Australia is the fourth largest producer of wine in the world by value and volume, and the industry is well regarded as a significant contributor to both the domestic and export economies. According to Wine Australia, the Australian wine industry – encompassing wine grape growing, winemaking and wine related tourism – contributes $40.2 billion in gross output to the Australian economy.
It provides 172,736 full-time and part-time jobs, mostly located in regional Australia. Since it was introduced in 1999, the wine equalisation tax (WET) has provided an important government revenue stream.
The wine sector paid $792 million in tax in 2014–2015 and is forecast to pay $920 million by 2018–2019. Australia wine producers have similarly benefited from the government’s wine equalisation tax (WET) rebate scheme since 2004. In particular, small and regional producers have been able to completely offset their WET liability and direct the funds into growing their businesses.
Reforms to adjust the current state of the market are welcome, particularly in the context of a broader discussion between the wine industry and the Government. However, the proposed changes do present a number of challenges for wine producers, from assessing eligibility for rebate claims to adjusting to the reduced offset.
Current market issues
However, over last decade there has been a sustained period of grape and wine oversupply, leading both the wine industry and government to question the merits of the WET rebate scheme. Some industry players have exploited loopholes in the legislation using advantageous business structuring. Operating as “virtual wineries” (with no involvement in the winemaking process) they have been able to claim more than one rebate for the same parcel of wine by blending and remanufacturing in the names of different entities.
The negative impact of the oversupply has been two-fold: the market pricing structure has been distorted, disadvantaging smaller wineries and producers; and the government has been losing tax revenue by providing rebates that were not justified.
In recent years, the wine industry’s calls for reform have gotten louder, and the government has responded with two measures to provide long-term sustainable support. The first is a reform of the WET rebate scheme – specifically, tightening the criteria for rebate eligibility and reducing the rebate cap. The second is a significant government investment to promote wine tourism.
Snapshot: reforming the WET rebate scheme
Following industry consultation, in December 2016 the government announced the following reforms to be introduced to Parliament in 2017:
- a rebate reduction, from $500,000 to $350,000 per financial year from 1 July 2018;
- the rebate to be available only for packaged, branded wine;
- the wine producer must own 85% of the grapes used to make wine throughout the winemaking process and maintain ownership throughout the winemaking process;
- wine containers must not exceed five litres;
- wine containers must be branded with a registered trademark; and
- the wine must be for domestic retail sale.
Snapshot: industry growth incentives
To encourage more wine tourism, the government will make up to a further $100,000 per annum available to producers who exceed the rebate cap, through a new wine tourism and cellar door grant. The eligibility criteria to qualify for the new grant will be finalised after consultation with the industry.
The issues for wine producers: what to consider now?
Reforms to adjust the current state of the market are welcome, particularly in the context of a broader discussion between the wine industry and Government. However, the proposed changes do present a number of challenges for wine producers, from assessing eligibility for rebate claims to adjusting to the reduced offset, which, given the regional distribution of the industry, may affect producers in some states more than others. While the final details have yet to be drafted, starting a conversation now with your tax and business adviser about the reforms and the cellar door incentives will be invaluable.
The rebate’s criteria hang off two terms – “eligible producer” and “rebateable wine” – which draw on former primary industry legislation.
To be an “eligible producer” requires owning or leasing a winery. In light of the changes to the production and business models of the industry, this is not as straightforward as it once might have been. There is debate around whether to use the winemaking process or equipment and machinery assets to define ownership and to determine the degree of significant interest an entity has in the process.
Unless skillfully interpreted and applied, these definitions could unfairly exclude small wine producers who have stake in the industry but do not own or lease a winery, contracting out the winemaking process involving their grape products for legitimate economic reasons.
An issue with the “rebateable wine” definition is linked to the brand and trademark requirements, the definitions of which have themselves raised questions. For example, when be considering eligibility, it is not clear whether the requirement applies from when an application of trademark is lodged or when it is granted.
Reduced rebate cap
One of the wine industry’s major concerns has been that small to medium-sized businesses would suffer the most from the rebate cap reduction. The reduction could see a negative impact on profitability if the WET liability was previously largely offset and formed part of the finance stream. If this applies to your business, planning a strategy for managing the reforms or reconsidering your business model with the guidance of your adviser will be essential.