TAXPAYERS are subsidising deals between grape growers and supermarket chains that enable the supermarkets to obtain below-cost wine for their house brands.

Australian wineries pay a 29 per cent wholesale tax on their products, called the Wine Equalisation Tax, for which they receive a full rebate on the first $1 million of sales.

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But the Australian Tax Office also provides the rebate to anyone who has grapes turned into wine by a contract winemaker.

Winemakers' Federation of Australia chief executive Stephen Strachan said as a result, retailers were asking growers with surplus fruit to have it made into wine by a contract processor.

He said the growers were prepared not to be paid for their grapes as long as they received the WET rebate once the fruit was processed, bottled and sold.

The retailers were therefore obtaining wine at below the cost of production because they were paying only for the winemaking, not the grapes.

Mr Strachan said retailers were undercutting genuine producers struggling to cope with surging imports and oversupply.

"Retailers are predators and will do everything they possibly can to undermine Australian wine producers' brands," he said. "Their behaviour is absolutely deplorable."

Mr Strachan said retailers were exploiting the wine-tax rebate system to the tune of $50 million a year and called on the Federal Government to restrict it to genuine wine producers.

Wine Grape Growers Australia executive director Mark McKenzie said retailers were "rorting" a system meant to support struggling wineries.

Mildura wine producer Lance Milne said the retailers' actions were an "obscenity".

A Coles spokesman said Coles Liquor had "been long-time supporters of Australian winemakers and growers, so we're pretty disappointed with the WFA's comments".

"We believe their attempts to paint the WET tax as a retailer issue is naive, as this is obviously an issue that affects all players in the wine industry," he said.

A Woolworths spokeswoman said the WET rebate eligibility criteria "actually support the small or medium producer" because it gave contract winemakers "assured cash flow in an uncertain market".

Federal Agriculture Minister Tony Burke was unavailable for comment.