New Zealand gets WET!
How honest Australian wine drinkers were shafted into subsidising the very imports from New Zealand that were responsible for destroying their own beleaguered domestic white wine sector.
There was a time before sauvignon blanc.
In the early 1990s, the womenfolk of Australia – who were far more important, as a segment of the domestic wine market, than men – liked to drink chardonnay.
But then, with the turn of the millennium, sauvignon blanc, and much of it imported from New Zealand, began to tip the scales, becoming Australia’s favourite white wine, relegating chardonnay to second place.
What made this early incursion into the domestic market all the more astonishing was its timing – coming, as it did, at the height of the expansionist period in the Australian wine industry.
The mid-to-late 1990s were the silly and jingoistic years that followed Strategy 2025 (1996). The era was one defined by an uncritical kind of growth-worshipping boosterism. This boosterism, which originally emanated from the industry before the government threw its weight behind it, was fuelled by mass vineyard expansion (incentivised through a generous vineyard depreciation allowance for vineyard operations, and cash grants for winemaking operations) and mass overseas market penetration (through campaigns and promotions carrying across a ‘marketing decade’ that were funded through winery levies, Commonwealth grants, state grants, export levies, and the occasional partnership with other sectors or departments).
Astonishing the kiwi invasion undeniably was, in other words, because after doing all of that work to get Australian women to start drinking lots of white wine in the 1970s and 1980s, the country’s wine industry visionaries presumed wrongly in the 1990s that this segment would always unfussily remain the loyal consumers of domestically produced white wines.
That story is an interesting one, but this article tells the story about what came next: when boom times turned to bust times in the mid-2000s, and the Australian government was asked, and remarkably agreed, to subsidise New Zealand producers of cheap sauvignon blanc, and in turn allowed them to capture an even greater domestic market share than they already enjoyed.
It all begins, as many good stories do in this genre, with a tax reform.
After the Liberal Party had been umming and ahhing about a general sales tax for over a decade in opposition, when the party was finally given the keys to the Federal Government it went ahead and introduced the Goods and Services Tax (GST) of 10% in 1999. This GST was designed to standardise consumption taxes at the retail level, while rendering many of the older wholesale taxes obsolete – which, of course, included the one that had been applied to wine at a steeply increasing level since 1984.
In its purest form, the GST should have applied to everything that was either, well, a good or a service.
However, following a bit of push-back in the senate during the bill stage, Liberal Party Treasurer Peter Costello was begrudgingly forced to compromise and offer a GST exemption to ‘basic food for human consumption’. This opened a can of worms, and forced the government first, and inevitably the courts second, to define what ‘basic food’ was and wasn’t.
For our purposes, it should be easiest just to qualify here that while beverages did fall under the category of ‘basic food’ (think here of juice, water, tea, coffee, milk, and milk-like drinks), alcoholic drinks did not, which ensured that the GST would be applied to wine.
The introduction of the GST is rather the smaller part of a much bigger and far more ridiculous story about the replacement of the wholesale sales tax with a new calculation for collecting tax at the point of sale for wine in Australia. For the GST was but an inspiration to what became an utterly different and entirely standalone tax regime for wine that came with its own initials – acronymic, in this case – the wet W-E-T.
And it came about like this.
The government did not want to look like it was raising taxes when it came to wine; it was merely shifting around some of the parameters to achieve more or less the same kind of clip, so it claimed. But 10% was a lot lower than what had previously been exacted. Accordingly, in order to achieve roughly the same amount of tax revenue that had been captured through domestic wine sales before the GST, the government introduced an additional tax on wine value, called the Wine Equalisation Tax (or, the WET). As a tax that was applied entirely ad valorem (by value, that is, rather than volumetrically calculated), here was an exaction that rewarded producers (and consumers) of cheap bottles with a lower tax burden while punishing producers (and consumers) of expensive ones with a higher tax burden – which, by the by, utterly contradicted the whole cult of premiumisation. Calculated at 29%, the WET in addition to the 10% GST more or less equalled the same rate that had been applied through the wholesale tax of 41%, which rather explains the name of the WET, albeit imperfectly. In hindsight, it would have been far more fitting to call this a Wine Approximation Tax – and more especially so if one factors into the equation the system of rebates that were immediately dreamed up and added to the rulebook to pervert the operation of the tax. And since it applied to value, and therefore indirectly incentivised the mass production of cheap wine, it might also have been called the Wine Goonification Tax.
It is another curiosity of the WET system that it has never been allowed to operate puristically. For no sooner had the law come in and replaced the wholesale sales tax than a 14% rebate was provided for cellar door and mail order sales up to a wholesale value of $300,000 per annum.
It instilled confidence in nobody that the Howard government had actually got the initial rate of tax correct in the first place when the same government immediately saw a need to introduce a system for assistance to help out the smaller-scale boutique winery operations to whom it was immediately concluded that an unfair proportion of tax now applied to their sales.
