FOI 3812 Document Set.pdf

FOI 3812
Pages that are out of scope in full and/or exempt
Document 1
in full have been deleted from the document set
Background – KPMG il icit tobacco report 2017
•  KPMG’s Illicit Tobacco in Australia Report, commissioned by Phillip Morris and Imperial
Tobacco, estimates that il icit tobacco cost the Government around $1.91 bil ion in forgone
revenue in 2017.
•  The estimate is of a similar magnitude to recent KPMG estimates of the size of the illicit
tobacco market.
•  According to the KPMG Report:
o  Total consumption  of illicit tobacco declined by 1.0 per cent. However, this
represents an increase in the proportion of illicit consumption because legal
consumption decreased by around 6 per cent.
o  Contraband consumption  accounted for the majority of total il icit tobacco
consumption at 51.1 per cent of the total. Contraband refers to cigarettes
manufactured legal y outside of Australia and smuggled into the country.
•  Key quote: “We believe there is no denying the link between high excise and the il icit
market. As excise on tobacco contributes to increased prices, the attractiveness of the il icit
market becomes  even more obvious to serious and organised crime”.
Defensive talking points
Impact of excise on the size of the illicit market
•  The il icit market is driven by a multitude of factors of which the excise duty rate is only one.
•  Tobacco excise is among the most effective interventions to reduce the prevalence of
smoking and protect the health of Australians.
•  Australia’s tobacco excise rates are below the World Health Organisation’s recommended
level. As of 1 September 2017, tobacco excise was estimated to account for between 53 and
62 per cent of the retail price of manufactured cigarettes compared with the WHO’s
recommendation of 70 per cent.
Difference between the Government’s estimate and the KPMG report
•  The ATO and Home Affairs estimate of the revenue impact of illicit tobacco is approximately
$600 million per year.
•  Though this estimate is significantly lower than the KPMG estimate, any loss of revenue is a
serious issue and even more so given the involvement of organised crime in the il icit
tobacco market.
•  The estimates by  the ATO and Home Affairs are based on extensive and high quality data
held by these agencies, and use a methodology endorsed by independent experts.
o  The supply-side methodology used by the ATO and Home Affairs has been endorsed
by an independent expert panel, comprising: Professor Neil Warren (Professor of
Taxation at the University of New South Wales), Mr Richard Highfield (Adjunct
Professor with the School of Taxation and Business at the University of New South
Wales) and Mr Saul Eslake (Vice Chancellor’s fellows at the University of Tasmania).

•  Some aspects of the KMPG methodology are considered to be prone to variance such as:
o  The use of empty packet analysis, as it is impossible to estimate and adjust for
legitimate overseas imports and the duty free al owance for international air
passengers.
o  Questionnaires and surveys suffer from misinterpretation and error.
•  Notwithstanding the difference in estimates, the Government agrees that a coordinated
strategy is needed to combat illicit tobacco. That is why we are introducing a
comprehensive illicit tobacco package, including the creation of the Illicit Tobacco Taskforce,
which will combine the resources and capabilities of a number of law enforcement and
border security agencies.

FOI 3812
Document 2
BACK POCKET BRIEF – Illicit tobacco

Budget measures
2018-19 Budget measures (BP2 pg.12)
•  From 1 July 2019, tobacco importers wil  be required to pay excise when tobacco enters the
country, rather than when it enters the domestic market, eliminating leakage  from warehouses to
the black market.
•  From 1 July 2018, a new multi-agency Il icit Tobacco Taskforce, led by the Australian Border
Force (ABF).
o  The Taskforce wil  leverage whole-of-government  capabilities  and powers
from multiple  agencies to investigate, prosecute and ultimately dismantle the
international  organised crime groups responsible  for a large part of the ilicit
tobacco trade.
•  From 1 July 2018, the ATO wil   be provided with additional  resources, including an additional
six investigators, to fight domestic il icit  tobacco crops.
•  From 1 July 2019, permits wil  be required for al   tobacco importations, assisting border officers
to quickly and efficiently determine when an offence has been committed.
o  This wil   deter the trade in il icit  tobacco by providing the ABF  with new
enforcement options to seize il icit  tobacco and infringe its importers more easily.
•  Beginning 2020-21, the ATO wil  upgrade and future-proof its excise and excise equivalent
goods payment systems to replace the outdated paper lodgement system.
•  Moving the tax point will require legislation.
2017-18 Budget measures:
•  Consistent duty calculation was introduced for cigars and ‘roll your own’ tobacco products.
o  The amendments ensure that cigarettes and ‘roll your own’ tobacco products receive
comparable tax treatment.
2016-17 Budget measures:
•  Increase in excise on al  tobacco by 12.5 per cent commenced on 1 September 2017, with three
subsequent annual increases (until 2020).
•  The Government agreed to strengthen the legislative framework for illicit tobacco offences.
These wil  be implemented through two pieces of legislation:
o  The Treasury Laws Amendment (Illicit Tobacco Offences) Bill - introduced to the
House of Representatives in February 2018, currently before the Senate.
o  The Customs Amendment (Illicit Tobacco Offences) Bill - introduced to the House of
Representatives in March 2018.
•  The new penalties provide enforcement officers, including the ABF, with strengthened
enforcement measures to tackle the il icit tobacco trade.
•  The changes wil  give ABF/ATO  officers the tools to better target criminals who smuggle or
grow illicit tobacco. It wil  also remove current obstacles to prosecution by providing officers
with powers to enforce offences where the origin of the tobacco is unknown or difficult to prove.

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Impact of excise on the illicit market
•  The il icit  market is driven by a multitude of factors of which the duty rate is only one.
•  When costing increases to excise rates Treasury estimates the decline in demand for legal
tobacco due to behavioural responses. This decline in demand includes, for example, a reduction
in tax collections due to consumers deciding to quit smoking as wel  as consumers shifting to the
illicit market.
•  The exact amount that the il icit  tobacco market contributes to the decline in demand cannot be
separately identified from the overal  estimate.

Excise collections
•  Tobacco receipts for 2016-17 were $10.45 billion. (BP1: 5-17)
•  At the 2018-19 Budget tobacco receipts for 2017-18 were revised up by $140 mil ion (1.2 per
cent) to $11.5 bil ion, reflecting stronger than expected collections since MYEFO. (BP1: 5 – 15)

1.   What is illicit tobacco?

Tobacco in Australia must satisfy health regulations and tobacco importers must pay duty. Il icit tobacco has
avoided these requirements and is sold to consumers through the black market.

Currently there is no legal tobacco manufacture occurring in Australia and, since  2008, no-one is licensed to
grow tobacco for commercial sale or personal use.
2.  Why is illicit tobacco a problem?

