Tobacco

Budget Review 2018–19 Index

Phillip Hawkins

The ‘Black Economy Package – combatting illicit tobacco’ adopts a number of recommendations from the Black Economy Taskforce’s (‘the Taskforce’) final report, which was provided to the Government in October 2017 and publicly released with the Budget.[1]

The size of the illicit tobacco market is, by its nature, difficult to measure. The Taskforce’s report records several estimates; from the Department of Immigration and Border Protection ($0.5 billion to $2.3 billion); from KPMG ($2.5 billion); and from others ranging up to $6 billion.[2]

However, the tobacco-related measures that have a material impact on the Budget do not concern illicit tobacco per se, but concern changes in the timing of the collection of excise on legally imported tobacco.

Imposing duty on imported tobacco earlier in the supply chain

Currently importers can defer the timing of customs duty applied to imported goods (such as alcohol and tobacco) by transferring them to a warehouse licensed under section 79 of the Customs Act 1901 (Cth). The customs duty becomes payable once the goods are transferred out of the warehouse for domestic sale or export. Goods can be stored in warehouses indefinitely.[3]

From 1 July 2019, customs duty will apply to tobacco products as soon they are imported, removing the ability of tobacco importers to defer taxation using warehousing arrangements.[4] The Taskforce recommended this approach in order to minimise the opportunity for duty to be avoided by distributing tobacco from warehouses illicitly, prior to the imposition of tax.[5]

Taxing tobacco warehoused on 1 June 2019

In addition, customs duty will be applied to tobacco products which have been imported but which are being stored in a licensed warehouse as at 1 July 2019. The importer will have one year to pay the customs duty amount.  This would apply to all imported tobacco products stored in warehouses, including legally imported products. This aspect of the measure has the greatest fiscal impact, bringing forward to 2019-20 revenue that would otherwise have been paid in later years.

Other related measures

The package includes several other measures:

  • from 1 July 2018, creating a cross-agency Illicit Tobacco Task Force (ITTF) to allow for enhanced cooperation in tackling illicit tobacco trade and prosecuting organised crime groups. The new Task Force, which builds on the approach of the Australian Border Force Tobacco Strike Team, will have additional powers and capabilities to enhance intelligence gathering and proactively target, disrupt and prosecute serious and organised crime groups at the centre of the illicit tobacco trade.[6]   
    • The existing Black Economy Taskforce recommended that the ITTF comprise the Australian Tax Office, Australian Federal Police, Department of Home Affairs, the Australian Criminal Intelligence Commission and the Department of Health.[7]
  • providing additional resources to the ATO to detect and destroy domestically grown illicit tobacco crops
  • making manufactured tobacco products a restricted import from 1 July 2019, requiring a permit from the Department of Home Affairs to import them and
  • upgrading the ATO’s payment systems infrastructure for customs duties.

These policies will complement the previously announced measures to combat illicit tobacco.[8]  Some of these are proposed to be implemented in two Bills currently before the Parliament: these measures create a new offence regime for illicit tobacco that has been domestically manufactured or produced, or for which the origin of production or manufacturing is unknown or uncertain. The Treasury Laws Amendment (Illicit Tobacco Offences) Bill 2018 and the Customs Amendment (Illicit Tobacco Offences) Bill 2018 propose to set penalties at a high level to deter illegal activity relating to the production of illicit tobacco and for defrauding the Commonwealth of revenue that would otherwise be raised through customs duty.

Financial impact

The package of measures is expected to have a net gain to the Commonwealth of around $3.6 billion over the forward estimates period. This financial impact consists of an increase in revenue of $3.73 billion, less an increase in departmental expenditure of $0.14 billion and an increase in capital expenditure of $0.02 billion over the forward estimates period.  The revenue component consists of two elements:

  • Applying customs duties to tobacco products already stored within warehouses. This has the effect of bringing forward tobacco tax revenue that would have otherwise been paid in future years. This component is expected to have a one-off financial impact in 2019–20.
  • Additional revenue from reducing tax avoidance through the illicit trade in tobacco.  This component is expected to have an ongoing financial impact.

Table 1: Financial impact of the ‘Black Economy Package – combatting illicit tobacco’

($m)

2017–18

2018–19

2019–20

2020–21

2021–22

Total

Revenue(a)

-

11.0

3,280.5

192.0

247.0

3,730.5

Expense(b)

-

20.3

29.5

39.8

46.4

136.0

Capital(b)

-

5.6

0.2

4.2

7.2

17.2

Total fiscal impact(c)

-

-14.9

3,250.8

148.0

193.4

3,577.3

Source: Australian Government, Budget measures: budget paper no. 2: 2018–19, p. 12.

(a) A positive number indicates an increase in revenue.

(b) A positive number indicates an increase in expenditure or an increase in capital expenditure.

(c) A negative number indicates a decrease in the fiscal balance; a positive number indicates an increase in the fiscal balance.

 


[1].          Australian Government, Budget measures: budget paper no. 2: 2018–19, p. 12; Australian Government, Black Economy Taskforce: Final report, Treasury, October 2017.

[2]           Ibid., p. 30

[3].          Department of Home Affairs (Home Affairs), ‘Warehouses and depots’, Home Affairs website.

[4].          For explanatory material, see Australian Taxation Office (ATO), ‘Excise equivalent goods (imports)’, ATO website.

[5].          Australian Government, Black Economy Taskforce: Final report , op.cit., p. 311.

[6]           Australian Government, Budget measures: budget paper no. 2: 2018–19, p. 12

[7].          Ibid., p. 309.

[8]           For example, see Australian Government, Budget measures: budget paper no. 2: 2016-17, p. 16; ‘Tobacco Excise — measures to improve health outcomes and combat illicit tobacco’

 

All online articles accessed May 2018.

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