Jim Chalmers faces $1bn tobacco rebate hit to budget

As the Treasurer makes “difficult decisions” in his mid-year budget update, including $25bn in extra spending pressures over the next four years, The Australian can reveal that major tobacco companies have been promised close to $1bn from the government in rebates for tax they paid on imports before they were abruptly banned earlier this year.

The companies had paid the tax when they imported products such as menthol cigarettes into Australia last financial year, but tobacco reforms on July 1 required exporters to print health warnings on every single cigarette they produced for sale, and also prohibited menthol derivatives.

The tobacco companies are either in the process of re-exporting or have already re-exported the unsaleable product that has been sitting in their warehouses, and they have been promised a rebate that would leave Treasury needing to either update its numbers in Wednesday’s MYEFO or delay it until next year’s budget.

Industry figures obtained by The Australian show Big Tobacco companies were collectively owed more than $940m in duty drawbacks for stock in warehouses for re-export. The figures show that a single company was owed $400m in refunds, while two others were owed $240m and $300m each.

It’s the latest iteration of a disastrous policy on tobacco excise that has handed as much as 55 per cent of the market over to the illicit trade and curtailed as much as $11.8bn a year in lost federal government tax revenue, as well creating social cohesion problems with gang violence and money laundering.

Treasury estimates for tobacco excise revenue were slashed to $7.4bn for 2025-26 fiscal year, dropping from a peak of $16.3bn in 2019-20. That should mean tobacco excise revenues will be reported in Wednesday’s budget update about $3.5bn.

Monthly financial statements show that the past three months excise revenue – which includes alcohol and petrol – has come in under Treasury’s expectations in each of the reported months.

Industry sources are angry with the government’s policy tinkering.

“This is a crisis of the government’s making, a textbook case of unintended consequences,” said one source on condition of anonymity.

“It’s a perverse outcome where people aren’t consuming less, yet the government is bleeding revenue. Rather than acknowledging the problem, they doubled down on policies that were already failing.

“The result of which is the loss of billions of dollars flowing into the hands of organised crime. But the real cost isn’t just to government revenue; it’s to every taxpayer. When Australians are being told to brace for spending cuts in the budget update, this is money that should be funding aged care, housing and essential services.”

The Treasurer’s office declined to comment on the impact of the rebates to the budget bottom line.

Dr Chalmers said Wednesday’s budget update would not include major new information.

“It won’t be a mini-budget. There’s not a lot of new stuff in there, but there is a lot of hard yards to make room for our priorities,” he said.

Another industry insider said: “If government suddenly make new regulations that prevent you from selling product you have already paid tax on, then it’s only to be expected they refund that tax.”

The administration of duty drawbacks are led by the Australian Border Force, which allows exporters to claim a refund of customs paid on imported goods exported from Australia and unused since importation.

Estimating the hit budgets is difficult. The Australian Taxation Office’s most recent annual report for the latest financial year made clear that estimating the lost revenue had become so difficult it was now dropping its guess of that figure from its tax-gap analysis.

“Tobacco excise has been removed from the tax-gap performance calculation due to the limited ability of the ATO to influence the performance outcome,” it said.

The policy’s hit to government revenues is obvious, but tobacco companies are also losing huge business. As much as 5397 tonnes of illegal tobacco flooded into the country last financial year alone, according to the new Illicit Tobacco & E-cigarette Commissioner’s report.

Economist Chris Richardson said he thought that given stronger consumption levels, there was still a chance for the government to receive as much tax as it had predicted.

Mr Richardson has been a long-standing critic of how tobacco tax revenues have been managed.

“Perhaps most spectacularly, we raised cigarette taxes through the roof but didn’t match that with better enforcement. That blew a huge hole in the tax take while simultaneously make smoking cheaper for most Australians and underwriting the rise of the most lucrative, and least risky, market that organised crime in this nation has ever had.”

New e61 analysis of historical tax data by Lachlan Vass suggests Australia may now be beyond the revenue-maximising rate of tobacco excise.

But he shows that cutting it may also be problematic: “Back-of-the-envelope estimates highlight the uncertainty surrounding the effects of cutting tobacco excise back to 2019 levels (where revenue previously appeared to be maximised). Depending on how smokers and illicit sellers respond, we estimate the annual revenue impacts range from a $2.1bn decrease to a $3.2bn increase.”

Extracted in full from:  https://www.theaustralian.com.au/business/economics/jim-chalmers-faces-1bn-tobacco-rebate-hit-to-budget/news-story/66f2c76ecb300158c7d98a4a253a7100