Illicit tobacco is a key a source of funding for organised crime and undermines Government efforts to
improve public health outcomes by reducing the prevalence of smoking.

Law enforcement agencies have indicated that the il icit tobacco market is dominated by organised crime
groups, which use tobacco profits to fund their other criminal activities. Organised crime will continue to
operate and potential y expand if the Government does not increase resources  for combatting illicit tobacco.

Il icit tobacco undermines the Government’s harm prevention efforts by providing access to tobacco at
significantly cheaper prices compared with legitimate retail sales and in some cases in counterfeit branded
rather than plain packaging.

Based on ATO and Department of Home Affairs research, illicit tobacco results in almost $600 million of
forgone tobacco duty each year. The sale of illicit tobacco also reduces tobacco sales for legitimate retailers.
3.  What is the Government doing to combat illicit tobacco?

The Government has implemented its Black Economy Package – combatting illicit tobacco measure
announced in the 2018-19 Budget, which consists of five interconnected elements that target the three key
sources of illicit tobacco in Australia: smuggling; leakage from warehouses and domestic tobacco crops.

Tobacco smuggling

The Government has funded an Il icit Tobacco Task Force from 1 July 2018. The multi-agency Task Force has
a full array of powers to effectively investigate, prosecute and ultimately dismantle the international
organised crime groups responsible for a large part of the il icit tobacco trade.

The Government has also introduced a prohibited import control for tobacco. Since 1 July 2019, permits
have been required for al  tobacco importations, assisting border officers to quickly and efficiently determine
when an offence has been committed.  It wil  no longer be necessary to prove concealment of tobacco and
intent to evade duty.

Leakage from warehouses

Since 1 July 2019, importers have been required to pay al  duty liabilities upon importation. Duties were
previously paid when the tobacco leaves a licensed warehouse for the domestic market. This created a risk
that criminals may seek to obtain untaxed tobacco via leakage from a warehouse before duty is paid.
Moving the tax point has eliminated warehouse leakage by incentivising importers to maintain the integrity
of the tobacco storage system and ensure the right amount of duty is paid based on the total amount of
tobacco imported.

On 25 October 2018 Royal Assent was received of Customs Amendment ((Col ecting Tobacco Duties at the
Border) Bil  2018), moving taxing point for imported tobacco to the border from 01 July 2019.

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Domestic tobacco

The Government has funded the ATO to combat domestic tobacco crops ($8.8 million from 2018-19 to
2021-22). From 1 July 2018, the Government strengthened ATO enforcement capabilities, including by
adding an additional six investigators, to tackle domestic illicit tobacco crops. This is allowing the ATO to
undertake additional activity to detect and destroy il icit tobacco and undertake fol ow up criminal
investigations.

The ATO will upgrade and future-proof its excise and excise equivalent goods* payment systems beginning
2020-21 to replace the outdated paper lodgement system.

*Excise equivalent goods are imported goods – in this case tobacco – that are subject to customs duty at a
rate equivalent to excise duty to ensure they’re treated consistently with goods manufactured in Australia.

On 29 November 2018, Royal Assent was received of Treasury Laws Amendment ((Black Economy Taskforce
Measures No. 2) Bil  2018) and Excise Tariff Amendment ((Col ecting Tobacco Duties at Manufacture) Bil
2018) moving taxing point for domestical y manufactured tobacco (NB there is no domestic manufacturing).
4.  What is the budget impact of the package?

The Package is estimated to generate a gain to budget of about $3.6 bil ion from 2018-19 to 2021-22,
including an increase in revenue of about $3.7 bil ion offset by an increase in payments of about
$150 million.

Of the $3.7 bil ion revenue gain, most of the $3.3 billion  in 2019-20 arises because of a change in the time
that tobacco excise is paid (ie. shifting the taxing point to the point of importation).

This largely reflects a one-off boost to revenue in the first year of the measure as al  stock held in
warehouses as at 1 July 2019 becomes liable for duty and, at the same time, revenue is received from new
tobacco imports due to the earlier taxing point.
5.  What is the tobacco Tax Gap? How does it compare with the budget
estimates?

The 2015-16 net Tax Gap for tobacco was $594 mil ion.

The Treasury costing and the tax gap estimate vary as they measure different things.

The ATO tax gap estimate is a theoretical estimate of how much revenue would be raised if all illegal tobacco
were to be  taxed in 2015-16. The Budget estimate is what wil  happen in the real world as a result of the
policy changes announced by the Government.

A key difference is that tax gap estimates don’t estimate how effective any policy will be at reducing illegal
tobacco. The Budget estimates recognise that the criminal gangs behind il icit tobacco are sophisticated and
well-resourced, and it would be misleading to assume that this package wil  shut down the entire il icit
tobacco market overnight.

A second key difference is that tax gap estimates don’t include any behavioural responses, such as reduced
smoking due to significant price increases as il egal tobacco is taken off the market. Nor do they include the
increased enforcement costs of closing the gap.
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Collecting tobacco duties and taxes at the border
6.  What is the previous taxing process?

Previously, tobacco was imported by tobacco companies and stored in bonded warehouses. A bonded
warehouse was one licenced by the ATO to store Excise Equivalent Goods (in this case tobacco) before excise
was paid.

Duty was paid in weekly instalments based on the amount of tobacco that had left the underbond
warehouse system and entered the domestic market.
7.  What is warehouse leakage? How does it occur?

Warehouse leakage was the unauthorised or il egal removal of tobacco from a storage warehouse prior to
the payment of applicable taxes such as excise.

According to DHA and ATO estimates, approximately 250 tonnes of tobacco in licensed warehouses was
unaccounted for in 2015-16, and around $172 mil ion of tobacco duty was lost through leakage from the
warehouse system.

Conducting compliance activity to combat this behaviour was extremely difficult as large volumes of tobacco
was transferred between networks of licensed warehouses, obscuring the gap between the volume of
tobacco on which tax had been paid and the volume that was imported. Criminal gangs were suspected of
exploiting these weaknesses to steal tobacco.

Moving the taxing point to when the tobacco enters the country and imposing a permit system should stem
this leakage. This puts the onus on the tobacco importers to ensure that the tobacco is secure as tax has
already been paid. Any loss of tobacco effectively becomes a loss to the importer.
8.  Is this a new tax on tobacco? Will this affect the price of tobacco?

No. This measure does not increase the amount of tobacco duty that importers must pay.  It moved the tax
point from when tobacco enters the domestic  market for consumption to when it enters the country.  This
will prevent leakage of illicit tobacco from warehouses.

