NO.006

REFORM OF TOBACCO TAXATION

As outlined in A New Tax System (ANTS) the Government is introducing a new

‘per stick’ tobacco excise to replace existing tobacco excise, which is now

applied on both a weight and ad-valorem basis.

Today the Government is announcing final details regarding the implementation of this

measure.

This reform has been recommended by health experts and is favoured by most other

countries. It means uniform tax on each cigarette and removes the ability to vary tax by

adjusting price and weight. In addition it will streamline administration of collection of

tobacco excise.

In recognition of the significant change this represents to the industry, the

Government has decided that the revised arrangements will now apply from

1 November 1999, rather than 1 July 1999 as previously announced, in order to

give sufficient time for cigarette manufacturers to implement required changes.

At present, tobacco excise is calculated under a complex formula involving a

combination of a Commonwealth weight based charge, plus a hybrid State surcharge based on

both the wholesale price of tobacco and the tobacco weight. These complex arrangements

were introduced as a necessary short-term measure to shore up State revenue when, in

August 1997, the States’ business franchise fees on tobacco products were held to be

unconstitutional by the High Court.

These arrangements encourage the manufacture of low value, low weight cigarettes,

principally packaged in large packets. This taxation advantage has skewed consumption

towards higher volume, lighter cigarettes, which health experts consider more harmful on

health grounds.

The new single rate “per stick” excise will apply to all cigarettes with a

tobacco content up to and including 0.8 grams per cigarette. An excise per kilogram of

tobacco will apply to all other tobacco products, including cigarettes heavier than 0.8

grams of tobacco per cigarette, loose tobacco and cigars.

The per stick excise rate will be set such that the excise per kilogram of tobacco on a

cigarette containing 0.8 grams of tobacco will be the same as the excise on a kilogram of

tobacco. Incorporating the 2 February 1999 CPI adjustment the per stick excise rate is

18.815 cents per stick, with a weight based rate of $235.19 per kilogram of tobacco. These

rates are subject to existing indexation arrangements in the future.

It is expected that as a result of these changes the price of premium brand cigarettes

will not fall in price but high volume, low weight cigarettes will rise in price.

The Government will be carefully monitoring the cigarette market prior to the

introduction of these arrangements to ensure that excessive quantities of budget

cigarettes are not produced and cleared at current excise rates for sale after 1

November 1999.

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.

CANBERRA

3 February 1999

Contact: Paul McCullough, Treasury (02) 6263 4438