Budget update – Tobacco

Jeff Rogut

The budget announcement last week contained the following important change for tobacco: excise will now be linked to the AWTOE (Average Weekly Ordinary Time Earnings) indexation and not the CPI indexation. This means that tobacco will be subject to slightly higher taxation increases based on current trends and the timing of bi-annual price increases will change to March and September to coincide with the release of the ATOWE data. The change will become effective on March 1 2014,with the February 2014 excise increase not occurring to limit the number of annual increases to two. Below is the extract from the budget papers. There is no immediate impact as a result of the change announced last week.

Budget Paper
The Government will change the indexation of excise and excise‑equivalent customs duty for tobacco and tobacco products to average weekly ordinary time earnings (AWOTE), instead of the Consumer Price Index (CPI), commencing from1 March 2014. The excise and excise‑equivalent customs duty rates will continue to be indexed bi‑annually, on 1 March and 1 September each year, to coincide with the releases of AWOTE data by the Australian Bureau of

Statistics.
Consistent with legislative requirements for taxpayer confidentiality, estimates cannot be published for this measure and have been incorporated as a parameter variation in the budget aggregates. This measure is estimated to increase GST payments to the States and Territories over this period.
Currently, the rates of excise and excise-equivalent customs duty for cigarettes and other tobacco products are indexed bi‑annually on and from 1 February and 1 August in line with the CPI. The 1 February 2014 CPI increase will not occur to ensure there are only two indexation adjustments in the 2014 calendar year.

Based on the average historical difference between annual AWOTE and CPI movements this measure would result in the cost of a typical packet of 25 cigarettes increasing by an additional 7 cents in the first half of 2014. This indexation would occur on 1 March 2014 instead of 1 February 2014.
Indexing tobacco excise and excise‑equivalent customs duty to wages will ensure that tobacco excise keeps pace with incomes.
This reform implements another recommendation of the Australia’s Future Tax System review, and builds on the Government’s growing record of tax reform.