Prices may increase separately in line with standard six monthly changes to tobacco excise and already
legislated tobacco excise increases on 1 September 2020.
9.  How will this impact the cash flow of tobacco importers?

Importers are now required to pay tobacco duties at the point of importation, earlier than under the current
system and in advance of the point of sale.

The measure has a one-off impact on importers as tobacco held in warehouses as at 1 July 2019 will be liable
for tax at that time rather than when it enters the domestic market.

There were four broad options to enable tobacco companies to meet their excise liabilities as at 1 July 2019:
1. Reduce the likely inventory outstanding, by not replacing existing stock in warehouses as it was
sold, or for aged stock that is at risk of being unsaleable, applying to have it securely destroyed.

2. Start paying duties on imports prior to 1 July 2019, to smooth the cash flow impact across the
financial years.

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3. Import produce closer to when it is required by customers (‘just in time’), such as by importing
smaller quantities or staggering deliveries, and holding stock in countries closer to Australia until
needed by a customer.

4. Participate in the transitional arrangements.

To smooth the transitional impact on cash-flow, tobacco importers who are eligible to participate in the
transitional arrangements are able to pay the outstanding duties in 12 equal instalments over 12 months to
Home Affairs, on the basis they have provided an up-front financial security, and make the final payment by
30 June 2020.

The size of the security was determined based on a risk assessment made by the ATO and DHA, and ranges
from 25 per cent for smal  importers to 100 per cent. For smal  tobacco importers, the security was capped
at up to 25 per cent of the liability outstanding on the stock on hand at 30 June 2019, as part of negotiations
with Senators to secure the passage of the relevant legislation.

Al  tobacco importers participating in the transitional arrangements had to make sure  their income  tax, GST
and customs returns and remittances were up to date by 1 June 2019.
10.  How did the Government  prevent  duty evasion ahead of the change in tax
point?

The ATO and Australian Border Force conducted stocktakes and reconciled warehoused tobacco prior to
1 July 2019. This ensured an accurate calculation of tax and duty liability for warehoused stock as at 30 June
2019.

The ATO also cancelled permissions for the movement of warehoused tobacco for some warehouses prior to
1 July 2019 to ensure the integrity of the stocktakes. (Movement permissions allowed importers to move
tobacco between warehouses without incurring a duty liability.)
11.  What impact will this have on the underbond warehousing industry?

As tobacco is a perishable product and has a limited shelf-life, tobacco importers wil  need to continue to
import tobacco and have sufficient stock at hand, in warehouses, in order to meet ongoing demand.

The package means less red-tape for warehouses because duty wil  already have been paid and so they wil
no longer be subject to duty control measures.

There have only been a smal  number of complaints from the warehousing industry, mostly in relation to the
measures’ negative effect on  cash-flow, which we are addressing through transitional arrangements.
12.  What consultation was undertaken  with the industry?

The Government undertook public consultations from 8 August to 22 August 2018 on the Treasury and the
Home Affairs’ complementary exposure draft legislation. Consultation was conducted jointly between
Treasury and Home Affairs.
Eleven submissions  were received. The tobacco industry is broadly supportive. Some submissions  raised
concerns about the cash flow impact, which are being addressed through the transitional arrangements.
The non-confidential submissions  have been published on the Treasury website.
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The Taskforce and Permits System
13.  How does the permit system work?

Since 1 July 2019, al  importers have been required to hold a permit to import tobacco. Importers can apply
for a permit through the Department of Home Affairs. As processing applications may take some time, DHA
has some flexibility to administer the system during the transitional period.

Permits are valid for set periods with importers required to renew their permits periodically. This allows
enforcement agencies to ensure that importers are complying with their obligations under the permit
system. A comprehensive consultation and communication campaign has been conducted to notify
importers of the changes and their obligations.
14.  What are the Illicit Tobacco Task Force’s capabilities and powers?

There are three components to the Il icit Tobacco Task Force:

Intel igence: systems analysis and targeting organised crime syndicates to provide accurate
information to operational teams.

Enforcement: operational teams to detect and seize il icit tobacco at the border and investigate
organised crime using a coordinated multi-agency approach to disrupt supply chains.

Prosecution: the new offences  enacted in August 2018 provide the task force with greater ability to
prosecute il egal activity by establishing reasonable suspicion offenses and removing the
requirement to prove origin.
15.  What is the impact on tobacconists, duty free stores and other small
retailers/consumers?

Approximately 97 per cent of tobacco entering Australia reflects three main importers.

Most tobacconists and other smal -scale retailers and consumers are not affected because they purchase
tobacco from another importer rather than importing tobacco directly. If they import the tobacco
themselves, they are required to have a permit and pay the duty when the tobacco enters the country.

Duty free stores, providores and catering bonds (entities which store goods to be supplied to international
aircrafts or ships)  are exempt from the change in tax point. The importers who supply these stores are able
to claim a refund of the duty that was paid at the border.

Consistent with existing arrangements, where travellers are found with tobacco at the border above the
duty-free threshold (25 cigarettes), they are given the option of paying the duty at the border or forfeiting
the tobacco.

16.  What is the Government doing to address the delays in refunds and
drawbacks for tobacco under the new arrangements?

Since 1 July 2019, one major tobacco importer has raised with Home Affairs that it takes too long to receive
a refund of duty paid under the new arrangements for tobacco that is provided to duty free stores or re-
exported.

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Home Affairs advises that al  importers are encouraged to utilise a licensed customs broker on their behalf as
a way to facilitate smoother and more efficient processing of refund and drawback claims. Home Affairs wil
only consider a refund or drawback claim once al  relevant information has been provided.
Background
17.  Overview  of the tobacco importing industry.

Since 1 July 2019, al  tobacco imports are taxed at the border.
There were previously only 37 importers of tobacco who stored tobacco under bond in licenced warehouses
(before tobacco is entered for home consumption). The largest 3 importers accounted for approximately
97 per cent of al  imports.
There are approximately 1000 other smal  importers who previously paid at the border.
18.  What are the different tobacco types?

There are three main types of tobacco consumed in Australia:

Cigarettes/cigars: Cigarettes are the most common form of tobacco consumed in Australia.

Rol  Your Own (RYO): Loose leaf tobacco, which people rol  into cigarettes using cigarette papers. It
is cheaper than buying retail cigarettes.

Molasses (shisha): Molasses tobacco, also known as shisha tobacco, is a syrupy tobacco mix with
flavours added to it. It is commonly smoked through a water pipe and can have a tobacco content of
anywhere from 30 per cent to 70 per cent.

