How rising excise taxes handed the multibillion-dollar market to organised crime
When health campaigners first dreamed of ending Big Tobacco’s dominance in Australia, they probably did not imagine the lethal role organized crime would play.
Senate inquiry into tobacco crisis As if it were needed, this month heard more evidence of how the government’s rising cigarette taxes and lax law enforcement have combined to take Australia’s multibillion-dollar nicotine market into the hands of criminals.
By some estimates, 65 percent of our tobacco sales are on the black market; In 2020, this rate was only 16 percent.
The nearly tripling of excise taxes on tobacco over the past decade means you’ll pay $28 more in tax on a pack of 20 cigarettes than in 2016.
Billions of dollars a year now flow to organized crime rather than state coffers, and smoking rates are rising again. As Big Tobacco executives point out, this is an unmitigated disaster that has not been replicated anywhere else on the planet.
British American Tobacco (BAT) director Simon Trussler said in a submission to the inquiry: “In no other country have I seen such a rapid or extreme collapse in legal tobacco sales and tax collections. Indeed, Australia is a unique example and is being used around the world as a useful lesson in how tobacco taxes should not be used to achieve fiscal policy or health policy objectives.”
Health advocates will be foaming at the mouth at such a statement, but it’s hard to disagree when the government’s own watchdog, the Illegal Tobacco and E-Cigarette Commissioner (ITEC), estimates that illicit sales captured 60 per cent of the market last year.
This means that the takeover of the market by organized crime is happening much more quickly and brazenly than the industry anticipated; The Australian Association of Convenience Stores (AACS) announced in August last year that nearly half of all cigarette sales in Australia consisted of illegal tobacco.
Illegal Tobacco and E-Cigarette Commissioner Amber Shuhyta admits it will be difficult to break the habit.
“There is the potential for organized crime to become further entrenched through the development of innovative product designs and sales channels specifically designed to evade detection,” he said in a submission to the inquiry.
His agency estimates that $11.8 billion worth of excise taxes were turned to ashes last year alone.
“This money does not fund basic services; it funds organized crime, and workers and legitimate businesses pay the price,” AACS chief executive Theo Foukkare told the inquiry.
It’s hard to argue with the unnamed Philip Morris executive who told the inquiry at a closed-door hearing earlier this month that complete capitulation to organized crime appeared inevitable.
“On the current trajectory, legal supply will end by 2030… the entire supply of nicotine and tobacco products will be donated to organized crime,” they said.
A report from Oxford Economics This estimate, commissioned by independent supermarket chain Ritchies IGA, formed the basis of this forecast. The organization predicts that organized crime will capture almost 90 percent of total tobacco consumption by 2028-29 without government intervention.
The report’s authors and tobacco executives recommend reducing cigarette taxes to 2019 levels; This is a contentious issue among health advocates.
President of the Australian Medical Association, Dr. Danielle McMullen is among those who point to Canada’s Quebec experience as evidence that tax cuts won’t work.
“There is absolutely no evidence to support the idea that reducing excise duty will impact illicit tobacco – in fact the evidence suggests the opposite, with jurisdictions reducing excise duty seeing a terrible combination of increased smoking rates and no tangible impact on the illicit tobacco trade,” he said.
Using Canadian experience, Oxford Economics argues the opposite, saying a major cut in excise tax led to a decline in illicit tobacco sales.
But one of the most intriguing aspects of the story so far is the financial resilience of the global tobacco giants, who have traditionally controlled 90 percent of the market.
The latest financial accounts for BAT, Philip Morris and Imperial Brands reveal that the big three have proven highly successful in maintaining the financial health of their operations and delivering large dividends to their parent organisations.
When you take into account the non-cash decline in BAT, all three managed to turn a profit last year.
They also paid $950 million worth of dividends to their global parents in fiscal years 2024 and 2025 alone.
The vast majority of this dividend earnings (close to $800 million) came from BAT, which controls more than 44 percent of the legal market, according to industry statistics.
This is a remarkable achievement when you look at the collapse in incomes and government consumption payments.
BAT’s cash income from customers in 2020 amounted to $9.4 billion. For the year ending December 31, 2025, that amount had fallen to just $4.1 billion.
However, according to BAT’s calculations, the biggest flow-on impact was to government coffers, with consumption payments falling by approximately $5 billion during this period.
BAT reported a profit of $652 million in 2020 and a loss of $291 million last year – although the latter was a result of devaluing its Australian business by $556 million as illicit tobacco negatively affected its future sales. In real terms, the tobacco giant was still making a healthy profit.
So BAT was still able to pay out a whopping $393.2 million in dividends last year, thanks to increased cash flow as it saved money by reducing cigarette inventories faster than sales collapsed.
This helped it generate positive cash flow of $733.3 million in 2025. But it’s a gimmick that will have a very short shelf life as sales get worse.
The same sales collapse and hit to government consumption payments is reflected in the financial results of its two rivals.
But Imperial Brands’ gross profit remained fairly stable between 2020 and 2025, despite its revenue literally halving, falling from $115.1 million in 2020 to $102.4 million in 2025. Last year it paid $50 million in dividends to its listed UK parent.
Philip Morris reported that its net profit fell from $90 million in 2020 to just $33 million last year. The Marlboro maker did not pay dividends last year but could pay $68 million in 2024.
Whether the big three still have a job in 2030 may depend on whether health advocates or industry realists win the tobacco tax debate.
The most interesting voice in this debate last week was Nick Coatsworth, an infectious diseases expert and Australia’s deputy chief medical officer during the COVID outbreak.
The former top medical adviser criticized the “public health absolutism” that prioritized smoking reduction above all else.
Coatsworth is among those advocating for tobacco duty to be rolled back to 2019 levels.
He compared those advocating higher consumption taxes and tougher measures to those who made the same mistakes as some of his critics during the pandemic.
“The comparison to COVID is important because the intellectual pattern is the same. A narrow community of experts defines the problem. It recommends increasingly restrictive interventions. It dismisses trade-offs as distractions,” Coatsworth says.
“Then, when harms occur outside of his field of vision, he insists that the answer is more of the same.”
The Senate inquiry will present its final report on June 30.
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Colin Kruger is senior business correspondent for the Sydney Morning Herald and The Age newspapers.Connect via email.
