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  • Tobacco tax gap 2019-20

    This information is for historical purposes only. If you require previously published content for past estimates, please email taxgap@ato.gov.au.

    This estimate for the tobacco tax gap relates to the 2019-20 financial year

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    This gap forms a part of our overall tax performance program.

    The tobacco duty population is defined as businesses that deliver tobacco (cigarettes, cigars and loose tobacco) into the Australian domestic market.

    All tobacco and tobacco products that are imported into Australia are subject to tobacco duty. Broadly this duty is calculated on a per-stick basis for cigarettes and a per-kilogram rate for loose tobacco and other tobacco leaf products.

    Since 2015 when regulated domestic manufacturing ceased, Australia has imported all of its legal tobacco products. There are no licensed growers or manufacturers of tobacco (including tobacco intended for personal use) in Australia as no licences have been issued since 2006.

    Tobacco duty collection is jointly administered by the ATO and the Australian Border Force (ABF), which sits within the Department of Home Affairs (Home Affairs). Our analysis reflects the involvement of both agencies in managing the risk of illicit tobacco in Australia.

    For 2019–20, we estimate the net tobacco duty tax gap to be 6.2% or $909 million. In other words, we estimate that almost 94%, or $13,824 million of the total theoretical tobacco duty was paid in 2019–20.

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    Trends and latest findings

    The gross and net gaps both fell slightly this year. This follows a continual decrease in the importation of legal tobacco (down 456 tonnes in 2019-20). Detections of illegal tobacco only fell slightly (down 35 tonnes) with the drop in detected illegal tobacco offset by an increase in detected locally grown tobacco (chop-chop).

    Table 1 shows the tobacco duty reported, adjustments for compliance seizures, and the gross and net gap estimates from 2015–16 to 2019–2020.

    Table 1: Tobacco tax gap, 2015–16 to 2019–20

    Element

    2015–16

    2016–17

    2017–18

    2018–19

    2019–20

    Gross gap ($m)

    655

    978

    1,305

    1,571

    1,663

    Seizures of illicit tobacco ($m)

    135

    357

    470

    711

    754

    Net gap ($m)

    520

    621

    834

    860

    909

    Tax paid ($m)

    10,063

    10,969

    12,384

    12,858

    13,824

    Theoretical liability ($m)

    10,583

    11,590

    13,219

    13,718

    14,733

    Gross gap (%)

    6.2

    8.4

    9.9

    11.5

    11.3

    Net gap (%)

    4.9

    5.4

    6.3

    6.3

    6.2

    Figure 1 displays the same information as a chart.

    Figure 1: Gross and net tobacco tax gap percentages, 2015–16 to 2019–20

    Figure 1 shows the gross and net gap in percentage terms, as outlined in Table 1.

    ATO action to reduce the gap

    We administer tobacco duty collection jointly with Home Affairs, and we work together with other government partners to control the illicit tobacco trade.

    Illicit Tobacco Taskforce

    Illicit tobacco is a serious organised crime priority of the Australian Government. Illicit tobacco is a commodity just like any other illicit or illegal commodity. It is used by criminals to fund more serious and insidious crimes that undermine Australia’s national interests. Innovation in dealing with serious crime groups is essential in a sophisticated and prosperous country like Australia.

    On 8 May 2018, the Treasurer announced five tobacco-related budget revenue measures to collectively protect current and future Commonwealth revenue legitimately due from the tobacco industry.

    We are part of the multi-agency Illicit Tobacco Taskforce (ITTF), established on 1 July 2018 to combat illicit tobacco smuggling. The taskforce is contained within the broader Department of Treasury Shadow Economy Taskforce. Funding and staffing is provided by the:

    • Australian Border Force within Home Affairs
    • Australian Taxation Office
    • Australian Criminal Intelligence Commission (ACIC)
    • Australian Transaction Reports and Analysis Centre (AUSTRAC)
    • Commonwealth Director of Public Prosecutions (CDPP).

    A budget of $70.2 million for a four-year period was provided to Home Affairs for distribution to the relevant agencies. Led by the ABF, the taskforce has been phased in over four years for partner agencies and five years for the ABF, when it becomes an ongoing measure. The ATO is funded to support the ITTF under a separate measure.

    Through its joint-agency approach, the taskforce has a full array of powers to effectively investigate, prosecute and dismantle serious organised crime groups responsible for illicit tobacco smuggling, domestic cultivation, manufacturing and distribution. The taskforce works alongside Commonwealth and state law enforcement partners to implement the law.

