VALUER&BROKEREdition 10 © December 2013

INSIDE · ASSET WATCH · CURRENT OPPORTUNITIES · REGIONAL PROFILE: Victoria

EXPERIENCE • KNOWLEDGE • RELATIONSHIPS

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VALUER&BROKER

WE’LL BE DriNKiNG...As a tough year closes for most in the wine business, we hope our clients and friends enjoy a relaxing Christmas and holiday break and a prosperous New Year.

We will be closing the office from midday Friday 20 December and re-opening Monday 6 January.

In case you’re short of ideas this is what our office will be imbibing for our various Christmas Day lunches.

toBy LaNGLEy“We will be enjoying Tassie Sparkling with breakfast, Rockford Black Shiraz with appetisers, Martinborough Pinot Noir for lunch and Noble One with dessert...and a very cold beer and a lie down for afternoon tea.”

coLiN GaEtjENs“At our family gathering we will start with sparkling – Pol Roger Champagne and a Tasmanian bubbles, probably Arras. This will be followed by Crabtree Riesling, Heathcote Winery Shiraz, some Louis Jadot 1999 Burgundies recently salvaged from the lock up and a splash of ’01 and ’02 Egon Muller Spaetlese Riesling with the pudding. Finally we might squeeze in a wafer thin Dow’s or Taylor’s vintage port to consolidate.”

coLiN PicKEtt“I can’t go past Crabtree’s 2009 Riesling, winner of the Best Riesling of Show at the 2013 Clare Valley Wine Show. However, if it is stinking hot I suspect icy cold lager will feature.”

stEPhEN strachaN“My day usually starts with a peach, mango or strawberry Daiquri around late morning. Onto fizz pre-lunch and an aged Riesling with the meal, sharing a range of other wines from family members. Rarely any red, unless we pop a bottle of sparkling red. To finish, there’s always a few bottles of sticky at the end and a bit of one-upmanship from the various Strachan siblings. My brother blew us away with a Canadian Ice Wine last year, so this year I’m coming back hard with a Sauternes. “

MiKE caLNEGGia“On Christmas Day I’ll be drinking the new Rosabrook Single Vineyard Estate Tempranillo from Margaret River, an excellent festive season tipple.”

caroLiNE PLaNt“My glass will be filled with Grant Burge Pinot Noir Chardonnay NV, it has been my favourite for Christmas lunch for many years.

And then for dinner………Disclaimer: Colin Pickett and Colin Gaetjens are part owners in Crabtree of Watervale, Colin Gaetjens is part owner in Heathcote winery and both support their wines. Mike Calneggia is part owner of Rosabrook Wines.

assEt WatchA syndicate of investors lead by Hong Kong and Adelaide based Agri Partners has purchased the Thachi Monash Winery.

Agri Partners, which has offices in Adelaide and Hong Kong, has purchased approximately 880 hectares of vines over the last five years, but this is its first winery acquisition.

“The purchase of the Thachi Winery is the next step in developing our strategy for supplying wine into developing Asian markets,” Agri Partners principal David Harris said.

“The industry is undergoing major structural change and market channels, particularly into China, are consolidating quickly.

“Recent trends towards exporting wine in bulk containers and bottling at destination means that to compete globally, one now needs a large low cost winery as well as the ability to build relationships in export markets.

“We have had offices in Hong Kong and China for some time but have lacked the economies of scale required to tackle the booming Chinese market. The purchase of this winery now gives us a crushing capacity of 25,000 tonnes and 34 million litres of storage.

“It provides us with the assets to develop a formidable supply chain using fruit not only from our own vineyards in the Clare Valley and Limestone Coast but also from growers in the Riverland and Sunraysia districts.”

The business has been renamed Riverland Vintners and will also be operating as a specialist contract processing facility. This will enable large, progressive growers to directly access global bulk wine markets through Agri Partners’ processing resources in Australia and its wine marketing activities based in Hong Kong.