Other types of tobacco, which are not currently legal in Australia include:

Electronic devices (E-cigarettes): Products that heat ‘e-liquids’ to form an aerosol, which is then
inhaled by the user. E-liquids containing nicotine are illegal and not for sale in Australia.

Smokeless tobacco (snuff or snus): Smokeless tobacco product placed under the lip. It is currently
not legal in Australia after being outlawed in 1991.

Chewing tobacco: A smokeless tobacco product which is chewed. It is currently not legal in Australia.
19.  How much revenue  is raised through tobacco duty?

At the 2019-20 Budget, tobacco receipts for 2019-20 are forecast to be $17,410 billion, reflecting the
commencement of the 2018-19 Budget measure Black Economy Package — combatting illicit tobacco, which
included the shift in the taxing point to the border. The Final Budget Outcome for tobacco receipts for 2018-
19 was $12,147m.
20.  What are the current excise rates for tobacco?

•  Tobacco in stick form not exceeding 0.8 grams (e.g. cigarettes): $0.93653 per stick
•  Other tobacco (e.g. loose leaf tobacco): $1291.77 per kilogram

Tobacco excise rates are indexed to Average Weekly Ordinary Time Earnings. The increases occur on
1 March and 1 September each year.

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Tobacco excise rates increased by 12.5 per cent on 1 September 2029 and wil  increase by an additional
12.5 per cent on 1 September 2020. This reflects the decision taken in the 2016-17 Budget to increase excise
rates each year from 2017 to 2020.

The per kilogram rate is being adjusted over four years, from 2017 to 2020, to align the tax treatment of rol
your own tobacco and cigarettes. These adjustments occur on 1 September each year.

March  Sept
March  Sept
March  Sept
March  Sept
March  Sept
2012
2012
2013
2013
2014
2014
2015
2015
2016
2016
Indexation
1.006  1.016  1.008  1.137
1.139  1.016  1.13
1.012  1.136
(AWOTE)
Legislated

12.5%*
12.5%
12.5%
12.5%
Excise per  433.53  436.13  443.11  446.65  508.01  578.37  587.62  663.70  671.68  763.20
kilogram($)
Excise per  0.34681  0.34889  0.35447  0.35731  0.40639  0.46268  0.47008  0.53096  0.53733  0.61054
stick($)
*December 2013

March  Sept
March  Sept
March  Sept
March  Sept
March  Sept

2017
2017
2018
2018
2019
2019
2020
2020
2021
2021

Indexation  1.011
1.132  1.017  1.010  AWOTE AWOTE AWOTE AWOTE AWOTE AWOTE
(AWOTE)

Legislated
12.5%
12.5%
12.5%
12.5%

Excise per  771.60  901.39  916.72  1,076.35 1,090.33 1291.77

kilogram($)

Excise per  0.61726  0.69858  0.71046  0.80726  0.81775  0.93653

stick($)

21.  How is the 12.5 per cent applied?

The 12.5 per cent is applied at the same time as AWOTE (1 September each year to 2020). It doesn’t matter
which is applied first as it’s multiplicative.
22.  What is the price of a pack of cigarettes,  and how much is excise?

Product
Recommended
Excise rate (per
Current duty
retail price
stick)
component
GST
Total tax
Example mid-
$37.00
0.93653
$23.41
$3.36
$26.77
range
(pack of 25)
23.  Is the illicit tobacco market a result of higher excise rates?

According to the World Health Organisation increasing tobacco duty is among the most effective
interventions to reduce the prevalence of smoking. Some criminals have chosen to break the law and not
pay duty. The Government is continuing to take action to address this criminal behaviour.

The exact amount that the il icit tobacco market can be expected to grow due to an increase in excise rates
cannot be accurately measured because the illicit market is driven by a multitude of factors of which the
duty rate is only one.
24.  Reasons for tobacco excise (and are our tobacco taxes too high?)

There have been significant efforts by governments in recent years to reduce tobacco consumption through
a comprehensive suite of tobacco control measures, including staged increases and a swap to wage
indexation for tobacco excise.

The taxation of tobacco products helps to pay for essential services such as the delivery of health services
and other areas of spending that benefit the whole Australian community.
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The World Health Organisation (WHO) identifies price increases through taxation as one of the most
effective ways governments can reduce tobacco consumption. Australia is a signatory to the WHO
Framework Convention on Tobacco Control, a treaty to address the health, social, environmental and
economic consequences of tobacco consumption and exposure to tobacco smoke worldwide.

Australia’s tobacco tax rates are nearing the World Health Organisation’s recommended level, which
recommends that duty should account for 70 per cent of the retail price of tobacco products.

Excise increases announced in the 2016-17 Budget wil  improve the health of Australians by reducing their
exposure to tobacco products and move Australia closer to the World Health Organization’s recommended
level of tobacco excise.

As of 1 September 2019, tobacco duty was estimated to account for between 60 and 71 per cent of the retail
price of four popular brands of manufactured cigarettes sold in Australia.
25.  Who has jurisdiction for combatting illicit tobacco?

The Department of Home Affairs is responsible for combatting tobacco smuggling, such as attempts to
import tobacco using cargo containers or the international mail without paying customs duty.

The ATO is responsible for combatting il icit domestic tobacco crops.

The way both agencies address il icit tobacco at the retail level is by attempting to cut-off illicit tobacco at
the source (domestic crops and smuggling).

State and Territory police forces provide intelligence and protection for ATO and Border Force officers
conducting raids on illicit domestic tobacco crops or shipments.

Under the new Il icit Tobacco Task Force, the ATO, the Department of Home Affairs and the New South
Wales and Victorian Police Forces, as well as a number of other enforcement agencies, work together as part
of a single taskforce to combat tobacco smuggling.

The additional funding for the ATO provides additional investigators to detect and destroy illicit tobacco
crops and conduct fol ow-up criminal investigation activity. These activities will continue to be conducted in
partnership with local police forces.
26. What are the new offences in the Illicit Tobacco Offences legislation?

The Government increased offences for illicit tobacco in August 2018.

The new offences include penalties for reasonable suspicion offences (see table below), where it is
reasonable to assume that duty has not been paid on the tobacco. This makes it easier for the Illicit Tobacco
Taskforce and the ATO to prosecute offenders in instances where more than 5kgs of il icit tobacco is found
but it is difficult to prove intent.

A civil penalty has also been introduced for the possession  of more than 2kgs of tobacco where there is a
lack of documentary evidence to justify the possession of the tobacco. The penalty is a fine of up to $21,000.

The customs amendments make it an offence to import tobacco where a person is reckless as to whether
they are defrauding the revenue. The penalty wil  be up to 5 years imprisonment and/or a fine of 3 times the
duty payable or up to $105,000.

