Grape and Wine Sector Regulatory Impact Analysis

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9 September 2024

The Hon Julie Collins MP
Minister for Agriculture, Fisheries and Forestry
PO Box 6022
House of Representatives
Parliament House
CANBERRA ACT 2600

Dear Minister Collins

The purpose of this correspondence is to draw your attention to some unintended consequences relating to the Wine Equalisation Tax rebate (WET rebate) scheme as it currently stands, which sees some individuals who have not invested in establishing or running a vineyard and cellar door - nor invested in wine making facilities - still able to access the rebate. This is resulting in price distortion in the market, impacts upon the quality and provenance of wine and the sustainability of genuine producers, and ultimately sees taxpayer funds (the
WET rebate) effectively used as ‘profit’ by those individuals.

I also would like to propose a solution that would result in savings to the government that could be reinvested back into job creation in wine regions, including research and infrastructure to support sustainability in the wine industry that I believe would better support the intended purpose of the rebate.

I note that Dr Craig Emerson has been appointed to lead an independent impact analysis of the wine and grape sector’s regulatory options concerning fair trading, competitive relationships, contracting practices and risk allocation and this proposal may also be of interest to him as some of the issues intersect.

My name is Angelo De Fazio. My father migrated to the South Australia after
World War II from the Southern Italian province of Catanzaro which is renowned for its wine. Although he was never able to purchase his own vineyard he continued to work with vines, and in 1998 I was fortunate enough to acquire a parcel of land a few kilometres from the township of Greenock in South Australia where I have plantings of Shiraz, Grenache, Mourvedre and Nero d’Avola.
In 2004 I established the Zitta label where I continue to build on the knowledge passed onto me by my father, using natural techniques and minimal inputs to create exceptional estate wines. At Zitta we are passionate about only growing wine grapes that are suited to the soils and climate, and also know that provenance is important in building our brand, our regional profile and regional wine and food tourism opportunities. In turn, regional wine and tourism opportunities create a greater diversity in regional employment thus sustaining population levels in regional areas.

As I understand it, the WET rebate (as amended in 2017) was intended to
”support the Australian wine industry by ensuring that wine producers who build brands, invest in regional communities and create local jobs are the beneficiaries of the rebate and not wine traders and retailers” (source: Wine Equalisation tax rebate – explanatory memorandum, Department of the Treasury, 2017).

The current situation I want to bring to your attention is where the grapes are grown by a grape grower, a third party contracts for the purchase of the grapes and subsequently contracts a winery to process and bottle the wine. The wine is then sold under the third party’s label at cost price or less and the third party claims the rebate which is effectively taken as profit. There is another issue about the timeliness of payments made by the third party to the grape grower and/or the winery – if at all - but that is a matter for another day! However, the point I want to make is that in this scenario there is no long term investment by the third party in regional communities, the grapes may be of mixed or questionable origin, no risk is borne by the third party and the use of the rebate as profit has the effect of distorting the price, which places genuine producers at a disadvantage. In addition, those third parties generally don’t enter into long term contracts with growers which contributes to wine grapes being treated as a commodity rather than a premium product.

For the purposes of this discussion, the ‘third party’ I refer to is someone who has not made any investment other than the cost of purchasing grapes and paying a winery to turn those grapes into wine. It is not intended to preclude small producers or viticultural graduates who enter into sharefarming or similar arrangements and bear some of the seasonal and market risks associated with the wine industry.

According to the Australian Tax Office website, to be a producer you must do one of the following:

- Manufacture the wine
- Provide source product (whole unprocessed grapes, apples or
pears, other fruit or vegetables, or honey, and rice) to a contract
winemaker to be made into wine on your behalf, where at all times
you own the source product and the produced wine.

As you can see, the second point does not preclude the scenario I described above. South Australia’s ‘Wine Grapes Industry Act 1991’ includes the following definition.
- Producer means –
(a) a person by whom, or on whose behalf, wine grapes are grown
for sale;
(b) where wine grapes are grown for sale by a partnership or under
a share farming agreement – the partners or the parties to that
agreement;

but does not include an employee or other person who acquires no
interest in the grapes.

I believe that a combination of the two definitions would narrow the breadth of those who qualify for the WET rebate, also having potential to address some of the other imbalances mentioned above. That is, consider changing the definition of producer to:

To be a producer you must do one of the following:
- Manufacture the wine
- Be a person by whom, or on whose behalf, wine grapes are grown
for sale;
- Be a partner or party to an agreement whereby wine grapes are
grown for sale by a partnership or under a share farming
agreement.