Gaetjens Langley introduced the parties and was actively involved in the success of the transaction.

“Having a specialist, winery broker with years of industry experience meant that the complexities involved were able to be worked through in a strategic and constructive way,” Mr Harris said. “This is the second major asset we have purchased where Gaetjens Langley has successfully managed the relationship between the parties.”

Agri Partners has taken immediate possession of the property, with the business continuing as a going concern. Settlement is scheduled for January 2014.

UNiqUE tasMaNiaN WiNEMaKiNG aGENcy for saLEWith just 1,538 hectares of vines, cropping levels a fraction of some mainland regions and rapidly growing interest in its cool climate sparkling, white and Pinot Noir wines, Tasmania has established itself as the new boutique winemaking centre of Australia.

Whilst Tasmania is home to some major brands including Pipers Brook, Tamar Ridge, Moorilla and Bay of Fires, the majority of producers are small artisans who are forging a high-value niche in the competitive wine world.

Recognising this niche, a group of investors, led by renowned Tasmanian winemaker Julian Alcorso, got together in 2001 and decided to establish Winemaking Tasmania.

From its first vintage in 2002, the company has supported many of Tasmania’s wine producers (small and large) to produce and bottle the best possible wine from their vineyards. Investments in technology, constant innovation and highly trained winemakers have paid off, with Winemaking Tasmania’s clients enjoying unheralded wine show success and industry accolades.

At the same time the shareholders have received excellent dividends in each of the past 12 years despite an ongoing program of capacity expansion to meet growing demand. This includes now making

cider from fresh Tasmanian apples and pears outside of the peak winemaking period, which offers significant growth opportunities in the years ahead. A key point of difference for Winemaking Tasmania is that it does not compete with its clients because it has no brand of its own. Its first and only priority is to provide outstanding service and wine quality.

2014 will be the company’s 12th vintage and the shareholders, most of whom are now well into their retirement, have decided to offer the business for sale as a going concern.

Importantly, the sale will mean business as usual, with Julian Alcorso continuing to lead the dedicated and capable team in the service of their loyal clients.

To register for further information, please contact Toby Langley. E: tlangley@gaetjenslangley.com.au

thachi MoNash WiNEry soLD

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Check www.wineryforsale.com.au for more details.

cUrrENt oPPortUNitiEsMurray Street Vineyards Barossa Valley, South AustraliaInvestment opportunity in a prestigious Barossa Valley winery and business offered by negotiation.

This is an exciting opportunity to invest in and lead the next growth phase of an established Barossa Valley wine business:

• 500tonnepremiumstate-of-the-artwinerysetupforfurtherexpansion.

• 51hectaresofpremiumvineyardontwosites,33hectaresofShiraz.

• Largebarrelhall&drygoodsstorage.

• Establishedbrandanddistribution,28,000annualbottleandbulksales(9LE).

• Balancedinventoryofpremiumwinetosupportagrowthinsales.

• Experiencedanddedicatedmanagementteam.

• Awardwinningcellardooronseparatetitle.

• FivestarHallidayWinery.

The retiring partner is selling the vineyards, winery, cellar door, buildings, water licence and land and 50% of the business. An opportunity exists to purchase these assets and partner with renowned winemaker Andrew Seppelt for the next growth phase of this business.

Chapel Hill “Kangarilla” Vineyard McLaren Vale, South Australia

•SuperbMcLarenValevineyardadjacenttopicturesque Kangarilla.

•40hectarepropertywith27hectaresofvineyardfirst planted in 1994.

•OwnedbytheChapelHillWineryandmanaged by Chalk Hill Viticulture.

•Offtakeagreementavailable.

•Anideallocationfortheultimateweekend retreat with a commercial vineyard.

Mclaren Vale Wine Business Opportunity A legendary Mclaren Vale winery is seeking to bring in a partner as the owners gradually move towards retirement. The widely distributed brand portfolio is one of the best in the business, with superb vineyards and an historic winery and cellar door. The opportunity to acquire up to 50% in the business is available to the right partner.