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The law removes the requirement for prosecutors to prove whether the il icit tobacco was grown
domestical y or imported, which made it difficult to take enforcement action.

The penalties for each tiered offence are:
Penalties
Reasonable suspicion
Intentional offences
5kg or more
The greater of:
The greater of:
[Considered  a limited  •  $42,000 fine; or
•  $105,000 fine; or
commercial use]
•  5 times duty payable
•  5 times duty payable
100kg or more
2 years imprisonment or
5 years imprisonment or
[Considered a
greater of:
greater of:
marketable quantity]  •  $105,000 fine;  or
•  $210,000 fine; or
•  5 times duty payable
•  5 times duty payable
500kg or more
5 years imprisonment or
10 years imprisonment or
[Considered a
greater of:
greater of:
commercial
•  $210,000 fine; or
•  $315,000 fine; or
quantity]
•  5 times duty payable
•  5 times duty payable

27.  Why is the Government not actioning the Black Economy Taskforce
recommendation regarding track-and-trace, as noted in a recent World Bank
report?

The World Bank released the report ‘Confronting Il icit Tobacco Trade – A Global Review of Country
Experiences’ on 23 January 2019. It recognises the significant measures announced by Government to
strengthen both enforcement capabilities and tobacco tax administration fol owing the work of the Black
Economy Taskforce.

A key criticism in the World Bank report ‘Confronting Il icit Tobacco Trade – A Global Review of Country
Experiences’, 23 January 2019 concerns Australia’s lack of track-and-trace. It notes:

“The Black Economy Taskforce offered a number of recommendations that have either been “noted” or
explicitly “disagreed with” by the Government, the most salient being the use of track-and-trace
technology (Treasury 2017: 310-311). Regarding track-and-trace, the Government has opted for a wait-
and-see approach, preferring to review at a later date the success or otherwise of the other control
measures…”(Treasury 2018: 35).”

It is  expected that the 2017-18 and 2018-19 Budget measures will have a significant impact on the illicit
tobacco market in Australia and the Government wil  assess the impact of these measures before
determining whether Australia should adopt track and trace and become a Party to the Protocol.

Most countries do not currently use a track-and-trace approach. Two countries that have adopted track-and-
trace in recent years include Brazil, which began operating a track-and-trace system in 2008, and Ecuador,
which implemented track-and trace for domestical y produced cigarettes in 2017. In addition to these
countries, EU member states are poised to introduce an EU-wide tracking and tracing system by May 2019.

28.  Potential registration of tobacco license holders on a public register

The major tobacco importers have also suggested a register of permit holders be published to assist retailers
in identifying suppliers of illicit tobacco.

Treasury and Home Affairs is concerned about privacy issues for tobacco permit holders who may wish not
to be publicly identified.
10

As with track and trace, Home Affairs and Treasury consider the Government should monitor the impact of
the illicit tobacco package before considering further measures.

29.  KPMG ‘Illicit Tobacco in Australia’ Report 2018

KPMG’s Illicit Tobacco in Australia Report, commissioned by Philip Morris and Imperial Tobacco, estimates
that illicit tobacco cost the Government $2.02 billion in forgone revenue in 2018.

•  The KPMG estimate of forgone revenue is significantly larger than the Australian Taxation Office
(ATO) and Department of Home Affairs (DHA) tax gap research, which estimated illicit tobacco
represented around $600 million of forgone revenue in 2015-16. An explanation of the differences
between these estimates is at Additional Information.

KPMG also found that consumption of il icit tobacco declined by 11.1 per cent between 2017 and 2018. As a
proportion of al  tobacco consumption, consumption of illicit tobacco fell from 15.0 per cent in 2017 to 14.1
per cent in 2018.

Contraband accounted for 53.7 per cent of il icit tobacco consumption. Contraband refers to cigarettes
manufactured legal y outside of Australia and smuggled into the country.

KPMG’s estimates differ from the tax gap analysis prepared by the ATO and Home Affairs, in part because
they measure different things and use different methodologies.

•  The KPMG methodology primarily uses a consumption model based on a consumer survey; and an
empty pack survey analysis. The ATO and Home Affairs methodology uses a supply side model.

Some aspects of the KPMG methodology are considered to be prone to variance including
•  The use of empty packet analysis, as it is impossible to estimate and adjust for legitimate overseas
imports and the duty free al owance for international air passengers.
•  Surveys suffer from misinterpretation and error.
•  A change in the methodology through a new panel of respondents.

The estimates by the ATO and Home Affairs are based on extensive and high quality data held by these
agencies, and use a methodology endorsed by independent experts.

30.  Why is the Government not actioning the Black Economy Taskforce
recommendation to reduce taxes and duties on molasses  tobacco (shisha)?

Molasses tobacco, also known as shisha tobacco, is a syrupy tobacco mix with flavours added to it. It is
commonly smoked through a water pipe and can have a tobacco content of anywhere from 30 per cent to
70 per cent.

The addition of flavours and water to the tobacco leaves makes it difficult to determine the actual tobacco
content of molasses tobacco without special scientific instruments.

Reflecting this, changes were made in 2008 so that molasses tobacco was taxed on its  total weight, not just
its tobacco content. This made it significantly easier for Border Force personnel to determine the duty
payable on the tobacco.

Reversing that change would be a significant impost on the Border Force and would divert resources from
higher risk border security activities such as stopping il icit drugs and guns.
11

The additional resources dedicated to combating tobacco smuggling and the introduction of the new permit
system will address illicit shisha tobacco imports.
s 22

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Document 4
FOR OFFICIAL USE ONLY
How else is the Government combating illicit tobacco?
In the 2016-17 Budget the Government provided an extra $7.7 mil ion of funding for
the Tobacco Strike Team.
The tobacco strike team has seized 400 tonnes of il icit tobacco with an estimated
dutiable  value of around $300 mil ion.
What has been done to combat  illicit tobacco prior to the introduction of this
legislation?
The ATO has undertaken  16 investigations  since 1 July 2016 resulting in the seizure
and destruction of almost 120 tonnes of il icit tobacco, with an estimated duty
forgone of over $91 mil ion. Since 1 July 2011 the ATO has conducted 26
investigations seized il icit tobacco with an estimated duty forgone of $160 mil ion.
The ATO focuses on domestic growing and production and due to constraints with
the current law (the proof of origin concept) is limited to being able to seize il icit
tobacco and prosecute people caught growing it.

