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Illegal Tobacco Cost Australia A$1 Billion: KPMG Report

Illegal tobacco sales deprived the Australian government of about A$1 billion ($946 million) of taxes in the 12 months ended in June, according to a report commissioned by cigarette makers.

Accounting firm KPMG LLP released the study today as the first since a federal law prohibiting the sale of cigarettes in branded packages took effect Dec. 1 to discourage smoking and reduce related spending on health care. Illicit sales increased 1.5 percentage points to 13.3 percent of total shipments, while consumption didn’t drop in the year, according to the report.

Planned increases in tobacco taxes will cause illegal sales to increase, the report said, citing Scott McIntyre, a spokesman for British American Tobacco Plc’s Australian unit. Australia announced plans in August to boost tobacco excise to raise more than A$5 billion and help narrow the country’s fiscal deficit over the next four years.

“Instead of steep excise hikes, more resources for agencies and greater enforcement of plain pack laws by the health department will see a reduction in illegal tobacco sales,” McIntyre said.

Officials from Australia’s health department didn’t immediately respond to an e-mailed request for comment on the report, sent to the department’s media section.

Price Differentials

Taxes made up about 63 percent of the price of a packet of cigarettes last year in Australia, where a pack of 25 costs about A$20 for the best-selling brands. A pack of 20 Philip Morris International Inc. (PM) Marlboro brand cigarettes sells for A$15.96, compared with A$1.08 in Vietnam, A$2.66 in China and A$10.29 in Singapore, according to the KPMG report.

British American Tobacco, Philip Morris International Inc. and Imperial Tobacco Australia Ltd. commissioned the KPMG report.

About 17.4 million kilograms (38 million pounds) of tobacco were consumed in Australia in the year, matching the level in the previous 12 months and compared with 18 million kilograms in 2011, according to the report.

Australia last year banned the sale of cigarettes in packaging depicting tobacco companies’ trademarks and logos. Cigarettes are now sold in olive green packs, with graphic and written health warnings covering 70 percent of the front of a package. Brands are shown in uniform font at the bottom of the package.

Australia’s top court upheld the validity of the law on Aug. 16, 2012, dismissing a challenge from the tobacco companies arguing that the government illegally seized their intellectual property.

KPMG said tobacco companies set specific terms of reference and the report was issued to the parties “for information only.” The accounting firm didn’t specify the terms of reference in the report, which covered the 12 months ended June 2013.

To contact the reporter on this story: Joe Schneider in Sydney at jschneider5@bloomberg.net

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