New Zealand Wine Brand OpportunityEstablished premium New Zealand wine brands and inventory with wide Australian distribution across chains, independent retail and on-premise outlets with significant and growing volumes.

• AdditionalopportunitiesavailablethroughexporttotheUKandUSAwherethebrandsaretrademarkedbutnotyetdistributed.

• KeyvarietalsincludeSauvignonBlanc,PinotNoirandPinotGris.

• Anopportunitytoenterthecategoryorincreasemarketshare.

• Ongoingsupplycontractsincludedinthesaleifrequired.

Bass Hill Vineyard Clare Valley, South Australia

•SuperbClareValleyVineyardjustoutofAuburn.

•Plantedbymeticulousownersin1998onpremierelevated site.

•27hectaresplantedtoShiraz,CabernetSauvignon,Mataro&Malbec.

•Strongdemandforfruitfromarangeofwinemakers.

•Atruewinemakersvineyardregularlyproducingaward winning wines.

•Forsalebynegotiation,seekingoffersover$1,000,000.

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a coNsoLiDatiNG rEtaiL MarKEt. GLooMy ExPort statistics. a coNtiNUiNG oVErsUPPLy of BULK WiNE. sUPErMarKEt LaBELs GroWiNG at thE ExPENsE of PriVatE BraNDs.

WhEN thE BaNKiNG sEctor has BEttEr horsEs to PUt its MoNEy oN – ProPErty, fooD ProDUctioN, iNforMatioN tEchNoLoGy – What MaKEs thEM stay With WiNE. “The wine industry has always been about understanding the cycle, being nimble to expected and unexpected changes, taking advantage of opportunities when they arise...and patience,” NAB Agribusiness’s South Australian wine specialist Stephen Stegmeyer says.

“We’re dealing with an industry which is exposed to agricultural risks, many of which cannot be mitigated, along with domestic and international competition that for a number of years has benefited the consumer and not the producer.”

“Unlikeotheragriculturalcommoditiessuchaswheat, wool and meat, which are staple items, wine is generally considered a luxury item. Wine is a consumer driven product with many alternatives and the cost of production and holding is significant. There are few industries that produce a product that is held for 18 months to two years before sale.”

“The wine industry is unique and as bankers it is vital that we have a clear understanding of the market in which our clients operate, the business cycle and the need for patience. It is not an industry that you can support in the good times and then reduce your exposure in the difficult times. NAB’s philosophy is that we are in “partnership” with our clients and provide support when they need it most”

Stephen believes the current state of the wine industry, at least from his perspective as a banker dealing with South Australian wineries, is emerging from its darkest days.

“Wineries are capital intensive, cash hungry and generally have an extended cash cycle. A winery’s ability to generate sufficient cash is our primary focus,” Stephen said.

“The cash cycle varies between operations. For bulk wine operators the cash cycle, from the crushing of grapes to receipt of payment ranges between 180 to 400 days. However, for premium branded operations that are predominantly red varieties, the cycle is around750daysonapervintagebasis.”

“Bulk wine operators’ cash cycle is extremely good although margins are lower. Branded operations are focussed on brand value and reputation and generally you would expect improved margins that are required to cover higher holding costs.

“During the period 2009 to 2011 we found that inventory levels for branded operations had increased and that inventory days on hand had grown to around 1,000 days. Wineries were overstocked as export markets had deteriorated and there was an element of unsaleable or poor quality wine within their inventory. This was a very difficult period for branded operations as they were unable to unlock cash from their inventory and subsequently additional funding was required by these operations.”

Stephen said the reasons for the difficulties are well documented – the effect of the GFC on international demand for Australian wine, coupled with the high Australian dollar and the sharp increase in supermarket dominance of the liquor retail sector.

But the turnaround is just about here he believes, and much of that can be attributed to wine operations managing their position, identifying new market opportunities and cost control.

