ASSISTANT Treasurer Josh Frydenberg is set to throw an accelerant on a debate in the wine industry with the release of a discussion paper into the wine equalisation tax (WET) rebate.
It is understood that the discussion paper, to be released within the next two weeks, will not make any recommendations but will include case studies that show how the WET rebate is being manipulated and rorted.
It will include studies of virtual winemakers who don't own vines, production facilities or the wine but have managed to create a structure that enables them to access the $500,000-a-year tax rebate.
Dozens of companies are believed to have created artificial constructs to access the rebate. The rebate is also distorting supply and demand.
The stakes are high with hundreds of millions of dollars a year at risk. For this reason it likely the debate will get very heated - and personal. It has already got political.
The latest Australian & New Zealand Grapegrower & Winemaker magazine threw a grenade into the industry with an article titled "The letter that shocked the wine industry".
The article suggested the wine tax rebate reform was "set to be rolled out" as part of the May federal budget but was "cast aside at the 11th hour" following a letter written by Liberal senator Sean Edwards - a recipient of the WET tax rebate - to Assistant Treasurer Frydenberg, Treasurer Joe Hockey, Prime Minister Tony Abbott and other key government ministers.
The article suggested Paul Evans, head of the Winemakers Federation of Australia, "almost fell off his chair" when he heard the news. "It was late April and the chief executive of the WFA was at an evening function where Treasurer Joe Hockey told him WET rebate changes had been removed from the budget. Onlookers said the colour drained from Evans' face and he barely spoke a word for the rest of the evening."
On May 5 - a week before the federal budget - the Abbott government asked Treasury to prepare a discussion paper to "help inform consideration of the issue as part of the tax white paper process".
Senior government sources say the proposal was never going to be in the budget because the New Zealand factor hadn't been resolved.
The WET rebate allows wine producers to claim a maximum $500,000 a year. It costs taxpayers a fortune, with hundreds of millions of dollars given back each year in WET producer rebates. Treasury estimates it will balloon to $350 million in 2015-16.
Some believe the rebate should be scrapped. Others, including Senator Edwards, believe it is working well. The peak lobby group for the wine industry, the Winemakers Federation of Australia, has landed somewhere in the middle, calling for some changes to the industry, including scrapping the subsidy to New Zealanders and phasing it out for bulk and unbranded wine. The WFA's proposal would save the government almost $230 million a year.
The WFA's argument is that Australia should be promoting strong brands. Put simply, giving the rebate to unbranded wine drives growth in the retailers' home brands, pulling down the retail price for wine and lowering profitability for winemakers and grape growers.
It argues that some of the savings should be used to boost marketing, including helping Wine Australia grow the export demand opportunity for Australian wine.
But not everyone supports the WFA's recommendations. A significant medium-sized producer, d'Arenberg, epitomises the mood for change beyond giants such as French drinks giant Pernod Ricard Winemakers and Treasury Wine Estates (outlined in a previous column on May 18, 2015).
Chester Osborn, the chief winemaker at d'Arenberg, told Daily Wine News that we should get rid of the rebate and use a large portion of the savings for export marketing. He made it clear he was speaking for the many medium and larger producers who were not getting a hearing.
Osborne said the WET exemption had made wine cheaper and introduced "masses" of new labels to the market. "The latter are mainly coming from new, inexperienced growers and their friends and relatives, quasi-wine companies, retailers and New Zealand wine growers/ makers/ trade. In addition, there are similar cider-selling companies. The WET exemption has not sold one extra bottle of wine. Effectively it has acted like a handout to the final consumer by making wine cheaper."
It puts the government in a quandary. It has a rural constituency and Nationals party to consider but it also needs to be seen as walking the talk. Since it came into office it has taken a tough stance on "corporate welfare" in relation to the car industry and a lot has been written about its attitude to "the age of entitlement".
That is why the more likely outcome in this debate will be a reduction in the rebate from the current $500,000 and a toughening up the rules to try and stop the rorting. This could include removing the rebate from unbranded wine and taking a closer look at bulk wine and what it is doing for the image of Australian wine as a quality exporter and tourist destination.
It will also try to find a solution to the current situation where New Zealand wine companies can access the rebate, which is costing Australian taxpayers more than $25 million a year.
For now, the discussion paper will demonstrate how the system is broken and needs to be fixed.
The rebate is causing distortions in the market by a convoluted process in which growers end up with the rebate and producers want to lower the grape costs to the amount of the rebate.
Against this backdrop is the issue of alcohol and volumetric tax, which will be a harder nut to crack. Beer, spirits and alcopops are taxed on the basis of their alcohol content and container size, with spirits and alcopops taxed at a higher rate because of the perceived greater risk of abuse.
Wine is taxed on wholesale price rather than volume. This means low-value cask wine attracts little taxation - alcohol tax paid per standard drink on a $13 cask of wine is 5¢ - while more expensive bottled wine attracts higher tax under the WET system, at 15¢ for a $15 bottle of wine and almost $1 for a $50 bottle of wine.
But at the end of the day, reform is needed and now is probably the best time in years to tackle it given conditions in the industry seem to be improving, including a falling dollar making exports more competitive, the free trade agreement with Asia and rising consumption in the United States.
For the first time in eight years wine exports have increased.
The bulk wine industry uses the cheap wine industry's profitability challenges as a reason not to reform the WET (beyond the rebate) until things improve.
We are now in a position where that part of the industry is losing that fig leaf. With the improvement in the currency and an uptick in pricing, that argument could be obsolete.
With a Senate inquiry, a tax review looking at alcohol and volumetric tax and the WET rebate, the wine industry is in for a rocky ride. Whatever the outcome, the status quo isn't an option.
