Explanatory Memorandum(Circulated by the Authority of the Minister for Justice and Customs, Senator the Honourable Amanda Vanstone)
The purpose of this Bill, which includes two schedules, is to enact amendments to the Customs Tariff Act 1995.
Schedule 1 implements a per-stick rate of customs duty of $0.18872 on most cigarettes, lightweight cigars, bidis and other lightweight tobacco products marketed in stick form. The date of operation for these amendments is 1 November 1999.
Schedule 2 introduces additional measures to detect and deter fuel substitution by removing the tariff items which provided concessional rates of duty for non-transport usage. These tariff items were being misused. The amendments contained in this Schedule do not impose additional duty liability on fuel being used for declared purposes. The commencement date for these amendments is 15 November 1999.
Regulation impact statement
Previous tobacco excise arrangements encouraged the manufacture of low value, low weight cigarettes in large packets. This taxation advantage has skewed consumption towards higher volume, lightweight cigarettes, which experts consider more harmful on health grounds. As a result the government announced in A New Tax System (ANTS) in August 1998 the introduction of a per stick rate of duty explained below. This measure was incorporated in Excise Tariff Proposal No. 2 (1999) and commenced on 1 November 1999. Complementary legislation for imported tobacco products was implemented in Customs Tariff Proposal No. 6 (1999).
The 'per stick' arrangement was announced as part of the ANTS package. The per stick rate of duty of $0.18872 will apply to cigarettes, cigars, bidis and other tobacco marketed in stick form containing not more than 0.8 grams per stick tobacco content. All other tobacco products will pay duty at a rate of $235.90 per kilogram of tobacco content. Products subject to this weight based rate will include roll your own and pipe tobacco, heavy cigarettes, cigars and other stick form tobacco products containing more than 0.8 grams per stick tobacco content. These rates are subject to indexation following release of the CPI, usually in February and August.
The new excise and customs rates have been formulated based on health experts' advice and best practice experiences from other countries. This new approach will address community health concerns and further streamline the current administration and collection mechanisms. The 'per stick' rate has been set so that the excise per kilogram of tobacco on a stick of tobacco will be the same as the excise on a kilogram of loose tobacco.
As the change will result in an increase in the rate of duty for certain tobacco products, particularly lightweight cigarettes, usually packed in high volume packs (i.e. 40's and 50's). This should result in tobacco manufacturers adjusting wholesale prices of tobacco products and realigning their product lines following the removal of the taxation advantage. It is anticipated that this will decrease consumer demand for cigarettes, particularly with the likely removal of light weight, high volume cigarette packs from the market.
The changes will involve some minor compliance costs. This will involve initial costs in adjusting computer programs for the rate changes. On an ongoing basis, there will be some compliance costs in terms of additional weighing. It will also be necessary to provide sample details for ATO monitoring on a six monthly basis, however, this information would generally be used for internal quality control purposes in any case. Manufacturers will now be required to supply information regarding manufacturing weights of both tobacco and non tobacco components on a regular basis.
There will however also be compliance costs savings as there will no longer be the requirement to produce six monthly weight reconciliation statements unless the tobacco content is more than 0.8 grams. It will no longer be necessary to adjust computer systems every time the wholesale list price of tobacco products change. In addition weighing and quality testing such as moisture testing will not be required by the ATO where the stick has less than 0.77 grams tobacco content.
The introduction of a definition of tobacco is favoured by tobacco manufacturers and producers as a means to reduce illicit tobacco production which disadvantages legitimate producers and manufacturers.
Tobacco retailers may also experience a fall in demand for cigarettes particularly light weight, high volume brands and may also need to change stock levels of certain brands in response to consumer demand. As the duty is paid by the tobacco manufacturer, there will not be a change in compliance costs.
Individuals who smoke tobacco products will be affected by the change in excise duty depending on which brands they smoke. However, this is in line with the policy intent of the change which has been introduced for health reasons.
The changes will impact on the ATO and Customs who will administer it. There are some costs in implementing the measure which includes imposing quotas as a revenue protection measure and subsequent monitoring of information provided by manufacturers prior to implementing the per stick arrangements. However, there will be some savings in the longer term as calculations of duty will be made simpler due to the abolition of wholesale list prices rates.
The tobacco industry is highly concentrated, with only three major domestic tobacco manufacturers and importers. This industry utilises a high degree of automation and computerisation. The initial cost of compliance in changing the tobacco tax base from volume to per stick, is estimated to be less than $1 million.
The initial compliance costs would primarily result from taxpayers familiarising themselves with the new legislation and adjusting computer programs for the rate changes. The tobacco industry has been consulted and has been aware of the proposed changes for over a year prior to the per stick arrangement being introduced on 1 November 1999. The per stick arrangements are also similar to those used for taxing tobacco in most other countries, where the parent tobacco companies operate.
The recurring compliance costs are estimated to be negligible. Whilst additional weighing and sampling is required, this information would generally be compiled by the taxpayer for internal quality control purposes.
There are some minor administrative costs for modification to computer systems for the Australian Taxation Office and Australian Customs Service in implementing the changes. However, once the changes are in place, these costs will be offset by reduced administrative costs due to the removal of the use of wholesale list prices in determining the rate of excise and clarification of the law as a result of changing the definition of tobacco.