“I think a lot of Australia’s wine operations have done an exceptional job,” he said. “We are seeing inventory days back to around 500, positive cash flows and healthier balance sheets than we were seeing in 2009 and 2010. There are instances where branded operations are now short on inventory to meet demand and they are having to fill requirements from the bulk wine market.

“I really admire the way our clients have managed this difficult period. The true position of a relationship

is exposed during difficult or challenging times. Throughout this period we encouraged open and honest conversations with a “tell it as it is” approach with our clients. We could not help if we didn’t know.”

Stephen said for banks there was no one strategy that appeared to be more successful than another.

It depended on a number of factors including whether they were a bulk or branded operation, which region they operated in, were they domestic or export focussed and which price points they were targeting.

“Bulk wine operations which supplied domestic markets had varying results,” Stephen said. “They were largely driven by fruit/wine quality and volumes and that was largely driven by seasonal conditions. Whilst the majority of wine was moved there were instances where lower quality wine was very difficult to sell. The 2011 vintage was the most difficult.

Stephen said branded operations that were traditionally focussed on export markets, had also found trading conditions difficult. Exchange rate pressure, a drop in consumer spending and uncertainty around distributors’ ability to sell wine and remain financially viable all threatened producers.

“We noticed a number of branded operations withdraw from export markets and focus on domestic markets,” he said.

“The domestic market itself was highly competitive and there is no doubt that consumers benefited as they were able to purchase quality wine at lower prices. With high domestic competition, margins did reduce back to the producer. However producers were able to reduce inventory that had built up over the prior periods.”

The reduction in inventory has been welcomed by NAB, as it has unlocked valuable cash.

“In any wine related transaction the main consideration is the ability to generate cash. It is important to understand that cash generation is not purely assessed to establish or insist on an amortisation program as amortisation may not be the most appropriate use of cash if there are growth opportunities that provide a better return on capital / investment. Our view is that security via land, buildings and inventory provides a strong secondary exit. But a strong security position without cashflow is not a reason to lend,” he said.

PATIENT CAPITAL

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“There are many that simply assess the performance ofawineoperationonaProfit&LossStatement.However, we have found that any profit is generally held in inventory or debtors and not freely available. Cash is the key focus.”

Stephen said there has been a focus for wine operations to reduce their inventory and improve their cash flow between 2010 and 2012.

“Many have reduced their debt burden because it was the most appropriate use of cash in the short term. However, there are a number of operations looking for strategic acquisitions and having a lower debt position has provided them with confidence,” Stephen said.

“This is a long term industry and we have seen a number of successful and astute operations seize opportunities to purchase vineyards, winery properties and brands at historically low prices. These buying opportunities are rarely presented and for those who have purchased these assets over the last couple of years, they will gain significant future benefit.”

is a GooD BraND aN assEt?“It is very difficult to place a specific value on a brand. There are external firms that will provide a value on a brand. There are thousands of brands within the market and it can be quite confusing as some are virtual brands and others are backed by winery and vineyard assets. Creating a brand is not difficult. What is difficult is creating a compelling reason for a consumer to buy your brand instead of another brand. The value of a brand is largely determined by a story, market acceptance, demand, repeat business, quality, consistency and margin.

“A good story is undeniably important – you just have to see the impact the First Families of Wine are having here and overseas.

“But we also know that brand strength can change quickly – for example with the retirement of a brand champion or distressed sale.”

Stephen said brand was also increasingly influenced by region, given the move by more wineries towards acknowledging provenance and terrior and away from the generic Australian styles of the early 1990s.

“The Barossa seems to have really leapt ahead of other Australian regions in terms of land values, grape returns and wine prices,” Stephen said.

“It didn’t fall as far as other regions during the downturn and values are now being restored quite quickly. We have seen significant interest from international investors in the Barossa more than other South Australian regions.”

Stephen said whilst there has been increased interest in the Barossa, he expects there will be a time when opportunities will be harder to find.