Are our tobacco taxes too high?
Australia taxes tobacco below the World Health Organisation’s recommended level
of tobacco excise, which is that excise should account for 70 per cent of the retail
price of tobacco products.
As of 1 September 2017, tobacco excise was estimated to account for between 53
and 62 per cent of the retail price of five popular brands of manufactured cigarettes
sold in Australia.
As part of the 2016-17 Budget, the Government announced four annual 12.5 per
cent tobacco excise increases, beginning  1 September 2017. These increases wil
bring Australia closer to meeting the World Health Organisation’s target.
–
The excise increases are in addition to the biannual indexation  to average
weekly ordinary time earnings.
s 22
FOR OFFICIAL USE ONLY

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Has increasing the excise rate resulted in more illicit tobacco?
Treasury has not estimated how much revenue has been lost due to the
consumption of il icit tobacco in Australia.
Background: The 2017 KPMG Report into Il icit Tobacco estimated that $1.61 bil ion
more in revenue would have been received in 2016 if all il icit tobacco consumption
had been legal consumption. Philip Morris Ltd and Imperial Tobacco Australia Ltd
commissioned the report.
Given government has increased the taxation of tobacco, what is the
government doing to combat  illicit tobacco?
The Government has established a Black Economy Taskforce to develop a forward-
looking whole-of-government  strategy to combat the black economy.
–
A Final Report is being considered now.
In the 2016-17 Budget, the Government announced an additional $7.7 mil ion in
funding to expand the Tobacco Strike Team, and reforms to the Customs Act 1901
and Excise Act 1901 to provide enforcement officers with access to tiered offences.
–
The expansion of the Tobacco Strike Team has taken place, and
legislation to implement tiered offences continues to be progressed.
–
Since October 2015, the Australian Border Force has stopped more than
400 tonnes of il icit tobacco (valued at $294 mil ion) from reaching the black market.
Refer questions on the Tobacco Strike Team to DEPT OF HOME AFFAIRS.
Who is responsible for stopping illicit tobacco?
The Commonwealth and the States and Territories share responsibility for il icit
tobacco.
Commonwealth departments including the Australian Federal Police, Australian
Border Force, the ATO, the Australian  Crime Commission and the Australian
Transaction Reports and Analysis Centre (AUSTRAC) work with State and Territory
police to combat il icit tobacco importation and cultivation.
Treasury is responsible for setting excise taxation rates. Treasury does not engage
in enforcement activities.
FOR OFFICIAL USE ONLY

FOR OFFICIAL USE ONLY
The ATO is responsible for detecting, investigating and prosecuting il icit
domestically grown or manufactured tobacco products. The ATO is also responsible
for ensuring that businesses, such as tobacco retailers, are correctly declaring
income and sales for income tax purposes and GST reporting.
–
Where crops are identified the ATO takes action to disrupt those
operations, however most il icit product is thought to be imported. Refer
further questions on combatting domestically grown il icit tobacco to the
ATO.
–
Background: Since 2006 no-one has been licensed to grow tobacco in
Australia.
Department of Home Af airs is responsible for preventing il icit tobacco from being
imported into Australia and collecting customs duties and taxes on imported tobacco
products.
If asked about illicit tobacco in the retail environment
The Department of Home Af airs and the ATO focus their resources on cutting off the
imported and domestic supply of il icit tobacco at the source as opposed to individual
retail outlets.
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Document 11
Talking points from the 2023-24 Budget changes to Aligning the treatment of stick and non-stick
tobacco tax and increasing tobacco tax
•
The Government is taking steps to reduce smoking and nicotine use and address the physical
and social harms it causes.
•
These changes are part of the Government’s response to the National Tobacco Strategy and
related initiatives on vaping and smoking prevention and cessation, and an enhanced
regulatory approach to vaping.
–
The Government announced a range of health measures in the 2023-24 Budget targeted
at tobacco and vape use. These include;
:
increased funding for smoking and vaping cessation services, expanded the
Tackling Indigenous Smoking Program, and established national public health
campaigns to prevent uptake and reduce smoking and vaping.
:
The Government is also providing ongoing funding to establish and maintain a new
national lung cancer screening program. The program will support the early
detection of lung cancer in high-risk individuals.
•
The tax changes to tobacco complement the National Tobacco Strategy and involve:
–
increasing the tax on tobacco by 5 per cent per year for 3 years from 1 September 2023,
in addition to the normal indexation of tobacco excise; and
–
aligning the tax treatment of loose-leaf tobacco products (such as roll-your-own tobacco)
with the manufactured stick excise rate to ensure loose-leaf tobacco is taxed equally.
•
The first of the 5 per cent increases to tobacco excise has taken effect from 1 September 2023.
Tobacco Use
•
Tobacco use remains the leading cause of preventable death and disability in Australia and was
estimated to be the cause of death of over 20,000 Australians in 2018.
–
In 2021-22, 10.1 per cent of people aged 18 plus in the general population (2 million
Australians) reported daily smoking.
•
Statistics from the National Health Survey, last released in 2018, indicate that since 1995, the
proportion of adults who are daily smokers has decreased from 23.8 per cent to 13.8 per cent
in 2017-18.
•
The National Tobacco Strategy 2023-2030 aims to achieve a national daily smoking prevalence
of less than 10 per cent by 2025 and 5 per cent or less by 2030 in Australia, and to reduce the
daily smoking rate among First Nations people to 27 per cent or less by 2030.
Risks and Sensitivities
Illicit tobacco risks
•
Further increases to the tobacco excise and excise-equivalent customs duty will, however,
strengthen incentives to trade in illicit tobacco, both counterfeit cigarettes and loose-leaf
tobacco, as well as substitution into electronic cigarettes (“vapes”) containing nicotine, which
are substantially cheaper than even illicit cigarettes.

s 22
Demographic impacts
•
The package of health measures in the budget will provide support on prevention, cessation
and health care:
–
Some programs are targeted at socially disadvantaged groups such as the Aboriginal and
Torres Strait Islander Cancer Plan and First Nations Cancer Package.
–
The Government is also providing ongoing funding to establish and maintain a new
national lung cancer screening program. The program will support the early detection of
lung cancer in high-risk individuals and the screening program will target older
Australians with a history of heavy smoking.
•
Tobacco tax changes, viewed in isolation, can disproportionately impact socially disadvantaged
groups, who are more likely to be regular smokers, and suffer corresponding health impacts.
These include:
–
First Nations Peoples – according to the Australian Bureau of Statistics’ 2019 National
Aboriginal and Torres Strait Islander Health Survey, around 41 per cent of First Nations
peoples aged 15 or over were current smokers in 2018-19, which is substantially higher
than the general population
–
lower socio-economic and labour force status groups
–
adults living in areas of most disadvantage
–
adults living in outer regional and remote Australia
–
persons with a highest level of educational attainment of Year 10 or below
–
people aged 50-59; and
–
people with mental health conditions and high psychological distress.
•
However, socially disadvantaged groups are also those that are more likely to quit smoking in
response to increases in prices.

