Government's tobacco tax grab double ATO's estimates

The government hopes to gain $3.6 billion from a crackdown on tobacco sales. Pat Scala

Duncan Hughes
AFR

Government estimates on the tax grab from a planned crackdown on illicit tobacco are double estimates by the Australian Taxation Office of the tax gap caused by illegal sales, an analysis of government numbers reveals.

The government claims the crackdown on the illicit tobacco trade by the creation of an Illegal Tobacco Taskforce to protect tobacco duty and cut off a lucrative cash source for organised crime will increase revenues by $3.6 billion over forward estimates, which is the next three years.

But ATO analysis of the tobacco tax gap, which is the difference between the estimated value of excise of customs duty raised from tobacco and what is paid into government coffers, is $594 million a year, or about $1.8 billion over three years, or less than half the projected boost to revenues.

A government spokesman said additional revenues sources to bridge the gap include excise on future domestic tobacco manufacturing.

Key government estimates on revenue from black economy crackdown under scrutiny. John Woudstra

All tobacco and tobacco products produced in, or entering Australia, are liable to tobacco duty.

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It is applied on a per-stick basis for cigarettes and a per-kilogram rate for loose tobacco and other tobacco leaf products.

Tobacco excise was about $9.9 billion in 2015-16, according to the ATO.

A big – and growing – unlawful domestic tobacco manufacturing industry has grown since the regulated industry ended in 2015.

‘No one knew what was happening’

Estimates of the value of the illegal tobacco industry range from KPMG’s $1.6 billion to Rohan Pike Consulting’s $3.8 billion a year.

Industry bosses have welcomed the broad outline of the proposed reforms but are anxiously awaiting more detail about the Taskforce’s structure, resources and national strategy.

The government has allayed fears that it would be controlled by the Health Department, rather than a policing organisation with experience tackling organised crime.

There was widespread criticism of the Health Department’s role from the tobacco industry and other regulators for its inability to prosecute an effective agenda against local and international crime gangs.

From July 1 next year, importers will be required to pay all duty and tax liabilities when tobacco enters the country, rather than when it leaves a licensed warehouse and enters the domestic market.

Industry insiders claim the existing arrangement splitting warehouse control between excise officials and the ATO is a “disaster” because of duplication, poor communication and lack of compliance.

“No one knew what was happening,” a senior industry insider, who did not wish to be named, said.

“There was no compliance and the untaxed tobacco walked out the backdoor,” he said.

Black market

The announcement of the crackdown has so far done nothing to slow sales, which openly operate in markets, retailers and sex shops.

Industry whistleblowers have provided regulators with a detailed list of the names and addresses of more than 120 distributors in Melbourne and Sydney, according to sources.

They blame a turf war, competing priorities and divided responsibilities between regulators and state and federal agencies for frustrating attempts to close down offenders.

Brazen repeat offender online and retail distributors are set up under different names when prosecuted by legitimate providers or regulators.

Asian and Middle Eastern crime gangs use an intricate network of distributors to sell smuggled and locally-grown “chop chop”, which is raw tobacco, cigarettes and “shisha”, a fluid tobacco smoked through a water pipe.

Police and tobacco industry chiefs fear proceeds could be used to fund terrorism, buy political favours and support other unlawful activities.

The cost of a legal packet of cigarettes is about $22-$37, depending on the brand and the number in the pack, due to state and federal taxes intended to persuade smokers to give up and to discourage others from taking up the highly addictive habit.

Illegal imported and locally grown cigarettes are being sold through small stores, including independent tobacconists, and sex shops under the brand names “Original Gold” and “Special Gold”. Asian and Middle Eastern crime gangs behind the products are using stand-over tactics to further distribution, according to police and industry sources.

The lax enforcement and derisory penalties for distributors has also helped encourage the industry’s growth, according to industry sources.

Cigarettes that cost $3 in China and South Korea are illegally sold for about $23 in Australia, creating lucrative tax-free incentives for criminal gangs.

Drug runners importing between $100,000 and $170,000 of cocaine, or heroin, with a street value of $2.3 million could face lengthy jail sentences if caught. A cigarette smuggler importing between $100,000 and $170,000 of tobacco with a street value of $10 million in Australia is fined, sources said.

The street value of illegal tobacco means an illegal smuggler will make a profit if only one shipping container from a consignment of 25 is seized.