“When this happens we expect that other regions such as McLaren Vale, Clare and the Adelaide Hills will attract added attention or interest, and this will result in higher prices.”

He believes that the next five years will be very positive for wineries and viticultural enterprises in favourable regions who have well researched and documented business plans and positive cash flow strategies.

“The last few years have been extremely difficult for our wine producing clients. Whilst most have been through difficult times in the past they had not been presented with so many challenges at the one time.

“Their ability to navigate through the period by managing inventory, identifying new markets, reducing costs, maintaining relationships and identifying acquisitions has been remarkable. For many this will be a remembered as a defining period and they will benefit greatly in the long term. ”

thE BaNKEr’s WiNEry1. oPEN aND hoNEst rELatioNshiP With yoUr BaNK2. stroNG, sUstaiNaBLE cash fLoW3. MEDiUM to LoNG-tErM BUsiNEss PLaN4. sPEciaLisatioN iN a catEGory

EG ExPort, DoMEstic, BULK5. hEaLthy BaLaNcE shEEt6. coMMitMENt to DEBt aMortisatioN7. stratEGic aPProach to BUsiNEss DEVELoPMENt8. rEsistaNcE to GroWth for GroWth’s saKE9. aN EyE for ExPaNsioN oPPortUNitiEs10. qUaLity aND MarGiN focUs BEforE VoLUME

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The wine industry in Victoria is the most diverse of all of Australia’s states. It boasts the largest number of registered regions (21), the largest number of

wineries (around 800) and of course the most prestigious wine award in Australia – the Jimmy Watson Trophy from the Melbourne Wine Show.

The diversity in the industry is not simply reflected in the numbers either. Climatically, Victoria’s regions range from the cool Macedon Ranges, not far from Melbourne, to the hot regions of North West Victoria along the Murray River – the source of the largest tonnage of grapes in the state and the engine-room of Victoria’s commercial wine supply .

rEGioNaL ProfiLEVictoria:

Source: ABS, 1329.0 Vineyards, Estimates Australia 2011-12.

(1) Calculated as removals as % of total area.

(2) Calculated as Area not harvested as % of bearing area.

*CentralVic–Bendigo,GoulburnValley&NagambieLakes,Heathcote,StrathbogieRanges,UpperGoulburn

* North East Vic – Rutherglen, King Valley, Alpine Valleys, Beechworth, Glenrowan

*North West Vic – Murray Darling, Swan Hill

* Port Phillip – Yarra Valley, Mornington Peninsula, Geelong, Macedon Ranges, Sunbury

*Western Vic – Grampians, Pyrenees, Henty

Whilst many businesses have carved out their niche in winery tourism and sale of high-end wines, there is also clear evidence of structural reform across Victoria. Again, this is consistent with the rest of Australia, but arguably the reforms are more pronounced in some of Victoria’s regions.

In 2011-12, just under 3% of vineyards were removed in Victoria, compared with 2.6% nationally. Vineyard removals and replanting are typically part of many vineyard operations, however, some of this adjustment clearly represents the removal of unviable vineyards. This is positive, as it is an investment in more viable, productive vineyards.

The ABS statistics also indicate that just under 11% of Victorian vineyards’ bearing areas were not harvested in the 2012 vintage, again above

the national average of 8.4%. This is a mix of demand pressure, but also seasonal conditions, in particular north East Victoria which had some legacy issues from the very wet 2011 vintage.

The Victorian wine industry generates approximately $1.35billioninsalesrevenuewithanestimated$3.5Bin economic value-add to the national economy. Winerytourismaloneaccountsfor$1.04B.

The Victorian State Government has identified the wine sector as one of the key target sectors for growth and regional development investment. Their activities range from international trade missions to identify market opportunities, to declaring that Victoria is ‘open for business’ for investors seeking opportunities in the sector.

