How could such a strongly-united wine industry position be turned down by the Federal Government? Nathan Gogoll unpacks how the campaign for Wine Equalisation Tax rebate reform was set to be rolled out as part of the Federal Budget; cast aside at the 11th hour; and then reintroduced into an upcoming taxation review.
On April 22, South Australian Senator Sean Edwards sent a letter to Assistant Treasurer Josh Frydenberg that contained a long list of reasons (13 dot points) the government should not act upon the WFA’s WET rebate plans. Senator Edwards sent copies of his letter to the Prime Minister, Treasurer, Agriculture Minister and more than a dozen other Coalition MPs and Senators.
Those plans from the WFA called for WET Rebate eligibility to be removed from foreign and bulk wine producers. The intent of the WFA proposal was to achieve savings that could be redirected to marketing funds to boost the promotion of Australian wine.
The WFA had campaigned extensively since the Outlook Conference in October 2014 to see the government act on a WET rebate reform package. Evans and his WFA team had secured the support of by Wine Grape Growers Australia, Wines of Western Australia, South Australian Wine Industry Association, Wine Tasmania, Wine Victoria, the New South Wales Wine Association and Queensland Wine Industry Association, as well as wine regions including Riverland, Riverina and Murray Valley.
The widespread support seemed to have convinced the government. Heading into the last days of April, everything seemed in place for ‘budget night’ on the second Tuesday of May.
Winery representatives had taken note of how the industry had been drawn together for a common cause. But they were unaware the government had a change of heart and they didn’t realise that Senator Sean Edwards, who is involved in winemaking in the Clare Valley, had asked his colleagues to reject the proposed reforms.
Apparently Paul Evans almost fell off his chair when he heard the news. It was late April and the chief Winemaker’s Federation of Australia (WFA) was at an evening function when Treasurer Joe Hockey broke the news. Onlookers said the colour drained from Evans’ face and he barely spoke a word for the rest of the evening.
You can only imagine what the WFA boss was thinking. It was literally just days before the Federal Budget was to be handed down.
Before the end of April, The Australian newspaper reported that Joe Hockey, the Federal Treasurer, was “understood to have told the industry at a meeting on Tuesday that the plan was not supported, despite it delivering significant budget savings”.
Publicly, Evans stayed positive. He told Daily Wine News on May 1 he believed the government was still listening to the wine industry on the topic of WET Rebate reforms.
“What I can say is our discussions and advocacy continues and I think we have a compelling case,” Evans said. “Whether the media report is true or not, who knows. But the Government must be in ‘listening mode’ if both the Winemaker’s Federation and Wine Grape Growers Australia as well as all the key state-based organisations are calling for these changes.”
Behind the scenes a hastily-organised delegation of industry leaders met with Assistant Treasurer Frydenberg in Canberra to see whether the egg could be unscrambled. But it was too late for the budget to be put back together again.
On May 5, Frydenberg issued a media release that said the Treasury would prepare a discussion paper on the operation of the Wine Equalisation Tax (WET) rebate to help inform consideration of the issue as part of the Tax White Paper process later in the year. One line from that release skimmed over the events that had seen plans for reform adopted in the Federal Budget, then shelved, only to be reconsidered in a different forum… “the Government appreciates the strong interest in reform in this area”.
Privately, various industry leaders expressed their frustration with the process. Indeed, some of this frustration even made its way into the media, when snippets of a letter to MPs from one state body chair were printed by The Australian.
“For Senator Edwards to question the volume of research and evidence gained by the WFA over the past two to three years is purely belligerent,” said the letter. “The industry has presented a majority position to government for a compelling and comprehensive case to support the recovery of the sector and a return to profitability. It should not be delayed.”
The Australian also reported Senator Edwards’ had denied a conflict of interest in relation to WET Rebate reform. The newspaper revealed the Senator is a “significant” shareholder in Kirrihill Wines and the owner of Ballingarry Wines.
There are real concerns industry unity might be harder to achieve as a result of the events of the past few months. But there is still strong support for the WFA’s WET rebate reform proposal and the 45 page submission, plus appendices, has already been submitted as part of the Tax White Paper process.
Transcript of Senator Edward’s letter:
22 April 2015
Hon Josh Frydenberg MP
PO Box 6022
House of Representatives
Canberra ACT 2600
I write in relation to the most recent Winemakers’ Federation Australia budget submission.
As the Parliament’s only winemaker with a lifetime of involvement in the industry I offer my views in respect to that submission to assist to inform good policy outcomes.