    The ITTF enhances the whole-of-government response and capability to gather intelligence and investigate illicit tobacco activity. It targets, disrupts and dismantles crime syndicates, and prosecutes people involved. It brings together a range of agencies with distinct but complementary powers and functions, to work collaboratively to protect Commonwealth revenue and enhance border protection.

    Using enhanced investigative and intelligence gathering methodologies, the taskforce is disrupting illicit tobacco activity by:

    • targeting supply chain vulnerabilities both within and outside Australia through enhanced data analysis, complex profile referrals to the Home Affairs National Profiling Centre, liaison and operational engagement with international law enforcement partners and customs organisations
    • targeting the criminal wealth of the actors in cooperation with the Criminal Assets Confiscation Taskforce and the Serious Financial Crime Taskforce, aligning ITTF efforts with Capability 2 of the Commonwealth Organised Crime Strategic Framework in targeting the criminal economy
    • using specialist law enforcement capabilities available to partner agencies in pursuit of the ITTF mission
    • leveraging the data-mining and financial analysis capabilities of AUSTRAC and the ATO to trace the illicit financial flows derived from illicit tobacco trafficking domestically and across Australia’s border to generate a coherent picture of the illicit tobacco financial activity and generate opportunities for disruption
    • working closely with the CDPP in the preparation of cogent briefs of evidence in both the criminal and civil (proceeds of crime) jurisdictions
    • working with domestic and international law enforcement and customs bodies, based on operational requirements, to leverage additional capabilities and support for ITTF operations.

    The achievements of the ITTF over the past few years demonstrate the effectiveness of Australia's enhanced approach in tackling illicit tobacco in the community. We use the backdrop of the experience of other countries, including the United Kingdom, the strategic insights of ACIC, and the findings of the Shadow Economy Taskforce to guide our approach.

    ATO Domestic Illicit Tobacco response

    Complementing our support to the Illicit Tobacco Taskforce, we conduct additional operations to seize and destroy domestically grown illicit tobacco crops. Reports of suspected illicit domestic tobacco crop production have increased through the 2019–20 year, with referrals being received from the ITTF, State law enforcement partners and Industry and Community initiated tip-offs. Further, the ATO provided technical advice and management support to two NSW Police operations resulting in the seizure of more than 5.5 tonnes of illicit tobacco with an estimated excise forgone value of $7.5 million.

    Tobacco legislation

    A range of policy and regulatory reform measures have been passed in recent years to tackle the trade in illicit tobacco.

    The 2018–19 Budget Shadow Economy Package – combatting illicit tobacco removed the option for importers to enter tobacco products into a licensed warehouse. The legislation took effect from 1 July 2019.

    On 16 August 2018, the government passed the Treasury Laws Amendment (Illicit Tobacco Offences) Bill with a new tobacco offence regime. This received royal assent on 24 August 2018.

    The 2016–17 Budget included an increase in the range of enforcement options available for illicit tobacco offences, including penalties.

    As part of our contribution to the ITTF and government, we continue to provide advice and assistance about the laws regarding illicit tobacco.

    Media approaches

    Our media approach to tobacco crop seizures has a strong focus on local media. This has led to an increase in referrals made by members of the community.

    We use a range of communication tactics, including media releases, to let people know about the risks of being associated with the illicit tobacco trade. This approach increases community awareness and ensures that people continue to refer illicit tobacco crops to state or federal law enforcement agencies or the ATO.

    We undertake targeted advertising to select communities in regional Australia, providing awareness and understanding of the signs of illegal tobacco growing operations and how to report suspicious activity.

    These strategies facilitate an informed community and an assurance that we are disrupting and dealing with serious organised crime syndicates involved in illicit tobacco.

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    Methodology

    The tobacco tax gap estimate is derived using a model-based bottom-up methodology drawing on supply-side channel analysis. This approach is considered the most suitable given the body of cross-agency seizure data available.

    Data has been sourced from:

    • Home Affairs – international sea and air cargo, and international post supply channels
    • ATO – domestic chop-chop cultivation
    • ATO and Home Affairs – customs warehouses (reflecting the involvement of both agencies in administering this part of the system).

    Figure 2: Administrative responsibility and supply channels for illicit tobacco

    Figure 2 shows the administrative responsibilities and supply channels for illicit tobacco: ATO administers domestic chop-chop and warehouse leakage, and the Australian Border Force manages warehouse leakage, international postage, international passengers, and sea and air cargo.

