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  • Measuring the gap

    Our approach to measuring the tobacco tax gap uses a bottom-up methodology. This incorporates a number of separate analyses across the various supply channels where tobacco may enter consumption without tobacco duty applied.

    Illicit tobacco enters the Australian market through the following supply channels:

    • tobacco domestically grown without a licence, commonly referred to as ‘chop-chop’
    • leakages of 'underbond' tobacco from licensed customs warehouses
    • tobacco arriving through international post without tobacco duty paid
    • tobacco brought in through international passenger arrivals in excess of the 25-stick limit, without tobacco duty paid
    • sea and air cargo – the most significant source of detected illicit tobacco currently entering Australia. This typically comprises a small number of high-value detections in sea cargo and smaller amounts through air cargo.

    We engage an independent expert panel to provide advice on the suitability of our gap estimates and methodologies. Further information regarding the panel, including the members, can be found in Australian tax gaps – overview.

    The reliability of this estimate is assessed as medium.

    Administration of tobacco duty

    Australian Border Force, which sits within the Department of Home Affairs, is responsible for levying customs duty on imports of tobacco as excise equivalent goods (EEGs). This duty is applied at the same rate as the tobacco excise duty rate, allowing consistent treatment of imported and local goods.

    The warehouse system of tobacco distribution is jointly administered between Home Affairs and the ATO. Customs duty has become the primary source of tobacco duty revenue since the end of domestic tobacco manufacturing in Australia in 2015.

    Tobacco duty may be levied on tobacco as it enters the country at import. Alternatively, the goods may be entered into the customs warehouse system as goods ‘underbond’. Duty payment is then deferred until the tobacco leaves or ‘clears’ the warehouse and enters into home consumption.

    Duty is indexed twice a year, in March and September. Increases in tobacco excise and excise equivalent customs duty of 12.5% apply to all tobacco products every year on 1 September, from 2017 until 2020. This will see tobacco excise or customs duty on a packet of 20 cigarettes reaching at least $19.77 in 2020, an increase from $16.15 in 2018.

    Home Affairs data is used for international sea and air cargo, and international post supply channels. The domestic chop-chop cultivation data has been sourced from ATO systems. Data on customs warehouses are from both the ATO and Home Affairs, reflecting the involvement of both agencies in administering this part of the system.

    We have compiled these estimates of tobacco lost through each channel to calculate the total amount of illicit tobacco entering home consumption without duty paid. This combined figure represents the ‘tobacco duty gap’ amount. This, together with the total duty collected, is the estimate of the total amount hypothetically due for collection, assuming full compliance with the law.

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      Last modified: 17 Oct 2019QC 55324