In a letter to you as the Assistant Treasurer dated 13 April 2015, WFA proposed a series of solutions to the wine industry’s challenges.
Treasury raises on average $1 billion annually on the 29% Wine Equalisation Tax levied on the wholesale cost of wine purchased in Australia in addition to the 10% GST. Approximately $225-250 million is rebated annually to the 2,500 eligible winemakers around rural and regional Australia and $23-27 million to any New Zealand companies selling in Australia under the provision of the Closer Economic Agreement of 1983 (CER).
WFA outlines the following:
It recommends the removal of the Wine Equalisation Tax (WET) Rebate on bulk and unbranded wines.
It claims to have legal advice confirming it is possible to abolish the New Zealand WET rebate arrangements and instead have New Zealand producers claim on the same basis as Australian and other foreign claimants.
It welcomes the Senate Inquiry however suggests it’s not the best forum for the reforms needed.
It says the time for action on growing the demand for Australian wine is now, given this confluence of a more favourable AUD exchange rate, three new FTAs and signs of renewed interest in Australian wine from North America.
The $25 million they seek for the Australian Grape and Wine Authority (fully offset by the savings we have identified of $278 million gross) will enable the development and delivery of a targeted marketing campaign to capitalise on this trifecta.
I advise against the WFA proposal and offer the following in response:
The NZ contention that we can reverse a WTO ruling under our CER agreement is fraught with political risk.
No credible study has been provided on the effect of the actions sought or the substantial changes outlines – just opinions on how to achieve them.
It proposes to remove $278 million from the rural regions where grapes are grown and wine is made.
It asserts that it will solve the industry’s supply/demand issues yet provides no cogent evidence of how it will restore profitability in the sector, when recovery will occur, not does makes known the drivers in the substantive changes as to the reasons why recovery will occur.
The WFA is the same organisation that produced strategy documents “Strategy 2025” in 1995 and “The Marketing Decade” in 1999 which largely (save currency issues) see s where the industry is today.
It provides no evidence of what regions in which states will be effected nor does it profile the grape growers and winemakers that will be forced to leave the industry under the WFA’s oft spruiked ‘rationalisation’ (read: go broke).
The political risk of removing $278 million from the regions without real, meaningful and demonstrable advantages is significant.
Much of the Australian wine industry’s problems can be accounted for by recent history.
A WFA report said less than 15 per cent of Australian grape growers made a profit last year. In South Australia’s Riverland profitability was reportedly even lower and is expected to decrease this year. This is not a new issue and has been the case for 10 years. It is inexplicable why wine grape growers have not transitioned to other crops or exited, rather than choosing to erode equity to unsustainable levels.
Unfavourable exchange rates between 2005 and 2014 led to reduced volume and value per litre to our export markets. I contend that with the AUD at $US1.07 no amount of marketing spend was likely to fix this given the disadvantage Australian winemakers were at in comparison with other wine producing nations in the developed markets like the USA and UK.
However, a more favourable exchange rate and the three new FTAs into emerging Asian markets provide an opportunity to grow demand in international markets, especially back into the United States, a place where our image has suffered tremendously over the last 10 years. I do agree that it is critical that a substantive investment in marketing is made and I cannot understate the importance of this.
The impact of a more favourable exchange rate today is now being felt by the industry and is flowing through but unlikely to be a significant benefit for another 24 months or so given the industry’s long production lead times from vintage to vintage and massive appetite for patient capital in the intervening period.
In addition, over the last 18 months the Agriculture Minister has prioritised the reinvigoration of the industry through the appointment of a new progressive board in the newly constituted presiding statutory body of the wine industry – the Australian Grape and Wine Authority (AGWA) which is charged with overseeing the future direction and fortunes of Australian wine marketing, research and development. This board has made considerable progress in a short time and the proposals by WFA to you are only likely to generate division in the industry and set back the Government’s agenda for reform.
In summary, the WFA submission would remove significant funding from the regions while it does not demonstrate anywhere how this will provide the panacea for profitability in the Australian wine industry; it proposes a legally dubious course of action in respect to the New Zealand rebate; and it proposes a significant political risk in respect to that funding.
The wine industry’s problems are more likely to be helped by an improving dollar and some smart marketing combined with equal funding support to that of other governments in competitor nations.
I am happy to speak to you in person should you require further information on the matter.
Senator Sean Edwards
Liberal Senator for South Australia
This post has been adapted from an article first published in the June 2015 Grapegrower & Winemaker magazine.
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