Slide 1

Fundamentals ofExcise Taxation

Master ClassThe Henry Review (Australia)

Mr Scott Cass-DunbarEconomic Counsel,

Distilled Spirits Industry Council of Australia (DSICA)

Seventh Asia Tax ForumExcise Taxation Master Class

20 October 2010, Siem Reap

Slide 2

Presentation overview

• The Henry Review process• The Government’s response• Design principles for the tax system• Tobacco taxation: recommendations• Road transport taxation: recommendations• Alcohol taxation: design principles in action

Slide 3

The Henry Review

• May 2008: Australia’s Future TaxSystem Review, a “root andbranch” review of the AustralianTaxation System led by Dr KenHenry (Secretary, Department ofthe Treasury)

• The review comprehensively examined the Australian taxsystem and made recommendations on how to positionAustralia to deal with the demographic, social, economicand environmental challenges of the 21st century

Ken Henry

Slide 4

Areas of review

• The Henry Review undertook a detailed analysisof the following areas:– Personal taxation– Investment and entity taxation– Land and resource taxes– Taxing consumption– Taxation as a social policy instrument– The transfer system– Institutions, governance and administration– Macroeconomic and fiscal impacts

• Analysis of current GST/VAT arrangementswere omitted from the scope of the review

Slide 5

The review process

• The review process was highly consultative, usingsubmissions, conferences and outsourced dataanalysis to inform the final report

19 Aug 08 to17 Oct 08

Publicconsultation

round 1

Dec 08 to May09

PublicConsultation

round 2

18-19 June 09

Tax policyconferenceMelbourne

Dec 09

Henry Reviewdelivered togovernment

10 Dec 08

Consultationpapers

released

13 May 08

Henry ReviewAnnounced as

part of 1st SwanBudget

26 Mar 10

KPMG Econtechanalysis of

Australian TaxSystem completed

Slide 6

Key recommendations

• The review made a total of 138recommendations, covering all areas ofthe tax system (with the exception ofGST/VAT)

Slide 7

Government’s response torecommendations

• To date, the Government has fullyaccepted two recommendations andpartially accepted a third

Prime Minister, Hon Julia Gillard, MP

• The newly electedAustralianGovernment hascommitted to a publicforum of experts by30 June 2011

Slide 8

Design principles for the taxsystem

• The Henry Review identifies five key designprinciples of an ideal tax system:– equity;– efficiency;– simplicity;– sustainability; and– policy consistency

Slide 9

Design principle 1: equity

• Equity refers to individuals andbusinesses with similar economiccircumstances and like products bearingsimilar taxation burdens

Slide 10

Design principle 2: efficiency

• Efficiency refers to the use of taxationarrangements which minimise compliancecosts for taxpayers and administrationcosts for government

• A good tax system is designed to minimisepossible costs to economic efficiency whiledeterring grey market activity

Slide 11

Design principle 3: simplicity

• A good tax system should be easy tounderstand and simple to comply with(for both taxpayers and administrators)

• A simple and transparent system makes iteasier for people to understand theirobligations and entitlements

Slide 12

Design principle 4:sustainability

• A tax system should have the capacity tomeet the changing revenue needs ofgovernment on an ongoing basis,independently of changing consumerbehaviour

Slide 13

Design principle 5: policyconsistency

• To the greatest extent possible, taxationshould be consistent with the broaderpolicy objectives of Government

• In the context of excise taxation, thisexcise system should establish anappropriate tax environment in whichresponsible consumption decisions can bemade

Slide 14

Tobacco taxation:recommendations

• The Henry Review provided three recommendations for the reformof tobacco taxation in Australia

Slide 15

Road transport taxation:recommendations

• The Henry Review provided the following recommendation for thereform of fuel taxation in Australia

Slide 16

Alcohol taxation:design principles in action

• The Henry Review provided two significant recommendations forthe long-term reform of alcohol taxation in Australia

