jurisdictions in the definitions of transactions that were assesable and those that were exempted. This included in various states, transfers of stock within companies, between states and between licence holders. A variety of schemes emerged that enabled tobacco sellers to avoid payment of fees, resulting in significant loss of revenues to state and territory governments. These schemes included (42):
Between 1992 and 1997, most state governments introduced amendments aimed at improving enforcement of tobacco franchise fee legislation (eg amendments to the Victorian Business Franchise (Tobacco and Petroleum Products) Regulations 1992/132 in 1993, (272), 1993 (273) 1994 (104 and 208) and 1995 (102,43). It is understood that compliance improved considerably, and revenues increased.
7.3.2 Invalidation of state licencing fees
Meanwhile, however the constitutional validity of state franchise fees was subject to several legal challenges in Australian courts. The state tobacco licence fees had always been somewhat tenuous given Constitutional limitations, prohibiting Australian States from raising revenue from the sale of products (Section 90 of the Australian Constitution). 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 administrative 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.
Several challeges to state franchise fees had been mounted without success over the years by various parties in various states (eg Philip Morris Limited & Ors v The Commissioner of Business Franchises (Victoria) & Anor (1989) 167 CLR 399; Capital Duplicator Pty Ltd & Anor v Australian Capital Territory (1993) 178 CLR 561). However, with fees up to 100% of the value of wholesale sales, when the Ngo Ngo Ha and Anor vs Sate ofNSW & Ors case was lodged in the High Court in 1996, many lawyers and governemnt officials correctly predicted the High Court ruling that the fees were unconstitutional (eg Francey 1997), a decision handed down on August 5 1997. (43). The ruling affected not just NSW tobacco franchise fees, but tobacco, alcohol and petroleum fees in all states in territories, effectively all struck down by the August 5 High Court judgement.
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| Source: Australian Tobacco Marketing Advisory
Committee Annual Report 1994, Appendix Q, 16
to 1993-94; Australian Bureau of Statistics. Taxation Revenue
Australia 1996-94, 38 55 06.0 Dec 97,
p 20,21. Victorian State Revenue Office. Records compiled, personal
comm August 97. 39 Costello, P. Final
Budget Outcomes 1998-99, Table 8: Revenue replacement payments
to the states. Costello, P. Final Budget Outcome 1999-2000 Table
28: Revenue replacement payments to the states. |
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Table 7.7 shows that between 1983 and 1997, total state and territorial income increased by more than 300% from $932,945 in 1982-83 to $2,855,684 in 1996-97.(5,7)
7.2.4 Tobacco revue and children
Hill et al estimate that in 1996, more than 336,000 full-time secondary school students aged between 12 and 17 smoked over 30 million cigarettes between them per month.(40) This amounts to around 373 million cigarettes per year. Assuming an average cost per cigarette of 0.27 cents, the retail value of schoolchildren's cigarette consumption in 1998 was estimated to be at least $64 million. Of this total, the federal government gained $22 million in federal excise and around $42 million was collected by state and territorial governments. See the introductory section to Chapter 10 for related discussion about the financial contribution by children to tobacco companies and governments.