The rebate was called the ‘cellar door rebate’, and it was actually modelled on, and designed to supersede, existing state government initiatives, which is not commonly remembered. States like Victoria and South Australia had already long recognised the importance to their economies of attracting regional wine tourists, and offered subsidies of around 15% the value of captured sales taxes at the state level to cellar doors in a bid to grow the tourism economy within key wine regions. Without knowing much more about how these calculations and rebates were actually administered, they are sure to have required a bit of double-handling. It made more sense in a federal system like Australia to render a system like this uniform and hypothecate the tax centrally.
In a way, the new rebate did that.
One of the explicit purposes of A New Tax System (Wine Equalisation Tax) Act 1999 was to prepare the way to replace some of the older subsidies and remove the necessity of awarding them from the states. And all of this was justified in the interests of sustaining a growing wine tourism sector – since sales generated at the farmgate were considered, on the whole, good for regional economies, and therefore the national economy.
It was a bad omen for the tax, however, that it felt unfair from the very outset, and required a system of offsets for it be seen, by those unto whom it applied, to operate equitably.
And, of course, the rebate was tweaked and tweaked again.
When, in 2004, the cellar door rebate was replaced by a similar initiative known as the WET rebate, this allowed producers to claim a full offset of the WET they paid on wine whether it was sold at the farmgate or not. In a move that continued to be defended for the benefits that it brought to ‘rural and regional Australia’, producers were henceforth able to claim 29% of the price sold at wholesale as well as retail, subject to a limit of $290,000 per financial year. This essentially allowed eligible producers to sell $1 million worth of wine before paying any WET.
And the jackpot just kept on climbing. Introduced in a federal budgetary context that was characterised, overall, by rather low confidence in the short-term future of the Australian wine industry, the effective tax-free threshold was lifted to $1.7 million from 1 July 2006, when the maximum WET rebate was increased to $500,000.
At the same time that the WET rebate was being expanded and hiked up in these years, the criteria for producer eligibility to receive the rebate was also expanded. For not only did producers of sake, perry, and cider become eligible to receive the rebate after 2004, which would have been funny enough given the otherwise rigid definition of ‘wine’ within its own standalone regulatory framework for tax purposes, but the rebate was even extended to provide cash payouts to producers of wine outside of Australia in 2005.
Economically and constitutionally, this really was fantastic – and if it is not immediately obvious why, then it will be worthwhile here to zoom out and consider this development in a broader context.
When New Zealand was offered a place in the Australian federation in the late nineteenth century, their colonial politicians across the Tasman politely (and rightly) declined. They decided instead to go it alone and erect their own parliamentary system on top of their own colonial constitutional infrastructure, and to govern for their own subjects.
At this time, the competing forces of free trade and protectionism provided the ideological undercurrents to most of the debates that erupted in the context of the creation of national legislatures under the imperial crown-in-parliament. And one of the arguments that is emerging in the long-form essay that I’m writing on the history of the Australian wine industry is about quite how long it took after 1901 for free trade to achieve a definitive victory over protectionism in the political economy of Australia.
After the world wars were all done and dusted, free trade also came to define the relationship between New Zealand and Australia: starting with a trade agreement in 1966, with the removal of most tariffs from trans-Tasman trade, which was followed by the Closer Economic Relations agreement in 1983, which established the pathway towards a completely free and frictionless trade of all goods and services, an achievement that was ultimately reached in 1990.
Which brings us up to the ‘marketing decade’ for the Australian wine industry: you know, that train that had to be derailed in the middle of nowhere somewhere vaguely half-way along its course due, among other reasons, to the climbing value of the Australian dollar.
No wine producing country can ever dream of exporting its way out of a wine glut when the exchange rate is so high.
Another equally important consequence of this trend in relative foreign currency valuations, however, was a growing incentive to import foreign wines into Australia.
To repeat the observation made at the outset of this article, female drinkers especially across the country found themselves becoming thoroughly bewitched by the naughty-but-nice tropical cat-piss ‘sav blanc’ that was being churned out en masse in a style that Australia had not factored into its industry growth plan at the same time.
Incidentally, this market trend led to an increase in plantings and re-graftings of sauvignon blanc in Australia at exactly the time that the country found itself unusually well endowed with gigantic low-profit vineyards and thousands of tanks filled to the brim with mostly red wine that were proving difficult to move. Try as Australian producers did to emulate the kiwi style, they ultimately found it difficult to compete at the price-point.
After a flurry of New Zealand winery takeovers by each of the large Australian wine outfits in the early 2000s, the strengthening Australian dollar against the New Zealand dollar during the mid-2000s made it lucrative for Woolworths, Coles, and some of the major wine wholesale businesses to import both bulk and bottled sauvignon blanc into the Australian market.