The partial year impact of these changes in 1999-2000 is expected to provide additional revenue of around $300 million. In subsequent years the full year impact is expected to be additional revenue of around $440 million.
The policy is likely to reduce demand for cigarettes overall, and in particular light weight cigarettes, in favour of other goods and services. Lower cigarette consumption can be expected to result in lower health care costs to the community.
The policy of changing the basis of excise on tobacco was announced in August 1998 in the ANTS policy document. Therefore the tobacco industry has been aware of the proposed changes for over a year before the per stick arrangements were introduced on 1 November 1999 and have been consulted.
The tobacco industry have been consulted in relation to the definition of tobacco as part of the Illicit Tobacco Reduction Strategy.
Health groups have been advocating a change in the basis of excise on tobacco to a per stick basis for some time.
This proposal will remove the taxation incentives which have encouraged consumption of large packets of light weight cigarettes. These are considered by health experts to cause more harm by encouraging higher consumption levels.
Financial impact statement
The partial year impact of Schedule 1 changes in 1999-2000 is expected to provide around $300 million in combined customs and excise duty. In subsequent years the full year impact is expected to be additional revenue of around $440 million.
The amendments to the tariff structure for petroleum products that are contained in Schedule 2 of this Bill do not create an additional tax liability. However, the revenue at risk, if the customs and excise tariff changes are not introduced, is estimated to be up to $100 million per annum.
Notes on clauses
A Bill for an Act to amend the Customs Tariff Act 1995, and for related purposes.
- Clause 1
- Short Title - Customs Tariff Amendment Act (No. 1) 2000.
- Clause 2
- Subclause 1
- Clauses 1, 2 and 3 commence on the day on which this Act receives the Royal Assent.
- Subclause 2
- Schedule 1 is taken to have commenced on 1 November 1999.
- Subclause 3
- Schedule 2 is taken to have commenced on 15 November 1999.
- Clause 3
This clause is the formal enabling provision for the Schedules to the Bill, providing that each Act specified in the Schedules is amended in accordance with the applicable items of the Schedules. The clause also provides that the other items of the Schedules have effect according to their own terms.
The amendments in this Schedule are taken to have effect from 1 November 1999.
These amendments were tabled in the House of Representatives on 21 October 1999 as Customs Tariff Proposal No. 6 (1999).
Previous tobacco tariff arrangements encouraged the manufacture of low value, low weight cigarettes in large packets. This taxation advantage skewed consumption towards higher volume, lightweight cigarettes, which experts consider more harmful on health grounds.
The new structure replaces the previous complex arrangements which were introduced following the High Court decision on 5 August 1997 which invalidated state business franchise fees.
These amendments introduce a per stick rate of duty of $0.18872 (pre February 2000 Consumer Price Index adjustment) for cigarettes, cigars, bidis and other tobacco marketed in stick form containing not more than 0.8 grams per stick tobacco content. All other tobacco products pay duty at a rate of $235.90 per kilogram (pre February 2000 Consumer Price Index adjustment) of tobacco content. Products subject to this weight based rate include roll your own and pipe tobacco, heavy cigarettes, cigars and other stick form tobacco products containing more than 0.8 grams per stick tobacco content.
Item 67 in Schedule 4 of the Tariff Act has been created to allow tobacco classified to subheadings 2401.20.00, 2401.30.00 and 2403.91.00 to be entered duty free by licensed excise manufacturers when it is to be used for the further manufacturer of tobacco products.
Item No. 1 in this Schedule contains changes to the table of paired customs tariff subheadings and excise items in section 19(1) of the Custom Tariff Act. It allows the customs rate of duty to be adjusted in line with movements in the excise rate of duty for similar goods. This amendment contains consequential changes to the tobacco subheadings and items.
The amendments in this Schedule are taken to have effect from 15 November 1999.
These amendments were notified in Special Commonwealth Gazette S541 which was published on 11 November 1999 and was tabled in the House of Representatives on 25 November 1999 as Customs Tariff Proposal No. 8 (1999).
Petroleum duty evasion activities known as fuel substitution occur when petrol or diesel used as a transport fuel is replaced with product that attracts a lower rate of excise or customs duty. These activities also lead to unfair competition in the market place.
In January 1998, the Government introduced a system that required duty-free petroleum products to carry a chemical marker. The marker system also makes it illegal to sell these products in circumstances that attract the highest rate of duty.
These arrangements were initially quite effective. However, petroleum duty evasion activities again increased during 1999 as some parties exploited weaknesses in the tariff that allow certain fuel substitution activities to occur.
These amendments introduce a new tariff structure that removes the categories of fuel which were being extensively abused, most notably, those categories relating to duty free gasoline and diesel. Alternative arrangements are in place to protect those consumers with a legitimate need to access duty free product, in particular when diesel is used other than as a fuel.
These amendments will not create a new duty liability.
Item No. 1 of this Schedule contains consequential changes to the paired customs tariff subheadings and excise items in section 19(1) of the Tariff Act. The changes are only to petroleum products references.