But does not include an employee or other person who acquires no
interest in the grapes.

By requiring that the rebate only be available to those who are producers according to the proposed definition, whilst retaining the ability for 15% of grapes used in wine production to be sourced from elsewhere) would ensure that only those who have invested in creating local jobs and who share in the costs and risks of wine grape and wine production are eligible.

As you would be aware, South Australia remains the largest wine grape producing state in Australia – in 2022 Australia’s total vineyard area was estimated to be 146,244 hectares, of which South Australia accounted for 52%.
The state has over 700 wineries spread over 18 wine regions, collectively producing around 500 million litres (or the equivalent of 665 million bottles) of wine. Properly targeted, the WET rebate has the potential to significantly support long term investment in the industry and positive regional development outcomes in grape growing, wine processing and cellar door facilities.

Further, discouraging third parties from the industry who do not have ‘skin in the game’ and are abusing the WET rebate will reduce price pressure on grape growers, reduce the risk of late or non-payment (which, although addressed in
South Australia’s Wine Grapes Industry Act, is poorly monitored/ enforced), assist in addressing oversupply issues (as it would reduce opportunistic grape purchases), and provide greater opportunity for local wine makers to source local product for genuinely regional products. I believe such a move would also
result in greater brand integrity for Australian wines, as the source of wine grapes would be more clearly indicated on labels, thus providing greater information on provenance and drawing interest back to wine producing regions
(for purposes of food and wine tourism).

The changes would likely be met by minimal resistance – in fact, I suggest it would likely be welcomed by those who the WET rebate initially sought to incentivise and assist in achieving a fairer playing field in favour of those who have made long term investments in regions.

Any savings that can be made by excluding third parties who do not make long term investments in regional areas could be directed to incentivising the long term sustainability of the industry (for example - through grape selections best suited to regional conditions, reduced consumption and/or cost of inputs, environmental outcomes including water and land management), and planning for meaningful entry points for aspiring winemakers and succession within the industry.

I have attached as Appendix 1 a table setting out the rationale/ benefits of the approach in greater detail, and propose that the next steps include an analysis of the approach, either within your department or outsourced, that also considers any unintended consequences as we have observed with earlier WET reforms.
To that end, I have also attached as Appendix 2 the key points that could be addressed in such an analysis, including implementation considerations.

I would welcome the opportunity to provide further detail to either yourself, Dr
Emerson on your departmental staff.

Yours sincerely

Angelo De Fazio cc The Hon Peter Malinauskas MP, Premier of South Australia
Appendix 1 – Rationale/ Potential benefits of clarifying qualification criteria for WET Rebate

Note: For the purposes of this discussion, a ‘third party’ is someone who has not made any investment other than the cost of purchasing wine grapes and paying a winery to turn those grapes into wine.

Current Issue Potential effect of changed qualification criteria
Price distortions in market Currently a third party who purchases wine grapes and contracts a winery to turn those grapes into wine can
quality for the WET rebate. The third party bears no risk and has no other costs other than labelling, and it is
a common practice for wine be sold at or below cost because the third party effectively takes the WET rebate
as their profit. This makes it difficult for genuine producers who have invested in infrastructure and inputs
(including labour costs) and who has borne the risks of seasonal variations to achieve a realistic price for their
product, as the WET rebate assists in offsetting some of those costs and risks.

Australian wine being considered a The proliferation of Australian wine on local and international markets that does not realistically represent the commodity rather than a premium product costs of production has contributed to the perception of Australian wine being considered a commodity, rather
than the premium position that it has enjoyed in the past.

Wine consumption has been declining globally, and oversupply issues are not unique to Australia. In order for
Australian wine grape growers, wineries and cellar doors to achieve financial sustainability, it must respond to
these trends and premium positioning is one way to do that.

Additionally, any savings made reducing the eligibility criteria for the WET rebate could be directed to
incentivising those issues that are increasingly important to consumers of premium wine, for example
 Improving sustainability through improved land and water management;
 Achieving a lighter ‘footprint’ by reducing consumption (and therefore cost) of inputs;
 Encourage grape selections best suited to regional conditions, resulting in a more consistently high
quality and reduced need for interventions.
 Focussing on provenance of grapes and building connections to wine and grape tourism
opportunities.
 Investing in succession within the industry that builds and maintains Australia’s position as a premium
wine producer.