VictoriaN ViNEyarD ProDUctioN (2012 ViNtaGE)

Victoria central Victoria* Gippsland North East

Victoria*North West Victoria*

Port Phillip*

Western Victoria*

Winegrape Production (t) 277,754 24,661 583 19,185 211,018 17,918 4,390

Bearing Area (ha) 24,713 4,270 241 3,046 11,535 4,085 1,535

Total Area (ha) 25,409 4,423 242 3,106 11,777 4,192 1,669

Area Removed (ha) 740 77 4 100 361 160 39

Removals (1) 2.9% 1.7% 1.7% 3.2% 3.1% 3.8% 2.3%

Area not Harvested (ha) 2,664 669 47 885 410 285 369

Area not Harvested (2) 10.8% 15.7% 19.5% 29.1% 3.6% 6.9% 24.0%

VictoriaN WiNE iNDUstryThe regional diversity, the range of wine styles and production that spans commercial wines through to top-end super premium wines means that the Victorian wine sector offers a wide range of opportunities for investors.

The economic circumstances confronting the Australian wine sector have been keenly felt in Victoria. The downturn in Australian exports has impacted Victorian wineries too, however, with a high proportion of wine destined for domestic sales, the impact has been mostly through the competitive impact of displaced export sales coming onto the Australian market.

The high proportion of small wineries in Victoria and the strong linkages to regional tourism provide a buffer for many operators who are successfully able to carve-out a profitable business on the back of their cellar-door, mail-order and tourism activities. More than any other state in Australia, winery tourism is an integral part of the financial viability of many of Victoria’s small premium wineries.

21 Gi rEGioNs 820 WiNEriEs 405 Micro 225 sMaLL 122 MEDiUM 64 LarGE 621 cELLar Doors 11,736 EMPLoyEEs 1.5 MiLLioN WiNEry VisitsSource: VWIA Knowledge Project, Economic Impact of Victorian Wine Production.

Micro winery <20 tonnes; Small winery 21 – 49 tonnes; Medium winery 50 – 400 tonnes; Large winery 400+ tonnes.

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thE rEcENt WiNEMaKErs’ fEDEratioN of aUstraLia ProPosaLs for iNDUstry rEforM haVE BEEN MEt With MixED rEactioNs, ParticULarLy iN rELatioN to thE WiNE EqUaLisatioN tax aND its coNtroVErsiaL rEBatE. Following a round of regional information sessions, a great many comments and questions have been aired by winemakers, with vigorous defence by WFA of their strategic reform priorities.

In simple terms WFA wants to tighten up the way the WET is rebated.

It supports the ATO’s move to tighten rebate requirements, so that WET can only be claimed once on a batch of wine.

It supports the removal of the entitlement by New Zealand wineries to the rebate.

It is also keen to remove the somewhat ridiculous anomaly allowing apple pulp producers, in China and elsewhere, to claim WET if they export the pulp to Australia to be used in production of cider (which is taxed as wine and therefore is covered by the WET regime).

On the surface these plans all look like good old Aussie common sense, practical ideas which should get the rebate favouring once again who it was designed to help – small wine businesses.

However, in addition to these mainly well-intended proposals WFA wants to change quite dramatically the definition of producer entitlement.

It suggests that the rebate should not be available to producers unless they have essentially a winery and vineyard making and selling wine in packaged form, withatleast70%ofrebateablewineproducedintheirown facilities – in other words a substantial investment in the business of grape growing and winemaking.

WFA would also like the eligibility for the WET rebate to be removed from bulk, unpackaged and unbranded wine and from wine that is not a finished product fit for retail sale.

traDitioNaL aND VirtUaLThis sounds sensible but trying to discriminate between a “traditional” wine business and a “virtual” wine business – that is a producer who owns no assets other than a brand and carries out winemaking and packaging under contract – is very controversial given the number of successful products with that type of provenance that are now on domestic shelves.

Of course the simplest solution which would save everybody a lot of time, administrative costs and money would be to do away with the WET and treat wine as a normal, natural manufactured food product, and simply tax it at the standard 10% GST rate like everything else.