Arc

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Com

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Slide 17

Alcohol taxation principles:equity

• The Review proposes a single volumetric rateof tax applied to all alcohol products– This ensures non-discrimination between products by

taxing only the alcohol content, and that all productsare subject to the same tax burden

===

Slide 18

Alcohol taxation principles:efficiency

• The Review proposes a review of theadministration of alcohol tax to ensurerevenue is raised at the least possiblecost to economic efficiency and withminimal administration and compliancecosts

Slide 19

Alcohol taxation principles:simplicity

• A single volumetric rate of tax is to be appliedto all alcohol products; this removes the need formultiple taxes applying to different alcoholproducts and the need to distinguish betweendifferent alcohol products

Slide 20

Alcohol taxation principles:sustainability

• The Review proposes that the single rateof taxation be subject to indexation toensure that the tax base retains its valueover time and in line with inflation

Slide 21

Alcohol taxation principles:policy consistency

• The Review proposesthe use of a lowexcise-free thresholdof 1.15% applying to allalcohol products– This encourages

consumption of low-alcohol products

Excise Free (e.g. 1.15%)

Excise Paid(e.g. on 3.85%)

No tax paid

Alcohol taxation principles:use of narrow-based taxes

• A distinction can be drawn betweennarrow and broad-based taxes

Slide 22

Purp

ose

of ta

x

Revenueraising

Behaviourchanging

Narrow BroadTax base

Alcohol taxation principles:net marginal spillover cost

• The Henry Review indicates that excisetaxation on alcohol products should beused to address the net marginalspillover cost arising from risky and highrisk consumption, not as a revenue-raisingtool

Slide 23

Alcohol taxation principles:spillover costs

• The Henry Review defines spillover cost in thefollowing manner:

• Alcohol consumption at low risk levels hasno spillover cost

Slide 24

Alcohol taxation principles:alcohol abuse costs

• There are three views of costs associated withrisky and high-risk alcohol consumption

Slide 25

Costs borne by theindividual

$

$

$

$

$

$

Costs borne bysociety

$

$

$ $

$

$$

$

Overall costs

$$

$

$

$

$

$$

$

$

Alcohol taxation principles:modelling spillover costs (2)

Slide 26

Overallcosts

Costs borne bythe individual–

$

$

$

$

$

$–

Alcohol taxation principles:net marginal spillover costs

Slide 27

Tang

ible

cos

tsIn

tang

ible

cos

ts

$

Lost labour(workforce - reduction

in workforce;absenteeism; home –

premature death;sickness)

$

Resources used inabusive

consumption

$

Loss of life

$

Pain & suffering

$Healthcare(medical; hospital;

nursing homes;pharmaceuticals;

ambulances)

$

Road accidents

Crime(police; courts; prisons;

property; insuranceadministration; productivity

of prisoners)

Alcohol taxation principles:calculated single specific rate

• The total net marginal spillover costscan then be divided by total alcoholconsumption (in LPAs) to give a singlespecific rate of taxation

Slide 28

Alcohol taxation principles:transition arrangements

Transition to Single Target Excise Rate

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0

Exci

se

Rate

($

AUD

pe

r LP

A)

Spirits Excise RateBeer Excise RateSingle Excise Rate

Indexation onspirits exciserate is frozen

Indexation onbeer excise rateis accelerated

Target single exciserate moves withinflation levels

Point at which beer excise rate meetstarget excise rate then moves with

standard indexation rate

Point at which spiritsexcise rate meetstarget excise ratethen moves with

standard indexationrate

Indexation can be used to transition to the single specific rate

Slide 30

Alcohol taxation principles:transition arrangements (2)

• The Review proposes that the AustralianGovernment should develop and announce along-term transition path to a common alcoholtax to ensure that both producers andconsumers have sufficient time to adjust to thenew arrangements

• The planned public forum ofexperts to be held before 30June 2011 is likely to discuss thetransition path in further detail

Slide 31

Thank you

Presenter Details

Mr Scott Cass-Dunbar

Economic Counsel,Distilled Spirits Industry Council of Australia

(DSICA)

+61 2 6248 1232