After decades of excise increases, legal tobacco prices in Australia are among the highest globally, supporting reduced smoking prevalence while historically generating substantial Commonwealth revenue. This report assesses the scale, drivers and impacts of Australia’s illicit tobacco market, benchmarks Australia internationally and models how different policy approaches (excise reform plus strengthened enforcement) may affect legal consumption, illicit consumption and government revenue.

The illicit tobacco market undermines tax revenues, distorts competition, increases enforcement costs, weakens public health protections and ultimately threatens the objectives of the National Tobacco Strategy and the long-term health and welfare of Australians.

Addressing the illicit tobacco market in Australia requires a coordinated policy response that tackles both demand-side incentives (which drive consumers toward illicit products) and supply-side controls (which disrupt illicit production, importation and retail distribution). The report provides eight key policy recommendations.

Key findings

• A widening legal–illicit price gap is accelerating substitution to illicit tobacco.
• Illicit penetration is now at a scale that threatens policy, revenue and legitimate commerce. 
• Evidence from a major retailer shows that closing illicit tobacco stores improved legal sales performance.
• Survey evidence from 1,500 Australian tobacco consumers shows strong price sensitivity and widespread use of illicit products.
• Reducing excise rates would shift consumption away from illicit products.