This will obviously never happen – no government would have the courage to reduce a tax – but it seems WFA’s intention is that in the absence of such logic, the WET and the subsequent rebate operates as equitably as possible.

It is worth remembering that the WET was only introduced by the Howard government, at the same time as the GST, so that the price of wine would not, heaven forbid, go down.

Introduction of the GST removed the wholesale sales tax applied to wine, so the WET had to be introduced to maintain the tax structure. Rather unfairly, by not adjusting for the double tax effect of the GST + WET, the tax take went up slightly so the rebate was applied.

DisGracEfUL, DisastroUsThe history of wine taxation in Australia is a disgraceful progression by various governments, mainly Labour, as they plunge their hands deeper and deeper into the winery till.

Until1930therewasnotaxonwine,orindeedanygoods. A general wholesale sales tax (WST) of 2.50% was introduced that year for consumer products including wine, but obviously proved politically disastrous (I assume, as I wasn’t there) as it was removed in 1931.

For the next 40 odd years wine enjoyed exempt tax status until dear old John Gorton decided to apply an exciseof$0.50pergallon.Thisalsoproveddisastrousandin1971itwasfirstlyhalvedandthenremovedcompletely by the McMahon government. I was there for that and remember the chaos and outcry which led to the removal.

Wine remained tax free until 1984, when the Labor Government applied a 10% WST. The Labor Government increased this in 1986 to 20% and we then had the famous bolt from the blue increase, again under Labor, in 1993 to a massive 31%. No consultation, no warning, no justification except revenue raising by another debt ridden government.

Undermassivepressureitwasreducedbackinthe same year to 22%, before being increased in 1994 to 24% and again in 1996 to 26%. This suite of arrangements has much to do with the mess we find ourselves in now...but that is another story.

In1997aHighCourtdecisioninrelationtostatelicence fees led to the increase of WST from 26% to 41% with the additional 15% being rebated to state governments which in turn rebated to wineries for their cellar door component of sales.

What a MEssFrankly there is no justification for a special tax on wine, indeed quite the reverse. The sole reason for the taxation of wine is blatant revenue raising.

Producing world-class wine that the nation can be proud of is, by its very nature, a high cost capital intensive business. To apply outrageous levels of taxation to such a high profile export industry is incomprehensible (obviously tax does not apply to exports but we cannot build an export business without a strong domestic base).

How is it that we are currently trying to broker a free trade agreement with China to get favourable treatment on our wine by reducing their punitive 48% tax on wine imports, when we are happy to have a total domestic tax component of around 42%, that is 29% WET and 10% GST? What a mess!

Apart from anything else the tax impost distorts the price/value ratio and lowers our competitiveness in the international wine sector. New Zealand pays excise at therateofaround$NZ26.00percaseandmostofEuropetaxes wine at the standard rate of GST or VAT for that country, typically around 20%. So a reasonable Chianti in Tuscanyattheequivalentofsay$20whichincludes20%VAT, leaves the producer with a net wine value of around $16.TheequivalentinAustraliawouldleavetheproducerwithanetwinevalueofonly$12–justbecauseofouradditional tax impost. Continued over the page...

CLEANING UP THE WET MESS Colin Gaetjens

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VALUER&BROKER

www.wineryforsale.com.au

Gaetjens Langley185 Fullarton Road, Dulwich, South Australia 5065

POBox722,KentTown,SouthAustralia5071Telephone: +61 8 8364 5600 Facsimile: +61 8 8364 5622

Email: info@gaetjenslangley.com.auABN64471514369

Gaetjens Pickett Valuers 185 Fullarton Road, Dulwich, South Australia 5065

POBox146,KentTownSA5071Telephone +61 8331 1633

Facsimile: +61 8 8364 5622Email: info@gpvaluers.com.au

ABN90791710106

Certain segments of the medical and health fraternities would like wine taxation increased dramatically, saying that somehow this will have a big impact on health and assist in paying for the damage that alcohol causes.