Megalitres of cheap white wine were crossing the ditch, and New Zealand’s trade ministers were eagerly waving the ships off as they went, before returning to their offices to hatch a plan.
It was apparently not long after the cellar door rebate was replaced by the WET rebate in July 2004 that a meeting came together with representatives of the Australian government. It was observed in this seminar room in Wellington that the playing field was no longer level for wine producers across the Tasman due to a rebate system that provided a level of assistance to the sector that therefore might be at odds with the terms of the 1983 Closer Economic Relations agreement with Australia.
From a technical standpoint, the kiwis were right to point this out. Indeed, they were courteous to do so in the manner they did too – by sending a few letters and knocking on a few doors. They could have brought the matter into their own forums for a few over-important trade lawyers to dissect. They could also have invited their own parliamentarians to bludgeon the question with their howcomes and wherefores. Either of these approaches would have risked bringing the whole agreement unstuck, but the New Zealanders were polite about it, true to form.
The Australian government really only had two options before it.
The finickier option was to abolish the WET rebate and find a workaround, either by recalibrating the tax rate to the point at which no rebate was considered necessary and finally allow the WET to operate purely and as it was originally intended, or otherwise by hypothecating some of the revenue generated from domestic wine sales to create a fund for rural and regional wine tourism destinations (which, after all, was ostensibly the point of the rebate) and ring-fencing the grant to prevent any use to offset the costs of production, and thereby disqualify the assistance.
The easier option was just to extend the WET rebate to individual New Zealand producers.
The Australian government quietly chose the easier option and, without any fanfare, invited New Zealand Inland Revenue to issue a bill every financial year to the ATO on the basis of the total cash figure of claims lodged by wineries in New Zealand across that year of up to $290,000 AUD ($325,000 NZD) per winery for every million dollars ($1.12 million NZD) worth of cheap, wholesale sauvignon blanc (which equated to between 200,000 and 300,000 litres per dispatch) they were able to send abroad after 1 July 2005.
Quite a lot of the $157 million worth of wine that was shipped into Australia from New Zealand during the financial year that followed landed on the shelves at aggressively low prices due to a combination of an exchange rate deficit and their cheaper methods of mass production for the styles they sent over the ditch. Few Australian taxpayers are likely to have appreciated that they themselves were subsidising those bottles even further through taxes collected at the point of transaction for any bottle of wine bought domestically.
The losers from this arrangement were the Australian wineries. The major beneficiaries – for there always have to be some winners too – were the corporate commercial wineries and the larger-sized wholesale operations and liquor retailers who had managed to diversify horizontally across New Zealand in the early 2000s or had otherwise stitched up bulk allocations to feed into Australian supply chains in the mid-2000s.
This astonishing tax workaround would then be manipulated even further, as the larger New Zealand producers found it in their interest to register multiple business names at the Companies Office in order to qualify for the maximum rebate for each entity, rather than just once. This was and is a practice that cannot be policed by the Australian Tax Office, or prohibited by an Act of the Parliament of the Commonwealth of Australia, as it falls outside of jurisdiction: New Zealand could no more legislate for Australians to call thongs ‘jandals’ at their barbecues than Australia could think of doing anything to stop the double or triple dipping from the WET payout that was never even intended for them in the first place.
The rebate was flawed for a number of reasons, it should be admitted, and not just in the way that somehow a cellar door subsidy came to be gamed by offshore companies who were in the business of flooding a foreign market with cheap wines and never remotely intended to establish a cellar door, or contribute in any way to tourism, in regional Australia. Over the years between 2005 and 2010, there were a number of inventive ways conceived by the medium and large Australian corporates to achieve access either to larger rebates or multiple rebates as well. This usually involved contorting their own buying and selling practices or registering for multiple producer licences and business names, but the system even inspired a strange pattern of collusion between contract wineries and grape growers.
And this entire rort continues. It is an entrenched part of the business of making and selling wine in Australia, propping up a number of unprofitable businesses and directing money, at the same time, to large commercial businesses that shouldn’t need it.
The exact figure is opaque, because the ATO apparently (and remarkably) does not know how to keep track of the payments that come out of the pot, but it is telling that every year the ATO seems to pay out far more in rebates than its own modelling and data lead it to expect to be paying.
On a rough estimate, close to half a billion dollars have been paid to New Zealand producers since the introduction of the WET rebate twenty years ago, and today New Zealand producers continue to receive, and share among them, around $20 million dollars worth of subsidies per annum – money that comes from a pool of money that is collected from a tax at the point of final sale.
Cheap and mass-produced Kiwi sauvignon blanc became the most popular white wine on Australian shelves over exactly this period.
That taxpayers were unwittingly subsidising the product, when the domestic industry was on its knees, is incredible.
Today in 2026, the industry remains on its knees; today, the WET rebate is still paid out annually to the 50 or more New Zealand ‘companies’ who qualify for it.