Tax breaks for distilleries open to ‘rorts and abuse’, government warned

Tax breaks designed to encourage small distilleries are being rorted by pub groups to sell cheap alcohol, posing an “existential threat” to some of Australia’s most famous spirits producers.

Medium-sized distillers, such as Archie Rose and Four Pillars, are at risk because of a federal government scheme that provides alcohol manufacturers with a 100 per cent remission of excise up to $350,000 each year, according to industry submissions to a government inquiry.

Patient Wolf Distilling Co. founder Dave Irwin said the federal government’s excise remission scheme is a disincentive to grow his business.Credit: Chris Hopkins

Western Australian-based Old Young’s Distillery founder James Young told the inquiry that the scheme was meant to help manufacturers grow their businesses but instead encouraged distillers to remain small.

Young said the scheme was also open to rorts and abuse, such as businesses splitting in two to claim two lots of excise remission.

“The ease with which businesses are able to access the full remission of $350,000 in tax is incentivising people to enter the industry for the wrong reasons,” he said in a submission to the federal parliamentary inquiry into food and beverage manufacturing.

“Across Australia, pub groups are installing cheap stills to produce spirits tax-free, with vastly superior profit margins than they could ever get by sourcing products from tax-paying distillers.”

Patient Wolf Distilling Co. founder Dave Irwin at his Melbourne gin distillery.Credit: Chris Hopkins

A Treasury spokesman said the federal government recognised the importance of small and regional distilleries for regional growth and employment.

He said the excise remission scheme provided economic relief to brewers and distillers, irrespective of size: “Current tax settings balance a variety of policy objectives such as health, industry support, control of illicit goods, consumer choice, and collecting revenue for essential services.”

But Young said the scheme allowed small distillers to undercut prices by up to $30 a bottle.

“This situation poses an existential threat for medium-sized distillers, especially in the current economic environment where consumers are extremely price sensitive,” he said.

Young’s submission was signed by a group of mid-tier distillers including Patient Wolf Distilling Co. founder Dave Irwin and Manly Spirits Co. chief executive David Whittaker.

Irwin said he backed the remission scheme, but said it was a barrier to growth because it left mid-sized distilleries less price competitive against smaller manufacturers.

The Melbourne-based gin distillery produces about 90,000 bottles a year and employs five people, down from 12 employees last year.

“If I had the choice of staying below the remission threshold and not taking on the considerable risk the never-ending excise hikes has created, I would have stayed under and put our efforts elsewhere,” he said.

Whittaker said the scheme created a disincentive for distilleries to grow beyond the point where sales match the excise remission.

“Any sales beyond the remission cap are subject to full excise and significantly reduced margins.”

He said the tax breaks also impeded the growth of mid-sized distilleries, including his Sydney-based distillery, and made it more difficult to attract investment.

“The natural equilibrium for many of the new distilleries is to run their businesses to stay below the excise cap running in limited local distribution and markets,” he said.

Distillers are also concerned about the high rates of excise on spirits eating into profit margins.

“Australia has the third-highest spirits excise rate in the world,” Whittaker said. “Spirits are taxed significantly higher than beer and wine in Australia.”

The distilling industry also wants the federal government to beef up labelling laws to prevent misleading product descriptions and implement blockchain technology to reduce the illicit trade of spirits.

Young said he wanted the scheme changed to reduce the tax rebate to weed out “market entrants such as pub groups that never intended to distil, but were lured by a $350,000 windfall”.

“The allure to operate a still purely to game the excise remission would therefore be diminished,” he said.

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