I don’t know about you but by the time I’m on my fourth glass of La Tache or Crabtree Riesling I may be adding another layer of fat, which could have some health implications, but I’m not about to go and start a brawl on the streets in the early hours of the morning. Before anyone starts to talk about taxation and health I think we need a serious discussion about the segmentation of alcohol, structural behavioural problems in our culture and the types of drinks most associated with the worst behaviours.

It won’t be fine wine!

Clearly casks are an issue but I’m sure there are many more “good” drinkers of cask wines than “bad” drinkers. It is also impossible to talk of a level playing field between various classes of alcohol and an absolute nonsense to compare spirits, beer and ready-mixed drink production with small premium winemaking.

So maybe we get down to identifying and segmenting types of consumers and then taxing them individually, based on their record of impact and harm on society, rather than penalising most of us who are quite responsible.

Why, for example, does my life insurance company modify my premiums if I am a higher or lower risk and my general insurer up my premiums if I claim more frequently for car or house insurance than the average?

Yet Medicare and the public health system has no such “user pays” checks and balances for serial pest drinkers. Instead the health lobby wants responsible drinkers to pay for those irresponsible few, every time we have a glass of wine.

If we apply the same basic nonsense sprouted by the health lobby – that higher tax rates solve social problems

– why aren’t we imposing massive levies on motor cars given that they create havoc, mayhem and death?

coMMoN sENsEThe same politicians who take pride when it suits them in our wonderful wine sector, show precious little common sense when looking at the tax structure.

The plain fact is that it is now nearly impossible to run a small winemaking business with a massive tax sitting in your costing structure. Smaller producers absolutely need the rebate to continue – it is in fact giving back something that should never have been there in the first place.

There is no doubt that our GST needs to increase and will probably go to 15% sometime in the next few years. I doubt that anyone would have any problems if wine were taxed an additional 5% to make the total taxation 20% or thereabouts.

But if GST does move to 15% and the WET stays the same, the cumulative tax impact would be then around 48% – half the price of a bottle of wine.

This is what the current battle should be about – the unfairness of a tax which penalises our nation’s wineries most of whom are exporters. And as we know you can never hope to build a strong export business in any sector without first establishing a strong domestic base.

Surely cleaning up the wine tax mess boils down to simple segmentation of who gets the WET rebate and why. Whether it needs to be micro-managed to the extent that WFA is proposing seems doubtful. Surely it can’t be that hard to work out who is a worthy, genuine producer of quality Australian wine on one side, and who are the murky fringe dwellers, the cleanskin and bulk producers, on the other.

Then we can spend more valuable time addressing the loony fringe of the health lobby, so that wine is seen by the community to be the good product that it really is, and not some evil potion worthy of draconian taxation.

CLEANING UP THE WET MESS Continued...

WooLWorTHS’ fIrST SUPEr PrEMIUM WINEWooLWorths’ DoMiNatioN of thE aUstraLiaN WiNE rEtaiL MarKEt has jUst stEPPED UP a Notch With thE iMPENDiNG rELEasE of its first $100 Barossa shiraz.Pinnacle Liquor Group, Woolworths’ exclusive brands business, acquired super premium Barossa Valley wine label the Barossa Old Vine Company from the Tanunda-based Langmeil Winery.

While Woolworths’ has been focusing on budget priced private labels, developed at its Dorrien Estate-Cellarmasters complex in the Barossa, this is its first foray into icon wines.

The Barossa Old Vine Company Shiraz typically retailsataround$100abottleandisconsistentlyrated at between 92 and 96 points out of 100 by leading critics such as Robert Parker and James Halliday.

Langmeilsales,marketing&distributionmanagerJames Lindner told on-line drinks news The Shout that the transaction comprised “just the brand and the stock that we had” and there were no vineyards or production facilities included.

“Our family business is Langmeil, and having a second brand was a potential confusion for us. We wanted to focus ourselves on Langmeil,” he said.