Labelling issues relating to provenance of Third parties will generally source their grapes at the lowest possible cost and do not tend to commit to long wine affecting opportunities to grow wine term grower contracts, so one label may include grapes from a wide range of sources and the wine made and food tourism under that label is likely to vary from one year to the next. Besides the inevitable result of high variations in
quality, the inability to identify a wine’s provenance reduces the potential to position Australian wine as a
premium product and to create and promote links with wine and food tourism.
Genuine producers create regional jobs by generally sourcing their machinery, supplies and labour inputs
locally, as they recognise the need to support local businesses to ensure continuity of supply. They also
recognise that provenance is important in branding and positioning, and that regional wine and tourism
opportunities create a greater diversity in regional employment, and that is an important contributor to
sustaining population levels in regional areas.

Third parties do not generally commit to cellar doors or the growth of regional tourism opportunities as they
have no enduring links to any particular wine region.

Sustainability of genuine producers vs The WET rebate, as amended in 2017, was intended to ‘support the Australian wine industry by ensuring that
‘third parties’ wine producers who build brands, invest in regional communities and create local jobs are the beneficiaries of
the rebate and not wine traders and retailers’.

The current definition of a producer including a person who ‘provides source product … to a contract
winemaker to be made into wine on your behalf, where at all times you own the source product and the
produced wine’ does not preclude those who purchase wine grapes specifically for the purpose of having it
made into wine, but with little or no other genuine investment in the wine industry. In actual fact, large
retailers can quality for the WET rebate under this definition and we see this in the proliferation of low priced
‘cleanskins’ available at large retail outlets.

Like any primary industry sector, the wine industry is subject to significant variations in seasons (and resulting
variations in quality from one vintage to another) as well as variations in the cost and availability of inputs.
Wine grape growers and wineries are particularly susceptible to those variations, whereas third parties bear
no such risk as they can ‘shop around’ for the lowest price wine grapes as they have no long term investments
in any particular vineyard, winery or region. Third parties then sell their wine at or below cost because they
can use the WET rebate as their profit margin – so the quality of wine produced is rarely – if ever – a
consideration.

Late or non-payment from third parties to Where a third party does not have a long term contracting arrangement with a grape grower or winery, it is not wine growers/ wineries an uncommon practice for late or non-payment for the goods or services rendered, which has a significant
impact on the sustainability of growers and wineries. This is particularly concerning for (a) grape growers who
have sold their grapes at a low price simply to move them and are left out-of-pocket either by selling grapes
below the actual cost of production and/or delays in receiving payment and (b) wineries who have borne the
cost of processing, inputs, labour and storage.

Longer term contractual relationships – particularly in regional areas – protect against these types of practices
as late or non-payment would see a producer stymied in their future endeavours, as late or non-payment
would be viewed as a failure of contract and their future ability to contract would be negatively impacted.
Short term contracting arrangements with As outlined above, short term or ‘one off’ contracting with wine grape growers lends itself to late or non- wine grape growers / oversupply of wine payment.
grapes
Further, it contributes to overplanting because wine grapes are viewed as a commodity and a third party can
‘shop around’ for their inputs and opportunistically purchase grapes at a low cost, or change the varieties
produced under their label according to changing consumer preferences (eg the third party may want to
release Riesling one year and Pinot Gris the next).

The quality of grapes also suffers with this practice, as wine producers with longer term contracts tend to
invest in supporting wine grape growers to improve the quality and consistency of grapes.

It is not an uncommon practice for genuine wine producers to purchase wine grapes from outside their region
either to create a blend, or to account for variations in seasonal conditions. It is recommended that this be
limited to 15% of grapes used in wine production.

Wine grape growers who currently sell grapes to third parties may have a number of pathways if the eligibility
for the WET rebate was narrowed, including developing longer term supply contracts with producers or
alternatively selling non-viable vineyards either to other producers or for other land uses.

Brand integrity affecting international Premium wine consumers value the provenance of wine, however ‘third party’ practices do not place a value market development and promotion of on provenance, as there is no incentive for them to do so.
Australian wine
While the WET rebate was intended to support those who build brands, invest in regional communities and
create local jobs, it is arguable to what extent third parties contribute to regional communities and jobs, let
alone contribute to brand development that increases the profile or quality of Australian wine more generally.