Question and Answers
How do these changes tie in with the National Tobacco Strategy 2023-2030 and the excise changes
announced in the 2023-24 Budget?
Australian Government policy has long reflected that tobacco smoking in all its forms is dangerous.
The National Tobacco Strategy outlines a national policy framework for government and non-
government organisations to work together to improve the health of all Australians by reducing
smoking rates.
The annual 5 per cent increase to the tax on tobacco supports the National Tobacco Strategy priority
of strengthening regulation to reduce the supply, availability, and accessibility of tobacco products.
The better alignment of the tax treatment of loose-leaf tobacco products with the manufactured
stick excise and excise equivalent customs duty will help to ensure these products are taxed equally.
What is the Government doing to reduce smoking and vaping
The Albanese Government is taking strong action to reduce smoking and stamp out vaping –
particularly among young Australians – through stronger legislation, enforcement, education and
support.
The 2023–24 Budget includes $737 million to fund a number of measures to protect Australians
against the harm caused by tobacco and vaping products.
These measures complement the development of new proposed national tobacco control legislation
first announced by the Government in November 2022.

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Document 12
Tobacco taxes & il icit tobacco – Additional Points

s 22

2.  Does Treasury think high tobacco taxes are driving illicit tobacco in Australia?
•  The illicit market is driven by a multitude of factors, of which the excise rate is only one.
•  Tobacco use remains the leading cause of preventable death and disability in Australia.
o  Reducing the affordability of tobacco products through taxation increases remains
the most effective measure in reducing smoking rates.
•  The decision to take further action on illicit tobacco is a matter for government.

3.  Does Treasury think tobacco taxes are now too high?
•  Tobacco use remains the leading cause of preventable death and disability in Australia.
•  Reducing the affordability of tobacco products through taxation increases remains the most
effective measure in reducing smoking rates.
•  The increasing tobacco excise has a very clear basis — the best deterrent for consumer
demand is price.
o  The World Health Organisation (WHO) recognises this as the most effective
intervention that governments can make.  As such, tobacco taxation remains a
central component of Australia’s tobacco control response.

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Document 14
s 22
For the first time, the latest Intergenerational Report (IGR) modelled a decline in indirect taxes over
the coming 40 years, driven partly by declines in tobacco excise (see IGR Box 8.1). As tobacco excise is
one  of  the  largest  sources  of  indirect  tax,  declines  in  smoking  rates  have  implications  for  the
sustainability of the tax base. This week’s chart highlights the uncertainty of the outlook for tobacco
excise receipts over the IGR period.
s 22
The  IGR  baseline  modelling  of  tobacco  (blue  line)  assumes  that  the  quantity  of  tobacco  products
imported, or clearances, will remain constant over the long run. This is consistent with the approach
taken for the medium-term tobacco projections and represents a decline in per capita consumption
of legal tobacco as the population grows. Tobacco collections are projected to decline from 0.5 per
cent of GDP in 2022-23 to less than 0.4 per cent of GDP in 2062-63 in this baseline. However, this
somewhat  simplified  assumption  does  not  factor  in the  impact of  future  policy  change  (which  has
likely had a significant impact on smoking rates in the past), future changes in preferences, the rise of
vaping, or the growing illicit market – all of which are very difficult to project.
To  demonstrate  the  potential  revenue  impact  of  a  faster  decline  in  tobacco  consumption,  we
examined the National Health Survey data collected by the Australian Bureau of Statistics on changes
in numbers of daily smokers by age and sex from 2011-12 to 2020-21. We compared corresponding
cohorts  (e.g.,  25-34  year  old  males  in  2011-12  with  35-44  year  old  males  in  2020-21),  and  found
significant falls in smoking rates for all cohorts. Assuming rates of smoking would continue to decline
at the same rate over the IGR projection period, excise receipts would decline to less than 0.1 per cent
of GDP by the end of the IGR period (red line).
s 22
Tax Analysis Division
20 October 2023
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Document 15
BACKPOCKET – Tobacco excise receipts, clearances, and forecasts
Senate Estimates briefing – October 2024
Key Points
Policy context

•
The Government is committed to reduce smoking related harms in Australia:

–
Tobacco use remains the leading cause of preventable death and disability in Australia.

–
Reducing the affordability of tobacco products through taxation increases remains the
most effective measure in reducing smoking rates.

•
As part of the 2023-24 Budget, the Government announced further increases to tobacco
excise (and excise-equivalent customs duty) of 5 per cent a year for 3 years, from 1 September
2023 to 1 September 2025.

–
The Government is also progressively lowering the equalisation weight for loose-leaf
tobacco from 0.7 grams to 0.6 grams per stick in annual increments from 1 September
2024 to 1 September 2026.
s 22
•
The increasing tobacco excise has a very clear basis — the best deterrent for consumer
demand is price.

–
The World Health Organisation (WHO) recognises this as the most effective intervention
that governments can make.  As such, tobacco taxation remains a central component of
Australia’s tobacco control response.
s 22

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•
The illicit market is driven by a multitude of factors of which the excise rate is only one.
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•  While clearances have been in a long-term decline, the steep decline in 2023-24 is being
driven by a combination of factors, including:
–
increased substitution to the illicit market, which is partly driven by higher excise
rates,
–
higher rates of quitting, and
–
weaker growth in discretionary spending due to cost-of-living pressures also
affecting tobacco consumption.
s 22

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s 22
Impact of the 2023-24 Budget measure on tobacco receipts
•  In the 2023-24 Budget, the Government increased tobacco excise by 5 per cent per year
for three years from 1 September 2023, in addition to normal indexation. The
Government also aligned the tax treatment of tobacco products subject to the per
kilogram excise rate with the per-stick rate, by progressively lowering the ‘equalisation
weight’ from 0.7 to 0.6 grams over four years, starting on 1 September 2023 and
reaching 0.6 grams on 1 September 2026.
s 22
•  It is not possible to split out the impact of the 2023-24 Budget measure on the decline in
tobacco tax receipts, but the drivers would include:
–
Increased substitution to the illicit market
–
Higher rates of quitting
–
Continued weaker growth in discretionary spending due to cost-of-living
pressures also affecting tobacco consumption
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Document 16
Elasticity analysis for tobacco
s 22
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Why we estimate and update the elasticity?
• Inclusion of the elasticity in the tobacco costing model
captures behaviour response to rate changes.
• It improves calculation of financial implications of policy
proposals.
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4
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Elasticity estimation
• The price elasticity used in the current tobacco costing model
– Least squared analysis in excel (1995-2015)
▪ 𝑙𝑛ν𝑡 = 𝛼 + 𝛽 ln 𝑝𝑡 + 𝜀𝑡,
(1)
▪ ν𝑡:  volume of tobacco consumed
▪ 𝑝𝑡: relative price (tobacco price/household consumable goods price)
▪ 𝛽: price elasticity
–  𝛽 = −0.5
• Two improvements in this update:
– Model: add income and habits/addiction to the model
– Data: update the dataset
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6
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A dynamic demand model for tobacco in Australia
• Desired tobacco consumption
𝑣∗
𝜅 2
𝜅 3
𝑡 = 𝜅 1𝑝𝑡
𝑦𝑡
,