    We compile these estimates of tobacco lost through each channel to calculate the total amount of illicit tobacco entering home consumption without duty paid using the following steps:

    Step 1: Estimate illicit tobacco arriving through importation

    The ABF provided intelligence for the 2015–16 year on the interdiction of tobacco that was not part of a targeted interception. This was expanded upon to create a total smuggled volume. This excluded high risk cargo that was targeted, examined and interdicted.

    In subsequent years, the ABF has supplied a total tonnage of smuggled tobacco interdicted. We established the 2015–16 financial year as the baseline year for the quantity of smuggled tobacco that wasn’t detected. By estimating the availability of smuggled tobacco that wasn't detected, we calculate the gross tonnage of tobacco attempted to be smuggled and from this, the total theoretical tax.

    Step 2: Estimate the size of domestic chop-chop cultivation

    There are currently no licences issued for the cultivation of tobacco in Australia for either commercial or personal use. All tobacco grown in Australia for consumption is illicit.

    We are responsible for managing risks related to the domestic cultivation of tobacco without the necessary licence. We conduct crop seizures in partnership with other agencies such as the ABF and state police.

    We have developed an estimate of the value of this channel. We have analysed the value of seizures, risk, and intelligence referrals and created an uplift factor. This covers domestically cultivated tobacco that has not been detected or reported to authorities. This uplift was developed through referencing under-reporting of crime statistics from the Australian Institute of CriminologyExternal Link.

    Step 3: Analyse the licensed warehouse system

    Before July 2019 the majority of tobacco duty relating to tobacco imports was deferred until it exited a licensed warehouse. Goods that are entered ‘underbond’ are held in the warehouse system and the Tobacco duty is payable when the tobacco leaves the warehouse.

    Leakages could occur where tobacco that had entered the warehouse system exited without tobacco duty being paid. This is distinct from tobacco that is smuggled into the country. It could occur because of theft, goods for export being diverted, or errors in the importation stage where the incorrect weights are recorded.

    The point of liability for tobacco duty is when the tobacco leaves from the warehouse system, not the point of importation. For this reason, it is treated separately in this analysis.

    Historically we performed an inventory reconciliation to gauge the degree to which the system is prone to leakage of tobacco without duty paid. The final reconciliation at closure demonstrated that no leakage had occurred and for future years this element of the measure will remain zero.

    Step 4: Compare total illicit amounts to legal clearances

    Combining the estimates from step 1 to step 3 arrives at the total of illicit tobacco from all the supply channels in Australia. Legal clearances of tobacco represented $13.1 billion in 2019–20. Adding the illicit amount to the legal clearances gives the amount theoretically subject to Tobacco duty in Australia.

    A portion of this would not be realistically recoverable, even if the illicit market was eliminated. This is because smokers of illicit tobacco would be likely to reduce their smoking rates if they had to smoke more expensive legal tobacco.

    Step 5: Deduct compliance and seizures to determine net gap

    This step involves deducting the total of ATO and ABF compliance activities and seizures of illicit tobacco to determine the net gap. These activities include seizures across the sea and air cargo channels, international post, and domestic crop destructions.

    Summary of the estimation process

    Table 2 provides a summary of each step of the estimation process and the results for each year by tons and dollar value, as well as the gross and net gap percentages.

    The net and gross gap in percentage terms differ slightly between tonnage and dollar calculations for the 2015–16 estimate. This is due to a component of the imports conversion from tonnes to dollars being completed by Home Affairs, using a slightly different conversion rate, in their original analysis.

    Table 2: Applying the methodology for tobacco duty tax gap

    Step

    Description

    2015–16

    2016–17

    2017–18

    2018–19

    2019–20

    1a

    Estimate of illicit tobacco importations (tonnes)

    642

    878

    978

    1,233

    1,124

    1b

    Estimate of illicit tobacco importations ($m)

    420

    659

    866

    1,300

    1,328

    2a

    Estimate of illicit domestic chop-chop cultivation (tonnes)

    110

    192

    274

    256

    284

    2b

    Estimate of illicit domestic chop-chop cultivation ($m)

    72

    144

    243

    270

    336

    3a

    Analysis of licensed warehouse leakages (tonnes)

    250

    233

    222

    0

    0

    3b

    Analysis of licensed warehouse leakages ($m)

    163

    175

    196

    0

    0

    4a

    Gross gap (total Step 1–3) (tonnes)

    1,002

    1,302

    1,474

    1,490

    1,408

    4b

    Gross gap (total Step 1–3) ($m)

    655

    978

    1,305

    1,571

    1,663

    4c

    Legal clearances of tobacco (tonnes)

    15,188

    14,135

    13,464

    11,520

    11,064

    4d

    Legal clearances of tobacco ($m)

