Keatings wine tax unbearable

The Federal Treasurer, Mr Dawkins’ increased wine tax might seem just another impost on the household budget. Instead, it has the potential to undermine a potentially great export industry by wrecking the domestic market. As well, it almost certainly precipitates a decline in investment by large companies and bankruptcies (and hence more unemployment) amongst smaller wine makers, wholesalers and retailers not sufficiently capitalised to cope with another massive government-imposed financial burden.

Where wholesale taxes rose generally from 20 to 21 per cent in the budget, wine was treated to a 55 per cent jump from 20 per cent to 31 per cent on all wholesale transactions after midnight last Tuesday. That massive slug triggered a run on existing retail stock not subject to the new tax. Some of that may be around for a few weeks, but anything new automatically goes up in price.

As well as the federal tax increase, states and territories get a bonus because liquor licence fees come after sales tax. Thus, under the old regime a case of wine costing a retailer $50 was subject to 20 per cent sales tax plus 13 per cent licence fee, bringing the nett landed cost to $67.80. The federal cut was $10 and the Territory’s $7.80, making the total tax $17.80 or 26.3 per cent of the cost price.

Under the new arrangement that $50 case of wine lands at $74.02, an increase of 9.2 per cent. The federal take rises from $10 to $15.50 (55 per cent), and the Territory’s from $7.80 to $8.52 (9.2 per cent). The total tax increase is therefore $6.22 (35 per cent), rising from $17.80 to $24.02 or 32.5 per cent of the cost price. Thank you messrs Dawkins and Keating.

These higher taxes translate to retail price rises of around 50 cents on a $5 bottle, $1 on a $10 bottle, and about $1 on a 4 litre wine cask. Perhaps that doesn’t seem a very great burden. But with household incomes not rising, the simple truth is that a good proportion of wine drinkers not able to afford the extra will trade down to lower quality at the same old price, move to beer and spirits, or simply drink less. Quite simply, higher prices reduce demand.

As consumers resist price rises, already-slim margins along the production, distribution and retail chain come under even greater pressure. Reduced margins, along with an increased need for working capital to service the higher taxes, add to the already great stresses at work in the industry.

What we’re seeing in the wine distribution chain are the same forces that moved grocery market share so dramatically from independents to the major chains in the last decade. We’ve all read of Davids Holdings and Foodlands manoeuvres to create a third retailing force through Australia-wide amalgamations of wholesalers and associated independent retailers.

Higher taxes will probably force the demise of many small liquor retailers before these plans take shape. Squeezed between lower margins and wine suppliers demanding shorter credit terms (in most cases it’s the winery that has to pay sales tax 30 days after selling goods to the retailer) many will go under. When that happens, financially weak suppliers get dragged under, too.

Will the government then boast that it snapped not only the twig of inflation but also the backs of small businesses imprudent enough not to have planned for a 55 per cent tax increase?

Bigger, well-capitalised businesses will bear the tax burden better than teetering or collapsing small ones. As well as being able to fund stock, large retailers feeling consumer resistance to higher prices have the leverage to ask suppliers to share the margin squeeze.

Large wine makers creating Australia’s dramatic export push appear horrified at the savage tax hike and the margin squeeze that’s to follow. Exports are not subject to sales tax. But without a healthy, profitable domestic market there is nothing to underpin the huge investment in vineyards demanded by export growth. Even before the tax hike, domestic sales were flat and margins under pressure.

The day after the budget, both Bruce Kemp and Perry Gunner, heads of The Penfolds Wine Group and Orlando-Wyndham respectively, expressed doubts about planned vineyard expansions in Australia. It will be a tragedy if a heavy-handed tax grab curtails the $600 million dollar investment that had been expected over the next five years.

It will be tragic, too, to see small businesses wiped out not by inefficiency but by government burdens too great to carry.

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