(2)
• Actual tobacco consumption
𝑣
∗
𝑡 = (𝑣𝑡 )𝜃(𝑣𝑡−1)1−𝜃,

(3)
𝜃 = 1, 𝑣
∗ (𝑓𝑢𝑙𝑙 𝑎𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡)
ቊ
𝑡 = 𝑣𝑡
𝜃 = 0, 𝑣𝑡 = 𝑣𝑡−1(𝑧𝑒𝑟𝑜 𝑎𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡)
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Document 17
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•  These downgrades reflect the following factors:
o  Preliminary tobacco receipts to end-October are lower than the 2023-24
financial year by $0.5 billion s 22

o  Increased substitution to the illicit market, which is partly driven by higher
excise rates,
o  increased substitution to vaping,
o  higher rates of quitting, and
o  the effect of weaker growth in discretionary spending due to cost-of-living
pressures on tobacco consumption.
s 22

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Additional information
Illicit tobacco
•  A contributing factor to the decline in legal tobacco consumption is the large
difference in price between legal and illicit products.
o  Illicit tobacco products are sold at a considerably lower price compared to
legal tobacco (around $15 cheaper for a standard 20s cigarette pack).
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Document 18
Smoking, vaping, and tobacco excise

Senate estimates briefing points – June 2024

s 22

s 22
The 23-24 Budget measure and tobacco excise receipts

•  It is not possible to split out the impact of the 2023-24 Budget measure on the decline in
tobacco tax receipts, but the drivers could include:
o  Increased substitution to the illicit market
o  Continued weaker growth in discretionary spending due to cost-of-living pressures
also affecting tobacco consumption
o  Higher rates of quitting
s 22

FOI 3812
Document 19
Senate Economics Legislation Committee
ANSWERS TO QUESTIONS ON NOTICE
Treasury Portfolio
Budget Estimates 2023 - 2024

Agency:
Department of the Treasury
Question No:
BET098
Topic:
Vapour Revenue Modelling
Reference:
Written   (13 June 2023)
Senator:
Hollie Hughes

Question:

1. In the lead up to the Budget, it was publicly reported the Treasury was hinting that vaping
may soon be subject to tougher taxes and that the Albanese Government is considering all
options to the issue. Has Treasury ever modelled the potential revenue from taxing vaping
products like we do with alcohol or tobacco?

If No:

2. If Treasury has never modelled potential revenue from regulating vaping products like
tobacco or alcohol, the Australian Government never really did have all options on the table
to fix this crisis.

https://www.news.com.au/national/nsw-act/politics/treasurer-jim-chalmers-slams-vaping-
explosion/news-story/507143527e513d1f552688ab4ec305eb

3. I refer to Table 5.7 general government receipts in on Page 185 of Budget Paper 1. In
relation to the projected $55.2 billion of tobacco excise revenue over forwards – what impact
or assumptions with regards to Australia’s vaping rate have been factored into this
calculation?

4. The Federal Health Minister has publicly stated – and I quote – “young people who vape
are three times as likely to take up smoking” – as part of the modelling undertaken by
Treasury, is the Australian Government banking on more youth smoking to underpin tobacco
excise?

5. (If no or it hasn’t been taken into account) – So to confirm, while the Health Minister states
those vaping are three times more likely to smoke this assumption hasn’t been included
within the modelling projections – is this because the Health Minister’s statement is not
reliable or statistically significant?

https://budget.gov.au/content/bp1/download/bp1_2023-24.pdf

https://www.health.gov.au/ministers/the-hon-mark-butler-mp/media/taking-action-on-
smoking-and-vaping?language=en

6. With reference to tobacco excise government receipts – after the recent vaping crackdown
announcement from the Australian Government Professor Ron Borland the Deputy Director
of the Melbourne Centre for Behaviour Change at the University of Melbourne publicly
stated – and I quote – “I think there is a high likelihood it will result in an increase in the rates
of tobacco smoking, even though it will achieve its proximal goal of reducing levels of
vaping in the community,”.
SQ23-000357

2

7. Has this ‘high likelihood’ of increased rates of smoking been factored into the forward
estimates for excise revenue?

8. Has nothing been factored into the tobacco excise modelling because Treasury doesn’t
have confidence the announced vaping crackdown will work?

9. Does Treasury view there is a substitution factor between tobacco products and nicotine
vaping products?

10. (If there is a substitution factor or increased smoking has been factored in) – To confirm,
a key beneficiary of the Australian Government’s recently announced vaping policy will be
Treasury through increased tobacco excise receipts?

Answer:

1. Treasury provided a range of advice and analysis to support the development of various
health initiatives in the Budget.

2. Please refer to response for question 1.

3. Tobacco excise is modelled using a ‘base-plus-growth’ approach, where the latest known
outcomes are forecast to grow according to economic parameters. While we don’t explicitly
estimate the impact of vaping, the effects of vaping on tobacco excise are accounted for in the
baseline and historical data.

For more information see Treasury Working Paper 2019-03, Tobacco excise: historical
trends and forecasting methodology
https://treasury.gov.au/sites/default/files/2019-
07/t392185_tp_tobacco_forecasting_working_paper.pdf.

4. Please refer to response for question 3.

5. Confirmation of the modelling methodology is supplied in response to question 3.

6. N/A

7. See responses to question 3 and question 9.

8. Treasury takes all government policy into account when forecasting revenue.

9. Any substitution impacts are currently implicitly accounted for in the ‘base-plus-growth’
modelling approach (see response to question 3). Treasury regularly examines the data and
evidence available to support its revenue forecast.

10. Please see earlier responses. Substitution between vaping and smoking is not explicitly
accounted for when modelling tobacco excise, however, the effects of vaping on tobacco
excise are accounted for in the baseline and historical data. Tobacco excise is collected by the
Department of Home Affairs and not Treasury.