    9,928

    10,612

    11,914

    12,147

    13,070

    4e

    Total theoretical clearances of tobacco (tonnes)

    16,190

    15,437

    14,939

    13,010

    12,472

    4f

    Total theoretical clearances of tobacco ($m)

    10,583

    11,590

    13,219

    13,718

    14,733

    5a

    Seizures and compliance outcomes (tonnes)

    206

    475

    531

    674

    639

    5b

    Seizures and compliance outcomes ($m)

    135

    357

    470

    711

    754

    5c

    Net gap (Gross gap less seizures and compliance) (tonnes)

    796

    827

    943

    816

    770

    5d

    Net gap (Gross gap less seizures and compliance) ($m)

    520

    621

    834

    860

    909

    5e

    Gross gap (%)

    6.2%

    8.4%

    9.9%

    11.5%

    11.3%

    5f

    Net gap (%)

    4.9%

    5.4%

    6.3%

    6.3%

    6.2%

    Limitations

    For each of the three core components of the model, the following limitations apply:

    • Sea, air and international post statistical model – the methodology assumes that the sampling data set available for analysis is a truly random sample. Where the sampling method has changed from the original design, the methodology analyses the relationship differences between the historic and current intervention activities.
    • The calculation of the available illicit tobacco in the market relies on the relative price differences between licit and illicit tobacco.
    • Domestic chop-chop analysis – the revenue forgone figure is approximate given the high-level nature of some of the referrals. Judgment calls are made regarding the likely yield for given acreages under cultivation. This includes crop spacing, the quality of crop management in regard to fertiliser and pesticide application, and the quality of seed.
    • Warehouse analysis – is included for historical purposes. Previously warehouse analysis was contingent on the quality of data entry by each warehouse licensee or customs broker. Keying or inventory errors may affect the final result. This reconciliation may not detect under-reporting of physical quantities of tobacco into the data system.
    • The legal tobacco market suppliers – the revenue integrity of large tobacco companies is monitored through transaction assurance warehouse checks, our client relationship management framework, and continuing intelligence and monitoring activities. An assumption has been made that there is minimal gap attributable to these clients.
    • Tobacco excise duty realistically recoverable – we recognise that smokers of illicit tobacco may reduce their smoking rates if they have to pay the higher legal price that includes tobacco duty. This would impact on the amount of tobacco duty realistically recoverable if the illicit market was eliminated.
    • Accounting for the shadow economy – the tobacco duty gap arises as a result of illegal activity and, therefore, the entire gap falls into the shadow economy.

    Read the shadow economy glossary definition.

    Updates and revisions to previous estimates

    Each year we refresh our estimates in line with the annual report. Changes from previously published estimates occur for a variety of reasons, including:

    • improvements in methodology
    • revisions to data
    • additional information becoming available.

    The 2021 revision has used the same channel-based approach to estimating the gap as we have done in previous years. The results for 2015–16 are similar in both releases, with slight revisions resulting from updated data.

    Figure 3 displays the gross gap and net gap from our current model compared to the previous estimate.

    Figure 3: Current and previous tobacco duty tax gap estimates, 2015–16 to 2019–20

    Figure 3 displays our previous and current net gap estimates, as outlined in Table 4.

    Table 4: Current and previous net Tobacco tax gap estimates, 2015–16 to 2019–20

     

    2015–16*

    2016–17*

    2017–18*

    2018–19*

    2019–20

    2018 program

    5.6

    n/a

    n/a

    n/a

    n/a

    2019 program

    5.4

    5

    4.9

    n/a

    n/a

    2020 program

    5.1

    6.6

    6.5

    6

    n/a

    2021 program

    4.9

    5.4

    6.3

    6.3

    6.2

    Reliability

    We seek feedback and advice about the methods we use to estimate the gap from our external and internal subject matter experts. Based on the advice and assessment, the reliability rating for this estimate is medium (with a score of 18).

    As with all gap estimates, the tobacco tax gap estimate remains sensitive to assumptions made. We will be continuing to monitor and test the overall approach as we improve it in future releases.

    Figure 4: Reliability rating scale from very low to very high – tobacco tax gap

    Figure 4: This image shows a graph that represents the reliability rating for the current tobacco tax gap estimate.  The rating scale includes: - Very low, which is a score between 0 and 10 - Low, which is a score between 11 and 15 - Medium, which is a score between 16 and 20 - High, which is a score between 21 and 25 - Very high, which is a score between 26 and 30.  The graph shows the current tobacco tax gap estimate has a rating of 18, which is medium.

      Last modified: 18 Nov 2022QC 70883