More than half of the cigarettes sold in Australia today are purchased on the black market, creating a fiscal shortfall of up to AU$11.8 billion (NZ$13.5 billion) annually and eroding the country’s hard‑won progress in reducing smoking rates.
According to the illicit‑tobacco and e‑cigarette commissioner, Amber Shuhyta, the illicit share of the market rose to between 55 percent and 60 percent in the 2023‑24 financial year — the highest proportion ever recorded (1 News). The Australian Treasury estimates that the government now collects roughly AU$7.1 billion in tobacco excise, a 57 percent drop from the AU$16.3 billion collected in 2019‑20.
Tax policy and market distortion
Successive federal governments have raised the excise levy on a 20‑pack of cigarettes from about AU$8 in 2010 to AU$30 in 2025, a three‑fold increase intended to curb consumption and fund health‑care costs. The policy initially succeeded: smoking prevalence fell to a record low of 11 percent in 2019 and excise revenue peaked that year (Reuters).
However, the higher tax created a price gap that criminal networks quickly exploited. A legal pack now costs more than AU$40, while the same quantity can be bought illegally for less than AU$15. This disparity has driven a surge in demand for untaxed products, particularly among price‑sensitive younger smokers.
Economic impact on the budget and investors
The revenue loss translates into a fiscal hole of roughly AU$11.8 billion each year, equivalent to about 0.3 percent of Australia’s gross domestic product. That shortfall pressures the federal budget, which already faces rising health‑care expenditures for smoking‑related diseases.
For the tobacco sector, the shift reshapes competitive dynamics. Global majors such as Philip Morris International and British American Tobacco (BAT) have seen their Australian‑focused subsidiaries experience slower volume growth, while their international operations continue to benefit from higher margins in markets with lower tax pressure. BAT’s Australian‑listed subsidiary, British American Tobacco Australia, saw its share price slide 7 percent in the first half of 2024 as investors priced in the erosion of the domestic market (Bloomberg).
Enforcement spending and policy response
In response, the Commonwealth has allocated an additional AU$300 million (NZ$343.9 million) over the past two years to law‑enforcement agencies, including the Australian Border Force and state police task forces. According to Shuhyta’s inaugural annual report, officials seized 2,244 tonnes of illicit tobacco during the 2024‑25 financial year.
Commissioner Shuhyta cautioned against lowering the excise rate, arguing that “entering into a price competition with the illicit market could lead to adverse health outcomes and undo successive generations of government policy to drive down smoking rates.” Instead, she advocated a multipronged approach: tighter penalties, expanded policing, and a public‑education campaign to diminish demand for illegal products.
Analyst perspective
Economists at the e61 Institute, who modeled the fiscal impact of a potential excise reduction, warned that cutting the levy back to 2019 levels could produce ambiguous outcomes. Their analysis suggests revenue could rise by AU$3.2 billion if smokers migrate back to the legal market, but could also fall by AU$2.1 billion if illicit sales remain entrenched (e61 Institute). The researchers emphasize that the profit margins for black‑market sellers would shrink, yet demand elasticity and the established supply chain make a swift reversal unlikely.
For investors, the key takeaway is that the Australian tobacco market is transitioning from a regulated revenue stream to a high‑risk environment dominated by organized crime. Companies with diversified international exposure are better positioned to weather the domestic downturn, while firms reliant on Australian sales may need to adjust earnings forecasts and consider strategic pivots.
Policy makers face a delicate balance: raising excise sufficiently to discourage smoking without inflating the black‑market incentive, while ensuring enforcement resources are both effective and proportionate. As the fiscal gap widens, the issue is expected to remain a priority on the federal agenda, with potential implications for broader tax policy and public‑health strategy.
Read more on Globally Pulse Business for further analysis of fiscal pressures and market responses.
